German chemical giant BASF closes factories without cheap Russian gas

The world’s largest chemical company is closing many factories as the era of cheap Russian gas comes to an end amid a deteriorating global economy.

BASF SE is hiring 2,600 people, about 2% of the global workforce, to save operating costs as the European Union’s largest chemical company is forced to cope without affordable Russian energy imports. to reduce

Last year, European natural gas prices soared following Russia’s invasion of Ukraine.

Meanwhile, 65% of BASF’s proposed job cuts in Germany will be primarily in management and research positions.

According to Berlin government data, the German chemical and pharmaceutical industry employs about 466,500 people worldwide and has annual sales of over $211 billion.

Products made in Germany are also an integral part of the automotive and other supply chains.

BASF closes plant due to prohibited energy costs

The company announced on February 24 that it will cut 700 jobs at its main plant in Ludwigshafen.

“We are doing this because we believe in the future of the Ludwigshafen site, which is now 158 years old,” BASF CEO Martin Brudermüller said in a statement. He added that he remains committed.

“We believe in the people who work here and we believe in the region,” he said.

BASF also plans to prematurely end its share buyback program due to economic uncertainty caused by lower revenues, higher costs, borrowing rates in Europe and the war in Ukraine.

The company also plans to reduce annual costs by an additional $211 million.

BASF announced a $7.7 billion loss in the value of its Wintershall Dea energy venture in 2022 after deciding to exit Russia.

According to preliminary figures, this cost the company a net loss of $1.46 billion for the year, down from today’s net loss of $663 million.

German industry can hardly cope without Russian gas

However, Brudermüller attributes much of Europe’s economic responsibility to over-regulation, slow and bureaucratic permitting processes, and high costs for most production inputs.

“Europe’s competitiveness is getting worse and worse,” said Brudermüller. “High energy prices are now putting an additional strain on Europe’s profitability and competitiveness.”

BASF’s energy bills jumped $2.3 billion last year compared to the previous year, despite a 35% drop in consumption.

The German chemical company said last October that it would slash annual costs in Europe by $530 million as it does not expect gas prices to return to pre-2022 levels.

Gas prices have fallen from last year’s highs, but are still far above what German industry can sustain because production costs are higher than in the United States or East Asia.

Despite surviving a mild winter with relatively full gas storage tanks, Germany has so far held back the threat of energy rationing, but costs will continue to rise.

Europe’s largest economy switched from Russian pipeline gas to liquefied natural gas, which also happens to cost almost four times as much.

Eurozone energy prices have fallen from peaks of over $360 per MWh last August to around $53 per MWh, but are still above historical averages.

European manufacturers look elsewhere for investment

Like across Europe, rising gasoline prices are putting thousands of jobs in Germany at risk, forcing businesses to divert their investments elsewhere.

Last month, a survey by Germany’s VCI chemical association reported that almost half of all chemical companies plan to cut domestic investment this year due to high energy costs.

In 2023, BASF forecasts pre-interest and pre-tax income of $5.71 billion. This contrasts with last year’s 12% decline to $7.3 billion.

The company expects market conditions to improve in the second half of the year, particularly in China, as the global economy remains in the midst of recovery through the first half of 2023.

BASF happens to be one of several major German companies expanding in China, while Europe faces contraction.

The German chemical group is currently investing $10.58 billion to build a new plastics engineering facility to meet growing demand in China.