The world’s largest chemical company is closing a number of its factories, as the era of cheap Russian gas grinds to a halt amid a deterioration in the global economy.
BASF SE will cut 2,600 positions, about 2 percent of its global workforce, to save on operational costs, as the European Union’s biggest chemical firm is forced to deal without affordable Russian energy imports.
Natural gas prices in Europe soared last year after Russia’s invasion of Ukraine.
Meanwhile, 65 percent of BASF’s proposed layoffs in Germany, will be mostly in administrative and research positions.
Germany’s chemical and pharmaceutical industry employs about 466,500 people worldwide and has an annual turnover in excess of $211 billion, according to government data from Berlin.
BASF Closes Factories Due to Prohibited Energy Costs
The chemical giant will close several factories in Germany, including two ammonia plants and related fertilizer facilities, which will lead to 700 job cuts at its main plant in Ludwigshafen, the company announced on Feb. 24.“We are doing this because we believe in the future of the Ludwigshafen site, which is now in its 158th year,” said BASF CEO Martin Brudermüller in a statement, adding that the company remains committed to the site.
“We believe in the people who work here, and we believe in the region,” he said.
BASF will also terminate a share buyback program ahead of time, due to a decline in earnings, rising costs, and borrowing rates in Europe, along with economic uncertainty caused by the war in Ukraine.
The firm also laid out plans to cut another $211 million in annual costs.
BASF announced a $7.7 billion loss for 2022 on the value of its Wintershall Dea energy venture, after it decided to pull out of Russia.
German Industry Barely Coping Without Russian Gas
However, Brudermüller put much of the financial blame in Europe on overregulation, slow and bureaucratic permitting processes, and high costs for most production inputs.“Europe’s competitiveness is increasingly suffering,” Brudermueller said. “High energy prices are now putting an additional burden on profitability and competitiveness in Europe.”
BASF’s energy bill surged by $2.3 billion last year compared to the year before, even as consumption fell by 35 percent.
The German chemical company announced last October that it would reduce annual costs in Europe by $530 million, since it does not expect gas prices to return to pre-2022 levels.
Although gas prices have declined from last year’s high, levels remain well above what German industry can sustain, since manufacturing costs are higher than in the United States and East Asia.
Despite surviving a mild winter with relatively full gas storage tanks, Germany has so far staved off the specter of energy rationing, but costs will remain elevated.
Europe’s largest economy switched from Russian pipeline gas to liquefied natural gas, but this also happens to be almost four times as expensive.
European Manufacturers Look Elsewhere to Invest
Like throughout Europe, the rise in gas prices has put thousands of jobs in Germany at risk and has forced companies to divert investment elsewhere.Last month, a survey from Germany’s VCI chemical association reported that almost half of all chemical companies plan to cut domestic investments this year due to high energy costs.
BASF’s forecast for 2023 projects adjusted earnings before interest and taxes to be as high as $5.71 billion, in contrast to the last year’s 12 percent decline to $7.3 billion.
The company is expecting 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 the several major German firms that are expanding in China, while Europe faces a contraction.
The German chemical group is currently building a new $10.58 billion plastics engineering facility in China to support growing demand in the country.
