BASF to cut 2,600 jobs as energy crisis hits German industry

BASF plans to cut 2,600 jobs and reduce production in Germany as Europe’s biggest chemical producer braces itself for a future without cheap Russian gas.

The company is closing a number of energy-intensive factories, including two ammonia plants and related fertilizer facilities, resulting in 700 job cuts at its main Ludwigshafen site in Germany.

BASF also forecast lower earnings this year and said it will end a stock buyback early because of a deteriorating global economy. The shares fell as much as 7% in Frankfurt, the most since June.

Overall, the cuts will reduce BASF’s workforce by about 2% through 2024.

They’re some of the biggest yet by a German company amid an energy crisis prompted by Russia’s invasion of Ukraine, and more are set to follow.

Chemical maker Lanxess has said investments will go to more competitive locations including the U.S., while foreign manufacturers with operations in the country, including Dow and Ford, have announced thousands of job reductions.

“High energy prices are now putting an additional burden on profitability and competitiveness in Europe,” BASF Chief Executive Officer Martin Brudermüller said in a statement in which he also cited “overregulation, slow and bureaucratic permitting processes, and in particular, high costs for most production input factors.”

Germany’s chemical sector, supplying auto, pharmaceutical and agricultural companies, is particularly gas-intensive and made up around 15% of the country’s total annual use of the fuel before the war.

While Europe’s biggest economy has been successful in securing alternative supplies, the new sources aren’t as competitive as gas from Russian pipelines that accounted for more than half of Germany’s imports before the invasion.

With virtually no prospect of those imports resuming, the outlook for German chemical, glass and building-material companies, where gas and electricity can account for a third of costs, is bleak.

Chemical output in the European Union slumped nearly 16% during the fourth quarter, with BASF’s operations in Germany swinging to a loss during the second half, according to a company presentation.

“The competitiveness of German locations has suffered in the energy crisis,” analyst Oliver Wojahn from Alsterresearch said. “We will see job reductions and an enlargement of locations outside Europe at several chemical companies.”

BASF’s gas bill surged by €2.2 billion ($2.3 billion) last year compared with 2021, even as consumption fell by 35%.

The company previously said it’s targeting annual cost cuts of €500 million as it doesn’t expect gas prices to return to prewar levels.

While gas has retreated from highs, prices remain elevated relative to historical levels. They’re also higher in Germany than in rival manufacturing regions in the U.S. and Asia.

BASF forecast lower operating profit this year, with adjusted earnings before interest and taxes of as much as €5.4 billion, after earnings declined 12% in 2022 to €6.9 billion.

The company kept its dividend for 2022 unchanged from a year ago at €3.40 a share, despite a target of delivering annual increases.

The second half of the year is set to be better than the first, led by a recovery especially in China, BASF said Friday.

The company has also suffered in other ways from the invasion of Ukraine, which severed long-standing connections between German industry and Russia.

BASF had helped fund construction of both Nord Stream gas pipelines via its Wintershall Dea subsidiary.

Cutting ties with the venture in January prompted a €7.3 billion write-down and a historic loss for BASF, which also operated joint ventures with Gazprom PJSC and others.

A survey from Germany’s VCI chemical association in late January revealed that almost half of chemical companies plan to cut investment in Germany this year due to energy costs.

Production is likely to shift to countries with similar values and political systems, Wojahn said, and companies are set to increasingly avoid investing in China. BASF already had big ambitions in China before the energy crisis, he added.

BASF’s €3 billion share buyback program, starting last year in January, was meant run until the end of 2023.

The decision to halt the share buyback is “sensible,” analyst Samuel Perry said in a note, given flagging demand.