In the third quarter of 2020, the global industrial economy recovered from the sharp downturn in the previous quarter. However, global production levels were still around 3% lower than in the prior-year quarter. Regional recovery rates were mixed. North America and Europe saw a strong quarter-on-quarter recovery, while Japan’s recovery was more moderate. In China, the pace of growth slowed slightly after strong gains in the second quarter of 2020, but remained at a high level overall.
The automotive industry, which was particularly strongly affected by the production closures in the second quarter of 2020, was still down around 2% from the prior-year period in the third quarter of 2020. In China, production was already well above the level of the third quarter of 2019, while volumes were on a level with the prior-year quarter in North America and still slightly lower year on year in western Europe. By contrast, the gap to the prior-year period was much larger in Japan, India and South America.
Demand for durable consumer goods picked up. Demand for consumables such as food and care products, some of which saw stronger demand as a result of the pandemic, gradually returned to normal. Following the dynamic recovery effects in the third quarter, momentum is expected to slow in the remaining months of the year.
Our assessment of the global economic environment in 2020 is therefore as follows (figures rounded to the nearest half a percentage point):
Our forecast assumes that severe restrictions on economic activity to contain the coronavirus pandemic, such as lockdowns, are not reintroduced.
Some of the risks relating to short-term demand and margin development presented in the BASF Report 2019 have materialized as a result of the coronavirus pandemic; the same applies to the impairment risks discussed in the Half-Year Financial Report 2020. This development was a major contributing factor to the year-on-year decline in earnings.
The fourth quarter continues to present risks given the uncertainty surrounding the further recovery of the markets, the future course of the coronavirus pandemic and any renewed restrictions on economic activity to contain the pandemic.
This particularly affects the development of demand and margins in our key customer industries, the impact of which can vary from region to region.
Above and beyond this, we do not see any material new or increased risks as a result of the crisis, such as supply chain disruption risks or the risk of default on receivables.
According to our assessment, there continue to be no individual risks that pose a threat to the continued existence of the BASF Group. The same applies to the sum of individual risks.
For the fourth quarter of 2020, BASF now expects a further improvement in the BASF Group’s EBIT before special items compared with the third quarter of 2020.
For the full year 2020, the BASF Group expects a slight decline in sales compared with the previous year, mainly due to weaker demand as a consequence of the coronavirus pandemic. We anticipate a considerable decline in EBIT before special items for 2020. As well as weaker demand, the company expects pressure on margins to continue, especially for basic chemicals, which will be partially offset by fixed cost savings.
For 2020, we expect global economic uncertainty to be very high and that growth will be significantly depressed by the drop in demand and production outages in connection with the coronavirus outbreak. Consequently, the global economy is forecast to grow by 2.0%, considerably slower than in 2019 (+2.6%). Global chemical production is expected to expand by 1.2%, well below the 2019 level (1.8%). We anticipate an average oil price of $60 for a barrel of Brent crude and an exchange rate of $1.15 per euro. Despite the challenging environment characterized by a high level of uncertainty, we aim to increase our sales to between €60 billion and €63 billion (2019: €59,316 million). The BASF Group’s income from operations (EBIT) before special items is expected to be between €4.2 billion and €4.8 billion (2019: €4,536 million). The return on capital employed (ROCE) should reach between 6.7% and 7.7% (2019: 7.7%) and thus be below the cost of capital percentage of 9%.
We expect growth in most of our customer industries. For the automotive industry, however, we anticipate a continued decline in production. Our outlook assumes that the trade conflict between the United States and its trading partners does not intensify, and that Brexit will not have any larger economic repercussions during the transition phase.
Our forecast for 2020 takes into account the agreement between BASF and an affiliate of Lone Star on the sale of BASF’s construction chemicals business. The transaction is expected to close in the third quarter of 2020, subject to the approval of the relevant competition authorities. Until closing, the income after taxes of the construction chemicals business will be presented in the income after taxes of BASF Group as a separate item (“Income after taxes from discontinued operations”); it will not be included in the sales or EBIT before special items of the BASF Group.
The agreement between BASF and DIC on the sale of BASF’s global pigments business is likewise reflected in this outlook. The transaction is expected to close in the fourth quarter of 2020, subject to the approval of the relevant competition authorities. Until closing, the assets and liabilities to be divested will be presented in a disposal group in the Dispersions & Pigments division.
This outlook also includes the acquisition of Solvay’s integrated polyamide business on January 31, 2020, which will be integrated into the Performance Materials and Monomers divisions.
In 2020, we expect the BASF Group as a whole to increase sales to between €60 billion and €63 billion (2019: €59,316 million). The main drivers should be volumes growth and portfolio effects from the acquisition of Solvay’s integrated polyamide business, which closed in January 2020. Lower prices will presumably have an offsetting effect. We expect considerable sales growth in the Materials, Agricultural Solutions and Nutrition & Care segments. We anticipate slightly higher sales in the Chemicals, Surface Technologies and Industrial Solutions segments, and sales at prior-year level in Other.
The BASF Group’s EBIT before special items is expected to reach between €4.2 billion and €4.8 billion (2019: €4,536 million). We expect considerably higher contributions from the Industrial Solutions segment and Other. Our planning assumes that EBIT before special items will be slightly above the prior-year level in the Surface Technologies, Nutrition & Care and Agricultural Solutions segments. By contrast, we anticipate a considerable decline in EBIT before special items in the Materials and Chemicals segments.
The average cost of capital basis will increase in 2020 due to the inclusion of the assets acquired from Solvay. As a result, we expect the BASF Group’s ROCE to reach between 6.7% and 7.7% (2019: 7.7%). In both the Materials (2019: 10.7%) and Industrial Solutions (2019: 12.5%) segments, we forecast a considerable decline in ROCE compared with the previous year. We expect ROCE to be at the prior-year level in the Surface Technologies segment (2019: 5.7%). By contrast, we anticipate a slight year-on-year increase for the Agricultural Solutions (2019: 5.3%) and Chemicals (2019: 6.8%) segments. In the Nutrition & Care segment (2019: 10.0%), we expect a considerable increase in ROCE compared with 2019.
The significant risks and opportunities that could affect our forecast are described under Opportunities and Risks.
1 For sales, “slight” represents a change of 1–5%, while “considerable” applies to changes of 6% and higher. “At prior-year level” indicates no change (+/–0%). For earnings, “slight” means a change of 1–10%, while “considerable” is used for changes of 11% and higher. “At prior-year level” indicates no change (+/–0%). At a cost of capital percentage of 9% for 2020, we define a change in ROCE of 0.1 to 1.0 percentage points as “slight,” a change of more than 1.0 percentage points as “considerable” and no change (+/–0 percentage points) as “at prior-year level.”
This page contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors; they involve various risks and uncertainties; and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2019. BASF does not assume any obligation to update the forward-looking statements contained in this outlook above and beyond the legal requirements.