LONDON (ICIS)–Germany’s chemical major BASF is benefiting from higher-than-expected demand in Europe and China’s pollution-related plant closures, which have caused a spike in global chemical prices, analysts at Bernstein Research said on Thursday.
The analysts, who upgraded their forecast for BASF’s stock prospects, said that their previous 2016 ‘Under-perform’ valuation had come on the back of feared overcapacity in European chemicals which could have dented the firm’s margins.
However, a strong-than-expected economic performance during 2017 has changed the picture and BASF is set to greatly benefit from that.
Bernstein placed a ‘Market-perform’ valuation on BASF’s stock – or ‘Neutral’ in other investment banks’ terminology – and a share price forecast of €88 in a 12-month time frame.
BASF’s shares were trading 0.6% higher on Thursday morning €94.19.
The analysts explained that facts had proved their previous forecast for European chemicals wrong, after fearing that “overcapacity and a stagnant, uncompetitive European industry” would dent corporates’ margins.
“Combined with stagnant EU chemicals volumes, we argued [in 2016] it was a matter of time before price competition pressured margins… [However] Industry overcapacity is seemingly not as severe as we feared and EU chemicals growth is accelerating… To our surprise, supply-demand tightness has driven margins even higher,” said Bernstein.
“China has shuttered countless plants for environmental reasons, reducing supply. It is unknowable if these thousands of closures are temporary or permanent. As a consequence, prices have spiked for many chemicals. As there haven’t been major disruptions outside of China, global overcapacity must be less than we thought.”
According to the analysts, chemicals sales volumes have risen this year, and in September they increased by 4% year on year.
However, the analysts went on to say that, in BASF’s case, there was not enough of a case to upgrade company to ‘Outperform’ – or ‘Buy’ – as the analysts “remain reserved” about the potential positive changes to the German company’s portfolio.
Earlier this month, BASF announced it was in talks with Luxembourg-based investment firm DEA Group’s subsidiary LetterOne about the merger of its oil and gas operations, with an eye to a possible initial public offering (IPO).
“Although the market is hoping for BASF to make some big portfolio moves, we remain reserved. For example, they are in talks to separate Oil & Gas – which makes strategic sense but has relatively little impact on valuation. Or BASF could buy parts of DowDuPont’s specialties, but BASF’s integration track record is mixed.”
Pictured: BASF’s main site in Ludwigshafen, Germany