BASF suffers from geopolitical turmoil

BASF shares have plunged over the last several months amid Russia-Ukraine crisis. While some investors may consider it a chance to buy a quality company at a cheap price, there are reasons to be skeptical. BASF is in danger of further losing its position in the petrochemical market due to strong global competition, according to a report on investor portal Seeking Alpha.

Geopolitics was undoubtedly the culprit for the current situation – BASF, whose operational efficiency is highly dependent on Russian gas supplies, has been forced to look for ways to get rid of its Russian assets since the beginning of hostilities in Ukraine. BASF is exploring a plan to offload energy assets in Russia belonging to its Wintershall Dea unit to its Russian billionaire joint venture partner, according to people familiar with the matter.

Gas supplies from Russia via Nord Stream 2 began to fall sharply due to the restrictions imposed – this was particularly noticeable from the end of May 2022:

Inventories in Europe are steadily rising, which could indicate a decline in demand for non-perishable and non-essential goods – at some point, European manufacturers, which account for 39% of BASF’s total sales, will produce less, which will mean less demand for the company’s products.

Given the widespread increase in the price of goods, mainly due to rising fuel costs, the interest rate of the ECB may significantly grow from the current level. With inflation high and ECB’s upcoming monetary tightening, BASF’s largest market – Europe – is likely to be hit hard. At the same time, there is a risk that other markets important to the company will be taken over by competitors.

In Asia, another large market for BASF, other petrochemical producers including Russia’s Sibur and China’s Sinopec have been expanding sales.

Even in Russia, which was isolated by sanctions, the development of the petrochemical industry was in full swing before the outbreak of hostilities in Ukraine. The largest petrochemical company in Russia, Sibur, recently launched a major state-of-the-art polymer production plant in western Siberia, and I assume it will now have a huge production capacity for years to come. Recent news about the expansion of Sibur’s product line suggests that my suspicions are not unfounded:

SIBUR, the largest integrated petrochemicals company in Russia and one of the fastest-growing companies in the global petrochemicals industry, has expanded its offering of advanced, eco-friendly polymers for use in packaging, pipe production and other industries.

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