Vitamin prices eroding profits at BASF fine chemicals
earnings increases across the board although vitamin prices
continue to eat into profits at its fine chemicals unit, reports
Dominique Patton.
As expected, the chemicals giant saw a hefty rise in operating profit, up 83 per cent to €4.86 billion, with the strong increase in industrial output during 2004, especially in Asia and the US, lifting demand. In this climate, chemicals firms have also been able to raise prices to pass on higher raw material costs to customers.
Continuing high energy and raw material costs will however influence a drive to prioritise value over volume, a strategy that will be difficult to put into place in the fine chemicals unit.
"If raw material prices over one month can increase 65 per cent, for example benzene, then you can no longer focus on volume," BASF board chairman Jurgen Hambrecht told a press conference in Ludwigshafen.
Yet the fine chemicals business, which has customers in the human and animal nutrition sectors as well as pharmaceuticals and cosmetics, has seen margins reduced to 2.7 per cent from 6.8 per cent the prior year.
Much of the damage came from lower vitamin prices that eroded a volume growth of 6 per cent. Sales to third parties from this unit fell 2.8 per cent during 2004 to €1.79 billion while earnings before interest and tax fell 61.6 per cent to €48 million.
The human nutrition business suffered particularly from a fall in prices for vitamin C, said the company. Most other vitamins also fell in euro terms.
"It is not without risk of you prioritise value over volume," noted Hambrecht, pointing to the 'real challenges' in the fine chemicals unit.
"With lysine and vitamin C we have overcapacity on a global basis. But prices are not just governed by supply and demand. There is also an alternative lysine source, soy, and if these prices go down it affects us independently of supply and demand," he explained.
The group has forecast a slight decline in sales and a moderate increase in income from fine chemicals operations during 2005. It declined to comment on where this improvement in income would come from.
BASF has been working on reducing fixed costs to offset falling prices. In November the firm said it will shed about 3,600 jobs at Ludwigshafen - the main vitamin production site - over the next three years as part of efforts to improve efficiency.
