Relying on policies and market dividends, China’s chemical industry has crossed the “big river” and is now facing a new wave of industrial chain changes and restructuring. Is this a rare opportunity or a pitfall with unclear prospects?
BASF, the world’s largest chemical company, has invested in China, which is causing fluctuations in the industry. BASF, which owns bulk chemicals, special chemicals and some agricultural businesses, has a complete product matrix across the board and leads the industry in profitability. In 2021, BASF’s sales of US$93 billion far exceeded the US$65.8 billion of the world’s second-largest Sinopec and the US$55 billion of the world’s third-largest American Dow. The impressive performance and the fact that BASF’s share price earlier this year was close to the low during the 2008 financial crisis attracted the attention of the keen-minded stock god Buffett. Buffett purchased 2 million shares of BASF for US$1.3 billion. This move was regarded as a promising move by the stock god. Development of the global chemical industry.
42.5% of BASF’s revenue comes from Europe, and 1/3 of its employees work in Ludwigshafen on the Rhine. The “gas outage” crisis caused by the Russia-Ukraine conflict has a greater impact on its European business, which is affected by rapid cost increases and production shortfalls. The trouble with pauses. Although Germany has always subsidized electricity bills for its chemical companies to ensure global competitiveness, the impact of the Russia-Ukraine conflict on the European chemical industry and even the global chemical product market has been too great and lasted too long. Under repeated shocks European companies represented by BASF are under heavy pressure.
Against this background, BASF’s huge China investment plan passed in July this year shocked the industry. It took 8 years to build, invested 10 billion euros, and formed a closed-loop production in the third phase. It is the first wholly foreign-owned project in my country’s chemical industry. , the amount of a single investment has equaled all investments made by BASF since it entered mainland China in the 1990s. This time, the global chemical giant settled in Zhanjiang, Guangdong, which can be called a veritable vote with your feet.
At present, the first unit of the BASF (Guangdong) integrated base has been officially put into operation. It can produce 60,000 metric tons of modified engineering plastics per year to meet the needs of customers in the Asia-Pacific region in the fields of automobiles, electronic products and other fields. The industrial growth logic behind it is that the world will expand in the next ten years. 60% of the growth in demand for chemical products will come from China.
As one of the key regions in the global chemical industry, the global share of key chemical products produced in Europe is between 10% and 20%, and the global market share of TDI, MDI, and methionine production capacity is more than 30%. The turmoil has been transmitted to all links of the industrial chain. Whether to expand to regions outside Europe is a point of contention in the European industry. China, with its well-established industrial clusters and guaranteed supply of raw materials, has become a good choice – but geographical factors have led European companies to hesitate to expand. Noting that China had doubts, BASF did not officially make the decision until July, which was not without comprehensive consideration, but it also set a good example for European companies with travel plans.
The changes in the cost of chemical products in China and Europe brought about by the energy crisis are only temporary dividends for exports. It is really worth looking forward to whether China’s chemical industry can use this opportunity to shorten the pace of catching up in high-end materials and cutting-edge products such as new chemical materials and specialty chemicals. .
In addition, some of the development experience of the Japanese chemical industry, which still has great influence in the global chemical field, may be used for reference. Japan’s leading chemical companies generally focus on high-value chemical products, while the surviving small and medium-sized chemical companies have achieved the ultimate in specialization and refinement. The Japan Chemical Industry Association has been committed to promoting an internationally accepted certification system so that the superior technologies of the Japanese chemical industry can be promoted globally.
The chemical industry has entered a high-level stage of global competition, and the competition for specialty chemicals and terminal markets has become more intense. For my country’s chemical industry, where industry strength is still scattered and business diversification of high-quality enterprises is insufficient, labor cost advantages, engineers Dividends and industrial chain supporting advantages are close to peaking. It may be key to cultivate “single subject champions” with more advanced innovation capabilities and “all-round champions” with stronger comprehensive strength as soon as possible to comprehensively enhance their position in the global industrial value chain.
01
Is Buffett “betting” on the chemical industry?
Some investors may ask, what does it mean for Buffett to “buy the bottom” of BASF?
In the author’s opinion, considering BASF’s business segments and wide sources of revenue, for example, 43% of its revenue comes from Europe, about 29% from North America, about 24% from Asia Pacific, and about 5% from South America, Africa and the Middle East. The author believes that buying this chemical giant can be understood to a certain extent as the “stock god” is betting on the entire chemical industry!
BASF is a long-established chemical company in Germany founded in 1865. It is also the largest chemical company in the world in terms of revenue. Part of the main business is bulk chemicals (with relatively low differentiation and poor profitability). Among them, chemical products and general chemical materials account for 35% and 29% of operating profits respectively;
The other part is special chemicals (higher differentiation and stronger profitability). BASF’s specialty chemicals include industrial solutions, surface technology (mainly catalysts and coatings) and nutritional health products, accounting for 12%, 10% and 6% of operating profits respectively.
In addition, BASF also has part of its business in agriculture. It used to mainly make pesticides and herbicides, and later acquired Bayer and Munich.�They all merged and had to sell off their seed business. Because this part of the business has a patent protection period, it is somewhat similar to the pharmaceutical industry, so the valuation will be higher.
But as mentioned earlier, 42.5% of BASF’s revenue comes from Europe, and one-third of its employees work in Ludwigshafen, the giant chemical plant on the Rhine River. In the context of the current geopolitical conflict between Russia and Ukraine, Moscow has imposed a natural gas embargo on Europe, which has caused the price of natural gas in Europe to soar and has had a great negative impact on BASF’s operations.
We can see from Figure 1 that due to the surge in natural gas prices, BASF’s natural gas costs increased by 300 million euros per month in the first half of this year. On an annualized basis, the impact in one year is as high as 3.6 billion euros. As a chemical company with a strong presence in Europe, BASF is obviously the most affected by geopolitics.
Then why does Buffett still choose to buy against the trend at this time?
As we all know, Buffett’s investment logic is mostly to buy good companies at lower or reasonable prices in reverse. He has a long-term perspective. The author believes that the reason why he is willing to buy BASF worth more than one billion euros is because he believes that the company has a competitive advantage and can survive the current cycle and thrive in the next up cycle. Let him be richly rewarded.
In summary, there are two key points: first, competitiveness; second, valuation and growth.
02
BASF’s core competitiveness:Efficient operation system maximizes resource utilization
Those who are familiar with chemical engineering should be familiar with the Verbund Manufacturing System founded by BASF. BASF’s current two largest production bases, namely the Ludwigshafen production base and the Antwerp production base in Belgium, both use Webb production systems.
Among them, the Ludwig Chemical Base has 200 production plants, 3,000 kilometers of pipelines, 106 kilometers of roads, 230 kilometers of railways, and 2,000 buildings. In this area, 1,900 trucks, 400 rail cars and 15 barges work hard every day.
Since Europe historically does not have rich shale oil and gas reserves like the United States, nor does it have the natural resource endowments of the Middle East and Russia, it can only establish an optimized and efficient system. BASF links roads, pipelines, production plants, and buildings to efficiently optimize them.
For example, the production process of polyacrylic acid (Acrylic Acid) used in adhesives, diapers and ion exchange resins is an exothermic reaction. It would be a pity to dissipate a large amount of waste heat naturally, so BASF collects this waste heat in pipelines. Directly supplying the cracking device can save about 10% of energy consumption per year; in addition, by storing in pipelines, the use of additional storage tools and devices can be reduced, and the waste materials somewhere can be used as raw materials for another production process. Optimize the entire production process.
BASF is also unambiguous in its investment in technology. At its Ludwig and Antwerp production bases, BASF is assembling a large number of Automated Guided Vehicles (Automated Guided Vehicles). These vehicles do not require manual driving and rely on remote control and sensors as well as underground transponders for loading, moving, and transporting goods. Avoid diversion and unloading to reduce the increasing cost of blue-collar labor and create an effective value chain.
In addition, BASF’s performance during the 2020 epidemic is particularly remarkable. In 2019, the revenue gap between it and second-place Sinopec was only US$9 billion. During the epidemic, its operating capabilities and resilience were reflected, and the revenue gap widened to US$22 billion. It is worth noting that BASF generally does not pay excessive premiums during the capital allocation process. At the same time, the dividend payout ratio has also increased year by year to the recent 70%, which is relatively friendly to shareholders.
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