German chemicals giant BASF SE on Feb. 24 confirmed that in order to save further costs, it is closing a number of energy-intensive plants at its Verbund site, its main site in Ludwigshafen. The closures include one of two ammonia production facilities at Verbund and the caprolactam plant and associated fertilizer facilities at the site.
The closures will result in 700 job cuts at the site, and are part of wider plans by BASF to cut 2,600 positions globally.
BASF said the capacity of its caprolactam plant in Antwerp, Belgium, is sufficient to serve captive and merchant market demand in Europe going forward. It also said high value-added products, such as standard and specialty amines and the AdBlue business, will be unaffected and will continue to be supplied via the second ammonia plant at the Ludwigshafen site. Ammonia is the largest consumer of natural gas as a raw material at the site.
The two ammonia plants at Ludwigshafen have a combined production capacity of 910,000 mt/y, according to Green Markets database. Both ammonia units have been operating at reduced capacity in recent months amid high gas prices following Russia’s invasion of Ukraine. In Europe, BASF also operates a 610,000 mt/y ammonia plant in Antwerp, Belgium, according to the database.
The closures and job cuts are in addition to an already announced major cost savings program to be implemented this year and in 2024. BASF also plans to end a share buyback early because of a deteriorating global economy and Europe’s energy crisis. The €3 billion (approximately $3.18 billion at current exchange rates) share buyback program that started in January last year was meant to run until the end of 2023.
“High energy prices are now putting an additional burden on profitability and competitiveness in Europe,” BASF Chair and CEO Martin Brudermüller said in a company FY2022 earnings presentation statement, in which he also cited “overregulation, slow and bureaucratic permitting processes, and in particular, high costs for most production input factors.”
The group’s FY2022 operational earnings were burdened by additional energy costs of €3.2 billion (approximately $3.39 billion at current exchange rates) globally. It reported that Europe accounted for around 84% of this increase, which it said mostly impacted the Verbund site in Ludwigshafen, and that higher natural gas costs accounted for 69% of the overall increase in energy costs globally.
While European natural gas prices have retreated to around €52 per megawatt hour (MWh) from August’s peak of more than €340 per MWh, reached following Russia’s invasion of Ukraine, they remain above historic averages and what German energy-intensive industries are used to, and are higher than in rival manufacturing regions in the US and Asia. Germany – Europe’s biggest economy – has come out of a mild winter with relatively full gas storage facilities, and switching from Russian gas to liquefied natural gas has averted the threat of gas rationing, but will keep costs elevated.
Brudermüller, in an earnings call, while noting gas prices have declined since their August peak, said he expects gas prices to stay “considerably higher” in the long run compared to what they were over the past several years. He also cited lower market growth in Europe has negatively impacted supply and demand in several value chains.
Responding to an analyst’s question about the gas price scenario under which BASF made the Ludwigshafen site plant closures, the chief executive said the overall assumption that the group worked with was that “the very competitive, not to say price-advantaged, gas deliveries from Russia will not play a role in Europe, and in particular North Western Europe, going forward.
“In terms of what that means for the price setting for natural gas for North Western Europe going forward, we think that there is a high likelihood that the natural gas price for North Western Europe, and then resulting from that to a certain extent also for power, will be set on the basis of LNG imports,” he said.
Given that the key sources for LNG imports in Europe are the US and Qatar, BASF said it expects there is the likelihood that the base for prices will be the Henry Hub price plus the cost of the LNG supply chain.
“In other words, from the liquefaction and transportation to gasification, that cost is somewhere in the order of magnitude of $5 to $6 per million BTU,” said Brudermüller, adding that it likely will take about two years to get to this situation, given the time to establish a full LNG supply chain for Germany.
Responding to an analyst’s question whether BASF will retain the option to bring any of the Ludwigshafen plants that are to be closed back online should the demand picture improve in the medium term, Brudermüller said this option is excluded, as while the plants won’t be demolished they will be fully shut down and the teams that operate the plants also will be dissolved in order to reduce the fixed cost.
BASF said the structural measures it is implementing at its production site in Ludwigshafen are designed to lower costs by more than €200 million a year by the end of 2026. That is in addition to the previously announced cost-saving program BASF is implementing to save €500 million annually by the end of 2024, the company said.
The group last month unveiled a €7.3 billion write-down for FY2022 on the value of its Wintershall Dea AG energy business, which is pulling out of Russia. BASF had at the time warned it would swing to a €1.4 billion net loss in 2022, a figure that it revised to a €627 million net loss on Feb. 24
BASF expects adjusted earnings before interest and tax to be between €4.8 billion and €5.4 billion this year, compared with the €6.9 billion recorded in FY 2022.