Economic Environment and Outlook

Economic developments in the first half of 2020 were significantly impacted by the corona pandemic. The sharp drop in economic activity in China in January and February was followed by similar declines in almost all countries worldwide from March onward due to government-ordered or voluntary closures of production and sales sites and many other restrictions. Global gross domestic product is expected to have fallen by around 6% year on year in the first half of 2020.

The economic downturn has impacted our customer industries to varying degrees. Although demand from the detergent and cleaner industry and the food industry remained stable, production here was also affected by restrictions. Much higher supply and demand-related losses were seen in particular by the consumer durables, energy and resources, and construction industries. The automotive industry was particularly strongly affected: Globally, production fell by around one-third in the first half of 2020, although China, the world’s largest automotive market, was already recording year-on-year growth of 10% in the second quarter after a decrease of 46% in the first quarter.

Based on preliminary, partly estimated data, global industrial production contracted by around 8% in the first half of 2020. Industrial production in China sank by nearly 10% in the first quarter of 2020 but returned to growth of almost 5% in the second quarter. The rest of the world saw what are expected to be double-digit decreases overall in the first half of 2020.

Global chemical production contracted by around 4% year on year in the first half of the year. In China, this fell by almost 8% in the first quarter of 2020. In the second quarter, by contrast, it was again nearly 4% above the prior-year level. The recovery in China began as early as March, while the United States and the E.U. first saw signs of a stabilization at a low level in May. Chemical production in the United States declined by around 7% overall in the second quarter compared with the prior-year period. The E.U. recorded a total decrease of 11% in April and May. In Japan, chemical production declined by a total of 13% in April and May compared with the same months in the previous year.

The price of oil averaged $40 per barrel (Brent crude) in the first half of 2020, below the average for the prior-year period ($66 per barrel). The oil price fluctuated sharply due to the collapse in demand and the initial failure of OPEC+ negotiations on production cuts.

For the second half of 2020, we anticipate a high level of uncertainty due to the ongoing corona pandemic.

Some of the risks relating to short-term demand and margin development presented in the BASF Report 2019 have materialized as a result of the corona pandemic. Due to the high level of uncertainty at present, the development of demand and margins is exposed to increased risk in the second half of the year.

The corona pandemic also poses a significant risk for long-term macroeconomic developments. In the absence of a recovery in the near future, we see an increased impairment risk for some items of property, plant and equipment and intangible assets. We do not yet have sufficient visibility to predict the long-term economic effects of the corona crisis; we are analyzing market developments for potential needs for impairment. Above and beyond this, we do not see any material new or increased risks as a result of the crisis, such as supply chain disruption risks or the risk of default on receivables.

According to our assessment, there continue to be no individual risks that pose a threat to the continued existence of the BASF Group. The same applies to the sum of individual risks.

For the third quarter of 2020, we currently do not expect EBIT before special items to improve significantly compared with the second quarter of 2020, in part due to the generally lower demand in August and the seasonality of the Agricultural Solutions business.

On April 29, 2020, BASF withdrew its outlook for the 2020 business year as the economic effects of the corona pandemic on our customer industries, especially the automotive industry, cannot be reliably estimated. Given the continued high level of uncertainty surrounding economic developments due to the effects of the pandemic and the low visibility, it is still not possible to make any concrete statements on the development of sales and earnings for the full-year 2020.

We expect to close the divestiture of the construction chemicals business in the third quarter of 2020 and the divestiture of the pigments business in the fourth quarter of 2020, subject to the approval of the relevant competition authorities in each case. We do not see any significant increase in risks for the closing of the transactions as a result of the pandemic.