Economic Environment and Outlook
Economic development in the first half of 2022 was volatile. Following a subdued start to the first quarter of 2022 with wide regional variance (moderate growth in gross domestic product in the E.U. and Asia, slight decline in North America), the economy slowed in the second quarter of 2022. As a result, global gross domestic product largely stagnated in the second quarter compared with the previous quarter. Despite slowing growth momentum, global gross domestic product in the first half of 2022 was around 3.0% higher than in the first half of 2021.
A range of different effects contributed to the economic slowdown over the course of the first half of 2022: The temporary lockdowns in major Chinese cities reduced consumer demand in China and simultaneously led to supply shortfalls as a result of production shutdowns and disruptions to logistics chains. Moreover, prices for energy and raw materials rose sharply following the outbreak of the war of aggression on Ukraine. The U.S. Federal Reserve has already reacted to rising inflation rates with a significant tightening of monetary policy, which had a braking effect on industries such as construction. Declining share prices on the stock market and the resulting effects on wealth also curbed consumption in the United States. In the E.U. countries highly dependent on gas supplies from Russia, uncertainty among consumers and producers rose considerably.
Based on preliminary data as well as some estimates, global industrial production expanded by around 3.5% in the first half of 2022 compared with the prior-year period. Overall, the lockdowns in China in the second quarter dampened growth momentum in the manufacturing sector, as production slowed in China and other regions lacked intermediate goods from China. Demand varied in our customer industries. Global automotive production declined by around 1.8% year on year in the first half of the year. This was partially due to supply chain disruptions. The war in Ukraine restricted wire harness supplies for European automotive manufacturers. The global semiconductor shortage continued but the situation is gradually improving. In China, automotive demand was temporarily weakened by the lockdowns.
The production of consumables (health and nutrition, care products) and consumer durables (textiles, furniture) continued to grow compared with the previous year. Production also increased year on year in the electric and electronics industries. The picture was mixed in the construction industry, with growing demand in the E.U. but a downturn in the United States and China. Construction activity in the United States and E.U. was curbed by rising interest rates. Nevertheless, demand for construction materials remained high in the first half of 2022. Global agricultural output rose significantly, with the strong decline in output in Ukraine offset by higher volumes in other regions.
Global chemical production expanded by around 2.5% in the first half of 2022. Growth rates varied widely by region. In the E.U., chemical production declined slightly overall. By contrast, the United States recorded strong growth of 6.5% due to base effects following the restrictions to production caused by a winter storm in the prior-year period. In China, the world’s largest chemical market, chemical production rose by 4%.
The price of oil averaged $107 per barrel (Brent crude) in the first half of 2022, significantly above the average for the prior-year period ($65 per barrel). The war of aggression on Ukraine and the sanctions on Russia saw the average oil price jump from $87 per barrel in January to $122 per barrel in June. In Europe, average gas prices (TTF) rose from $7.76 per mmBtu in the first half of 2021 to more than quadruple this amount ($31.94 per mmBtu) in the first half of 2022. Average gas prices in the United States (Henry Hub) almost doubled in the same period, from $3.40 per mmBtu to $6.41 per mmBtu.
The assessment of the global economic environment in 2022 was adjusted as follows (previous assumptions from the BASF Report 2021 in parentheses; current growth assumptions are rounded):
- Growth in gross domestic product: +2.5% (+3.8%)
- Growth in industrial production: +3.0% (+3.8%)
- Growth in chemical production: +2.5% (+3.5%)
- Average euro/dollar exchange rate of $1.07 per euro ($1.15 per euro)
- Average annual oil price (Brent crude) of $110 per barrel ($75 per barrel)
For the second half of the year, BASF anticipates a gradual cooling of economic development globally, but much more pronounced in Europe. This assumes that there are no severe restrictions resulting from new lockdowns in China and that natural gas shortages do not lead to production shutdowns in Europe.
Based on the very positive business development in the first half of 2022 and the above assumptions, the forecast for the BASF Group for the 2022 business year was adjusted as follows (previous forecast from the BASF Report 2021 in parentheses):
- Sales growth to between €86 billion and €89 billion (between €74 billion and €77 billion)
- EBIT before special items of between €6.8 billion and €7.2 billion (€6.6 billion and €7.2 billion)
- Return on capital employed (ROCE) of between 10.5% and 11.0% (between 11.4% and 12.6%)
- Reduction in CO2 emissions to between 18.4 million metric tons and 19.4 million metric tons (between 19.6 million metric tons and 20.6 million metric tons)
Current developments, mainly driven by the war in Ukraine and its impact on energy and raw materials prices and the availability of raw materials, especially in Europe, may lead to additional headwinds, deviating from the assumptions presented above. In particular, risks could arise from production stoppages at major European sites as a result of further restrictions to European gas supplies from Russia. In this case, the loss of European capacities could be partially compensated for by higher plant capacity utilization at sites outside of Europe. Further risks could arise from the future course of the coronavirus pandemic and new measures to contain the number of infections. Opportunities could arise from continued high margins, even in the case of an economic slowdown. We are responding to the economic slowdown with cost reduction measures.
For the remaining opportunity and risk factors, the statements made in the BASF Report 2021 continue to apply overall. According to the company’s assessment, neither existing individual risks nor the sum of individual risks pose a threat to the continued existence of the BASF Group.
The sufficient supply of natural gas in Europe remains the greatest uncertainty. A continuous supply of natural gas according to demand is essential to chemical production. Around 60% of the natural gas consumed by BASF in Europe is used to generate the energy (steam and electricity) needed for production. Around 40% of natural gas is used as a raw material to produce important basic chemicals and a wide range of products in the downstream value chains supplying almost all sectors of industry.
The consequences would vary depending on the duration and extent of supply restrictions, the existence of alternative supply sources and possible substitutions, as well as any optimization of production to reduce the use of natural gas. It is therefore not possible to quantify the risks with sufficient accuracy.