The disruption of Russian gas supplies threatens its giant plant in Ludwigshafen and soaring energy prices are hampering its profitability. Through the world leader in chemicals, the bankruptcy of German energy policy is apparent.
Since the shutdown for maintenance of the Nord Stream gas pipeline on July 11, the 172,000 inhabitants of Ludwigshafen have been holding their breath. After the limited pipeline restart 10 days later, the respite was short-lived. The Russian gas giant Gazprom has indeed announced that it will drastically reduce gas deliveries to Europe via Nord Stream to 33 million m3 daily. The company will therefore deliver around 20% of the gas pipeline’s capacity, compared to 40% currently.
Since the shutdown for maintenance of the Nord Stream gas pipeline on July 11, the 172,000 inhabitants of Ludwigshafen have been holding their breath. After the limited pipeline restart 10 days later, the respite was short-lived. The Russian gas giant Gazprom has indeed announced that it will drastically reduce gas deliveries to Europe via Nord Stream to 33 million m3 daily. The company will therefore deliver around 20% of the gas pipeline’s capacity, compared to 40% currently. One of the first victims could be BASF, world leader in chemistry and pride of Ludwigshafen, to the point that some of its hotels decorate their rooms with the group’s photo. Established since 1865 in the industrial cradle of Rhineland-Palatinate, BASF has built a veritable city within the city which stretches along the Rhine for seven kilometers long and three kilometers wide. About 39,000 people travel there by bus or using one of the 14,000 red bicycles available to them. Some employees are housed in one of the 800 units of four neat little houses built at the beginning of the 20th century by BASF. The size of the site is commensurate with its economic weight: it provides 30% of the group’s production and its global added value. Ludwigshafen supplies Europe with products that are ubiquitous in daily life, from shower gels to fertilizers, including polyamides for cars, sportswear and food coloring. But, to do this, the Ludwigshafen site alone absorbed 37 terawatt hours of gas last year, or 4% of the volumes consumed across the Rhine. Martin Brudermüller, the CEO of BASF, sounded the alarm in the German media at the start of the war in Ukraine, when the debate mounted in Germany on the advisability of imposing an embargo on Russian gas: “If the supply fell sharply and permanently below 50%, we would have to shut down the production site in Ludwigshafen,” he warned. Four months later, BASF has not developed an alternative solution. The group still appears as helpless in the face of a closing of the Russian tap. Unlike households that can shorten the time they spend in the shower or reduce the level of their air conditioning or heating, the BASF installations in Ludwigshafen are an integrated model whose different elements are connected by a tangle of 2,850 kilometers giant pipes. Energy consumption has already been largely optimised, with the heat from certain chemical reactions being used to power other processes. As in a living body, renouncing one of the productions of the 200 or so factories present would unbalance the building. At the heart of this organism, two steam crackers the size of 13 football fields and heated by gas delivered by gas pipeline transform naphtha – a light hydrocarbon distilled from crude oil – into basic molecules such as ethylene or propylene which are used to produce plastics and other chemicals needed by industry. Some by-products that arise from the manufacturing processes in the various factories are reused as raw materials in others. The acetylene is thus transported to around twenty other production units. In total, only 7 to 8% of the raw materials that enter the site to the rhythm of the constant ballet of barges, trains or trucks end up as residue burned by 800 to 1,200°C in the site’s huge incinerator. It is difficult under these conditions to imagine saving the site by stopping the production of ammonia or acetylene, which are particularly gas-intensive. In the event of rationing, BASF could bring in some of the ammonia and acetylene from its other European site in Antwerp. “It is not running at 100% capacity and it is only 5% to 10% exposed to Russian gas, compared to 30% for Ludwigshafen”, underlines Markus Mayer, analyst at Baader Bank. The chemical giant’s spokeswoman, Daniela Rechenberger, recalls, however, that “Ludwigshafen is by far the largest site of the BASF Group and its value chains are significantly longer than those of Antwerp. A small part at most of Ludwigshafen’s production could be offset by our facilities in Belgium,” she concludes. The group could also buy ammonia and acetylene on the world market. “It’s not ideal but it represents a significant cushion for BASF, believes Markus Mayer. The question is to know at what price?”, He specifies. Even with enough gas, the profitability of the Ludwigshafen site is threatened. In an interview with Spiegel in early June, Martin Brudermüller pointed out that “80% of the total costs [pour produire de l’ammoniac] depends on the price of gas. If it continues to increase, production will very quickly become unprofitable”. Rising energy prices have already cost BASF’s European sites an additional cost of 1.5 billion euros last year, of which 800 million for the last quarter alone. During the first three months of the year, the bill increased by 900 million euros. The group now expects to see its annual operating profit fall from 600 million to 1, 2 billion euros. A pillar of BASF’s competitiveness is faltering. “It’s the end of the dumping of Germany manufacturing Inc.,” exclaims Thierry Bros, professor at Sciences Po Paris. He recalls that the chemical giant has for decades bet on Russian gas because it was inexpensive, without seeking to develop alternatives likely to guarantee the country’s energy sovereignty.And this with the blessing of the various German chancellors, Helmut Kohl from Ludwigshafen to Angela Merk el, to Vladimir Putin’s main lobbyist, Gerhard Schröder. In autumn 1990, gas marketing agreements were signed with the Russian Gazprom by the BASF subsidiary specialized in energy exploration and production, Wintershall. It has since been renamed Wintershall DEA when DEA was bought from Russian oligarch Mikhail Fridman in 2018. In exchange for attractive prices, the subsidiary brought its technology to Gazprom for gas production. It has also contributed to the construction of several gas pipelines between Russia and Germany, including the controversial Nord Stream 2. This last commitment has already cost Wintershall DEA dearly, which wrote down its stake to 1.5 billion euros. euros in the first quarter. But the company is still reluctant to abandon its existing projects in Russia. It must be said that it participates in two gas fields in Siberia that BASF had negotiated in 2015 against the passage under Russian control of Rehden, the largest gas storage in Germany. These deposits represent 63% of Wintershall DEA’s reserves and 47% of its production. BASF’s financial director, Hans-Ulrich Engel, supported this strategy at the end of April in front of the group’s shareholders, assuring that it “helps to secure the supply of Europe and Germany”. The remark may seem incongruous given the Russian blackmail but it reflects the difficulty of the German giant to change software as the change will be painful for him. Not only will we have to pay more for its energy in the long term by seeking it elsewhere than in Russia, but BASF’s Russian bet also threatens a strategic part of its transformation. The group was counting on the IPO of Wintershall DEA, in which it holds 72.7% of the capital, to finance the greening of its model. BASF aims for carbon neutrality in 2050 and intends to reduce its CO2 emissions by 25% by 2030. To do this, it will have to achieve a share of renewable energy in its electricity consumption of 60% in 2030, against 16% currently. . Besides the fact that the showdown with Moscow has further postponed the IPO of Wintershall DEA, Markus Mayer calculates that “in the event of nationalization of the company’s deposits by Moscow, BASF would have to give up 13 to 16 billion euros in potential valuation” for its subsidiary. The group risks having to depreciate in its accounts the value of the latter, of 9.6 billion euros currently. According to the analyst, BASF will have to sell certain assets and dip into its cash to find room for manoeuvre. Bad news for the shareholders of the group who received a generous dividend: it has increased by 30.7% in the space of 10 years. For 2021, the group has paid 3.1 billion euros to its shareholders, which represents a return of 5.5%, among the 15 best of the 40 companies of the Dax, the benchmark index of the German Stock Exchange. This beautiful era is threatened. Especially since, like the German executive, its industrial flagship has made another bet for several years now which now seems riskier. Former head of the Asia Pacific region of BASF, based in Hong Kong for 10 years, Martin Brudermüller sees in China the guarantor of the group’s future growth. The latter has planned to invest 8 to 10 billion euros by 2025 in its new interconnected site in Zhanjiang, in southern China. Started in 2018, it will be the third largest after Ludwigshafen and Antwerp. As for Russia, the reasoning of the CEO of BASF does not bother with geopolitical considerations. China will represent 50% of the chemical market in 2030, “a global company like ours cannot do without half of the world market”, he concluded in Spiegel. For now, the risk is mainly due to the European exposure of the German group to the tune of 40% of its turnover, against only 15% in China. The risk of a new dependence would be all the more limited as the group produces in China exclusively for the Chinese market. While Chinese President Xi Jinping shows the greatest benevolence towards Vladimir Putin and the German government itself distances itself from Beijing, “one should not compare Russia and China. The two countries have different systems and cultures”, “I am convinced that the country will open up more once the pandemic is over”, assures Martin Brudermüller. The future will judge, but if the German executive can toughen its tone, without expensive energy or Chinese outlets, the horizon for its industry is bleak. BASF is the most glaring example.