BASF’s profit warnings

On Monday, BASF SE (BASFY), the world’s largest chemical company, wreaked havoc on investors by providing a disappointing profit outlook for the second quarter and 2019. The German chemical giant expects its second-quarter EBIT to drop nearly 47% YoY (year-over-year). It’s guided for 2019 EBIT that’s nearly 30% lower than its EBIT in 2018.

In the last couple of quarters, the trend in BASF’s revenue growth and net profitability has turned negative. It reported a 2.8% YoY revenue fall in the first quarter, and its adjusted EBIT and net profits tanked 44% and 14.7%, respectively. Lower volumes in the Chemicals and Materials segments affected the company’s first-quarter operational results.

Weakness in the automotive business hurt BASF’s Surface Technologies segment’s profits in the first quarter.

Why BASF cut its profit outlook

BASF blames a notable decline in industrial production for its lower volumes. In a statement, it said, “At around 1.5% according to current estimates, growth in industrial production in the first half of 2019 was much slower than expected.”

BASF believes that the ongoing global trade war and the falling earnings of farmers are resulting in lower demand for its crop protection products.

Moreover, the company points to a significant slowdown in the global auto industry, where production has fallen nearly 6% in the last six months.

What does this mean for the global economy?

US auto sales peaked at ~17.6 million vehicle units in 2016. While in 2018, US vehicle sales rose a marginal 0.3% compared to the previous year, they’ve fallen nearly 2.0% in the first six months of 2019.

The National Automobile Dealers Association expects 2019 US auto sales to be near 16.8 million units, below the 17-million mark for the first time since 2014, according to CNBC.

The situation doesn’t seem to be promising in China either. According to the data compiled by MarkLines, new vehicle sales in China fell 12.4% in the first half of 2019.

Falling auto sales have forced global automakers, including General Motors (GM), Ford Motor Company (F), Fiat Chrysler Automobiles (FCAU), Toyota Motor (TM), and Honda Motor Company (HMC), to focus only on areas that yield high profits.

In the last few years, GM has exited many international markets, including Europe, India, and South Africa, and has shut down its plans in Russia. The company aims to increase its focus on North America and China as its key markets.

Mainstream automakers are also trying to improve their premium and pickup truck line-ups, as these categories yield higher profitability than small passenger cars.

Auto sales are cyclical in nature and typically act as a leading economic indicator. Therefore, it’s important for investors to pay close attention to the ongoing trend in auto sales to get a reasonable idea of the economy’s performance.

BASF’s warnings aren’t just limited to slowing auto sales. They also point toward a deteriorating global industrial output, signaling a rapidly slowing economy—if not a near-term recession.

Stock movement

After its profit warning on Monday, BASF’s American depositary receipt tanked 5.2% on the day. The warning also sent a shockwave through the US market. The Dow Chemical Company’s parent company, Dow (DOW), fell 1.6% on Monday. Similarly, US mining and manufacturing giant the 3M Company (MMM) slipped 1.6% on Monday.

In July so far, BASFY, DOW, and MMM have seen value erosions of 7.3%, 4.4%, and 3.6%, respectively. In the second quarter, BASFY, DOW, and MMM posted falls of 1.0%, 16.6%, and 4.5%, respectively.

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