Few companies are as geared to global trade as BASF of Germany.
The world’s second biggest chemicals company, founded in 1865, has 390 sites in more than 90 countries around the world and sells products that range from petrochemicals to pigments and dyes; from coatings and rust protection to battery materials; from foams to catalytic converters and from fungicides to food ingredients.
That global spread of products and activities means that, when global trade comes under pressure, so does BASF.
The €55bn (£49.5bn) giant today issued a profits warning that sent its share price down 6% at one stage.
It said that its earnings for this year before interest, taxation and one-off accounting items were likely to be down by “up to 30%” on 2018.
BASF was quite clear why this was the case. It said “significantly weaker-than-expected industrial production” had hit both sales volumes and profit margins.
Specifically, it highlighted weakness in global car-making, where it noted that production had fallen by around 6% in the first half of the year but by around 13% in China.
BASF also cited weakness in the agricultural sector in North America where, due to difficult weather conditions, there had been less planting of key crops than in the same period last year – hitting demand for herbicides, fungicides and insecticides.
It said the trade dispute had contributed to this. Among the retaliatory measures imposed by Beijing in response to Donald Trump’s tariffs has been levies of its own on soybeans, a key US agricultural export, where traditionally almost two-thirds of American export production has ended up in China.
The company added: “To date, the conflicts between the United States and its trading partners, particularly China, have not eased.
“In fact, the G20 summit at the end of June has shown that a rapid détente is not to be expected in the second half of 2019. Overall, uncertainty remains high.”
The warning has had a knock-on effect across world markets.
In the UK, shares of Melrose, the turnaround specialist that last year bought the car and aircraft parts maker GKN, have fallen by 12%. There have also been falls in shares of other UK-listed businesses which compete with BASF in some product categories, including Johnson Matthey, the industrial materials and catalysts group and Croda International, the speciality chemicals group whose products are used in the food ingredients and cosmetics sector.
In the United States, Dow, the world’s biggest chemicals company, has seen its shares fall by 1.5%, while in Germany itself peers such as Wacker Chemie, Covestro, Bayer, Evonik – the shirt sponsor to Borussia Dortmund – and Henkel have also fallen. So too have shares of Germany’s big three carmakers, Daimler, Volkswagen and BMW, which each to a greater or lesser extent rely on BASF’s products.
And, as a whole, the export-heavy DAX in Germany, which is more exposed than many European stock indices to global trade, has fallen by more than 1%.
The big question is whether the read-across to other sectors is quite as severe as the market reaction today suggests.
Some analysts wonder whether the problem is specific to BASF and argue that its chief executive, Martin Brudermueller, had been previously too optimistic about prospects.
Analysts at Citi, for example, told clients today they suspected there was “likely an element of ‘kitchen sinking’ (where every possible bit of bad news is thrown into a trading statement)” taking place.
But Carsten Brzeski, chief economist at ING Germany, said: “BASF’s profit warning shows that the big export-oriented German companies are starting to feel the pain [from the US-China trade war].
“Over the past 12 months, you could argue it was a nice bubble gradually deflating due to ongoing uncertainty, but further downsizing will cost jobs and money.”
If his analysis is correct, that is bad news for the German economy and, by extension, the eurozone, whose fortunes depend heavily on those of its most important constituent.
The most worrying thing about this profit warning is not its severity but the fact that it has been issued at a time when Germany is not even in recession.
The German economy only narrowly avoided a recession in the second half of 2018 and, while German industrial production in May rose slightly, this was on the back of some truly dreadful figures in April – in which activity contracted by more than at any point in almost four years.
And, if a quality company like BASF is suffering, others will be too.
As Arne Rautenberg, a fund manager at Union Investment, told Reuters: “It won’t be the last big German company forced to revise its assumptions downward.”
The United Kingdom is not as exposed to a slowdown in China, or to the malign consequences of the trade dispute between the US and China, as much as Germany.
Nonetheless, as a big open economy geared towards both imports and exports, it can be expected to feel some pain in due course.
And buyers of the goods in which BASF’s products feature – cars, textiles, foodstuffs – can ultimately expect to pay more for those items if the company is forced to respond to straitened circumstances by temporarily closing plants to reduce capacity or by raising prices to rebuild profit margins.
The lesson, if it were needed, from today’s events is that tariffs and trade disputes do not help anyone – companies, their employees and shareholders and, ultimately, consumers.