Shrink to Consolidate, or Just Consolidate – Mixed Signals from Europe

C-MACC Sunday Theme and Weekly Recap

Shrink to Consolidate, or Just Consolidate – Mixed Signals from Europe

• Radical shifts are needed in the European Chemical industry, and the moves announced by BASF this week suggest that the company is positioning itself better to exploit opportunities and reduce risk. 
• Europe needs fewer and larger companies to compete, something the EU competition body recognized this week. However, lessons from GE, Tyco, and DuPont suggest that the conglomerate is inefficient and confusing.
• The easiest example today is that BASF’s Agriculture business is very undervalued in the portfolio, and while BASF is suggesting a focus on “Verbund” chemicals with China, the split would allow focus everywhere needed.
• Europe needs some significant consolidation in basic chemicals, even if the oil company ownership of many assets complicates this. The Equistar model in the US in the last 90s may be the suitable proxy for Europe.
• Otherwise, we look at weakening ethylene prices in the US, lower oil prices driving lower chemical prices, except ammonia (for now). We also look at what it is costing Europe to pursue hydrogen, and we question the IEA.
• We want to highlight a webcast we are doing on October 9^th at 8.00am Central – we will co-host with Dragoman, and the subject will be energy supply/demand and Asia – Link to the webcast sign-up here

Exhibit 1: While BASF has underperformed its US peers, the broader US market is much stronger than Europe. Still, the fundamentals in Europe look weak.

Source: Capital IQ

See the PDF below for all charts, tables, and diagrams