Letter from the Chairman of the Board of Executive Directors
Dear Shareholder,
The past year has been a brutal wakeup call that peace and economic stability cannot be taken for granted. Since February 24, 2022, a war has been raging in Ukraine – in the middle of Europe. This is a catastrophe for the people of Ukraine, and it marks a new era for all of us. We absolutely condemn Russia’s invasion.
There are considerable consequences for the global economy, and future developments are very uncertain. The past year was characterized by rising energy prices, inflation and fears of far-reaching economic turmoil.
Natural gas is one of our most important energy sources and a key raw material. The gradual reduction of Russian gas deliveries and the associated increase in energy prices in Europe presented us with immense challenges. Thanks to the incredible efforts of the BASF team, we were able to significantly reduce our gas consumption in Europe. Now, we would still be able to operate our largest site in Ludwigshafen even if we only had around 30% of the average gas volume that we consumed in 2021.
Our economic performance in 2022
Not only in Europe did 2022 turn out to be fundamentally different than had been expected at the beginning of the year. In addition to the volatile global economy and high inflation, China’s strict zero-COVID policy also had an adverse impact on markets. Nevertheless, BASF’s business proved robust. In 2022, sales rose by 11% to €87.3 billion (2021: €78.6 billion). Our employees demonstrated exceptional dedication. We were able to implement price hikes in nearly all segments. Income from operations (EBIT) before special items amounted to €6.9 billion, down by €890 million compared with the €7.8 billion recorded in 2021, but within our forecast range.
BASF’s business proved robust in 2022.
Russia’s war against Ukraine destroyed the political, economic and social ties between Russia and the West that had been built up over decades. We therefore decided to wind down our business in Russia and Belarus in 2022. The sole exception is our business that supports food production, as the war also increases the risk of a global food crisis. Wintershall Dea, in which BASF owns the majority of ordinary shares, will also cease its activities in Russia. Due to the developments there, BASF had to write down its stake in Wintershall Dea by several billion euros. For the BASF Group, this resulted in negative net income for the year.
The considerable slowing of the global economy also impacted the stock markets. After reaching its 2022 high of €68.69 on February 11, BASF’s share price fell over the course of the year. At the Annual Shareholders’ Meeting, we want to propose a dividend of €3.40 per share, equal to the prior-year level. This would represent a payment of €3.0 billion to shareholders. Based on the 2022 year-end share price of €46.39 and the proposed dividend, the BASF share would thus offer a high dividend yield of around 7.3%.
Our transformation – Important steps toward climate neutrality
Despite the tense global economic situation, our priorities with regard to climate protection have not changed. The energy transformation is still at the top of our agenda. As the industry leader, we continue to make great strides here. We are working hard to significantly reduce our carbon footprint. Our goal is to achieve net zero emissions by 2050. This transformation requires endurance, resources and – most importantly – our combined knowledge. It is an enormous undertaking, but we are making good progress. I am very proud that teams at all our sites are pursuing this goal with great passion.
This includes the colleague shown on the cover of this report. She and many others are working to further expand our supply of green electricity in North America. As one example, our Verbund site in Freeport, Texas, is already benefiting from new purchase agreements for solar energy. We want our future energy purchases to come from renewable sources and are pursuing this strategy worldwide.
The energy transformation is still at the top of our agenda.
We are also investing in our own capacity to produce green electricity. At the Schwarzheide site in Germany, for example, our new solar park that we operate with a partner went online at the end of August 2022. In the North Sea, work is progressing as planned on the offshore wind farm Hollandse Kust Zuid, a joint project with Vattenfall and Allianz. Last July, the first volumes of green electricity arrived at the Ludwigshafen site. This wind farm is slated to become fully operational in 2023.
Our production – New technologies for the Verbund of the future
We are also breaking new ground in terms of how we produce, for example, in Zhanjiang in southern China, where we are building a new Verbund site. Once completed, Zhanjiang will be our third-largest Verbund site after Ludwigshafen and Antwerp. It is an ambitious project in the chemical industry’s most dynamic growth market. In Zhanjiang we will deploy the newest and most innovative technologies, making the site a role model for sustainable production – in China and worldwide.
We are also charting new territory when it comes to our production methods.
We are also transforming our existing sites. Our Verbund site in Antwerp aspires to be the first petrochemical site to approach net zero emissions by 2030, in part thanks to new, energy-efficient technologies. The Ludwigshafen site is also forging ahead, and we are testing many trailblazing approaches in pilot projects there. One of these is the steam cracker of the future that we are developing with our partners SABIC and Linde. It will be heated with electricity from renewable sources instead of natural gas. This project is being supported by Germany’s Federal Ministry for Economic Affairs and Climate Action. Over its more than 150-year history, BASF’s raw material base has changed again and again – from coal tar, to oil, to natural gas and now to renewables. I am therefore confident our transformation will be successful this time, too.
Our strength – We are close to our customers
The transformation toward value chains and products with low or zero carbon footprints will give us a competitive edge. In 2022, we further expanded our portfolio of products with a certified reduced carbon footprint. In this way, we help our customers to achieve their own sustainability goals.
We are stepping up our investments in growth regions because a more balanced regional portfolio makes us more resilient in a multipolar world. We are focusing on organic growth and are planning capital expenditures of €28.8 billion worldwide by 2027. Not having a presence in large growth markets, such as China, would be a major risk for BASF. Of course, we also assess our investments from various perspectives. We are therefore watching developments in China very closely and continuing our open dialog.
We are expanding MDI production at our site in Geismar, Louisiana. Our aim is to grow together with our MDI customers in North America and around the world, whether in the construction sector, the automotive industry or in shoe and furniture manufacturing. The total investment volume of around $1 billion makes it BASF’s largest single investment in North America to date.
We also further expanded our global business with battery materials in 2022. This includes investments to increase our production capacities for cathode materials and to establish innovative recycling concepts in the three key regions Europe, North America and Asia.
Our operating environment – 2023 to remain challenging
The year 2023 will also bring significant challenges. The high level of uncertainty will continue. Unlike the beginning of 2022, there will no longer be momentum from pent-up demand following the coronavirus pandemic. The difficult global economic situation will dampen demand worldwide.
The year 2023 will also bring significant challenges.
We are prepared for what lies ahead and we have put ourselves on the right track. We will continue to reduce our dependency on natural gas. This is particularly a matter of urgency in Europe, as we expect prices to remain significantly above pre-crisis levels in the long term. We are making our sites leaders in climate-neutral production. And we are strengthening our competitiveness. One contribution here will be from a cost-savings program with a focus on Europe and especially Germany.
We want to shape the transformation. But industry can only provide a stable foundation for prosperity when it operates in a competitive framework. Most recently, the war in Ukraine has made it clear that many urgently needed modernization efforts in Germany and Europe have been delayed for too long – digitalization, the sluggish expansion of renewable energy and the necessary investments in infrastructure. We can no longer afford for approval processes to take a decade or for projects to be endlessly debated. In Germany in particular, we are still slamming on the brakes even though now is the time to accelerate.
Competitive industry is a stable foundation for prosperity.
Moreover, the European Commission’s Green Deal will unleash a flood of regulations on the chemical industry, putting an additional burden on us. We therefore urgently need to reset priorities. This will require that policymakers, society and industry work together toward a common goal: a competitive industry that is strong enough to be the motor of change. We also continue to rely on the support of our many shareholders. I appreciate your trust and I am glad that you are joining us on this journey. Thank you!
Yours,
Martin Brudermüller