BASF and America’s Farmers Sound the Climate Change Alarm

(Bloomberg Opinion) -- Corporate bellwethers aren’t an infallible guide to the state of the global economy, but we still need to pay attention to what these canaries in the business coalmine are telling us. Monday night’s profit warning from Germany’s BASF SE, the world’s largest chemical company, is alarming on two counts.

First, it shows that industrial demand remains very weak. That might mean we’re much nearer to the end of this long economic upswing than record-breaking stock markets would have you think. Second, extreme weather – in this case the torrential rains that have disrupted the U.S. growing season and hurt demand for crop chemicals – is adding to the pain for big companies. Our changing climate is starting to take a toll on profit.

BASF’s shares tumbled almost 6 percent on Tuesday, dragging down chemical stocks and spreading unease in the financial markets. 

Indeed, the chemicals group is hardly alone in its gloominess. In logistics, FedEx Corp. and the shipping giant AP Moller-Maersk A/S have sounded worried about global trade lately, while the ball-bearings maker Schaeffler AG says the coming months will be tough for the car sector. ArcelorMittal’s steel production cuts in Europe aren’t encouraging either. No wonder sentiment is so febrile.

After a difficult 2018, BASF had been fairly optimistic about 2019. Not any more. Now it expects sales to decline slightly this year, while operating profit could fall by as much as 30 percent.

Investors were anticipating a poor second quarter – the hedge fund Marshall Wace even built up a big short position – but BASF’s guidance cut suggests this will be more than a brief dip.

The company is doing what it can to support its earnings and balance sheet. It is cutting 6,000 jobs and has put its construction chemicals division up for sale. Until industrial demand recovers, though, investors will question its ability to generate enough cash to sustain its shareholder payouts. BASF is committed to increasing its dividend every year, but the rather high 5.4% yield (the last dividend divided by the share price) shows the doubts in the market.

Most investors will focus on the comments about the global economy, but the warning about extreme weather is equally unnerving. Last year, low water levels on the Rhine reduced BASF’s profit by 250 million euros. This year, the company is struggling because heavy rainfall across the American Midwest has severely hampered the planting of important crops, and hence reduced demand for chemical crop protection products.

The 12 months to May this year were the wettest in the U.S. since records began in 1895. With hotter temperatures, evaporation and the water-holding capacity of the air increases so there’s more heavy rain in some places. A rapidly warming climate and rapidly cooling economy should make investors feel very queasy.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Opinion columnist covering industrial companies. He previously worked for the Financial Times.

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