German BASF Making Expansion In U.S.

Posted: November 3, 2014 in Econ 101, Free Trade, Technology and Energy

SOURCE: http://www.nytimes.com/2014/10/25/business/international/basf-an-industrial-pillar-in-germany-leans-abroad.html?_r=0


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BASF’s industrial complex in Ludwigshafen, Germany, with 33,000 employees working in 2,000 buildings. Credit Benjamin Kilb for The New York Times
 

LUDWIGSHAFEN, Germany — In the 1860s an entrepreneur named Friedrich Engelhorn started a firm here to produce dyes for Europe’s booming textile industry. Almost 150 years later, that company, Badische Anilin & Soda Fabrik — or BASF — is the world’s largest maker of chemicals.

Despite its growth into a global company, BASF has remained an integral part of the industrial base that has helped Germany grow into Europe’s largest economy. And Ludwigshafen remains the company’s hometown. The BASF site, spread over four square miles along the Rhine River, resembles a small city, with 33,000 employees working in 2,000 buildings, crisscrossed by roads and railways.

Lately, though, BASF has been investing more of its money and management energy outside Germany, especially in the United States. And the company’s reasons for doing that help illustrate why the German industrial economy has been losing momentum — and why Germany risks tipping back into recession.

BASF executives say that German and European Union policies toward industry, particularly when it comes to energy, are forcing big companies to look elsewhere as they seek to expand.

Harald Schwager, a senior member of BASF’s executive board. Credit Benjamin Kilb for The New York Times

Energy is perhaps BASF’s biggest cost. Tremendous amounts of electricity are required to produce chemical raw materials like ethylene, propylene and butadiene for a range of products like plastics, pharmaceuticals and rubber. And oil or natural gas are the basic feedstocks from which these chemicals are produced.

Especially in Germany, energy prices have jumped as a result of the government’s big push for renewable energy sources — a policy that the government of Chancellor Angela Merkel has labeled the Energiewende, or energy transition.

At the same time, surging production of natural gas from shale rock in the United States is creating cheap and ever more abundant energy, giving American chemical plants and manufacturing sites a new competitive edge over facilities in Europe.

That is a big reason BASF is expanding some of its plants in the United States and looking to build others.

Already, BASF has doubled its annual investment in the United States to about $1 billion a year. With its French partner Total, it recently completed an estimated $400 million expansion and upgrade of their petrochemical plant in Port Arthur, Tex., which employs about 250 people.

As a result of the modifications, the plant’s main production engine, an installation known as a steam cracker — which was first fired up in 2001 and previously used feedstock derived from oil — can now make its chemicals from shale gases, allowing for potentially huge savings.

“We shift investment money from Europe into the U.S. as a consequence of the less competitive environment in Europe,” Harald Schwager, a senior member of BASF’s executive board, said in an interview here.

It is a major strategic shift for the company, which had 74 billion euros, or about $94 billion, in revenue last year.

Over the next five years, BASF plans to pump a quarter of its planned €20 billion in investments into North America. For the first time, the company plans to trim its spending in Germany from its traditional level of at least a third of investment to only a quarter.

And slightly fewer than half of the company’s approximately 113,000 employees are now in Germany. These days, about 17,000 of them are in North America and about the same number work in Asia.

On Friday, the company reported a nearly 5 percent decline in profits for the third quarter, compared with a year earlier, and reduced its earnings forecast for 2015. The company cited the weak European economy as well as slower growth in emerging markets.

But while BASF said sales in its core chemicals business had declined by 4 percent in Europe, it added that its North American chemicals business had seen strong growth, as a result of demand for products from the Port Arthur plant. It did not provide a specific number for the North American results.

BASF’s overseas expansion comes even as Ms. Merkel’s government pushes corporate Germany to invest more within the country to help revive the flagging economy — even though her administration so far is declining to commit to any government stimulus investments.

BASF is not alone in looking beyond the country’s borders. Since 2011, the chemical industry over all — Germany’s third-largest industrial sector after automobiles and machinery — has not increased production or investment in the country, according to VCI, an industry association.

And nearly a quarter of all companies in heavy industry are considering reducing production in Germany, according to a survey by the German Chambers of Commerce.

The falloff in German investment in industrial sectors, also including aluminum and glass production, is not the only reason for the worrying slowdown in Europe’s biggest economy. But it is certainly a factor.

The government recently trimmed its economic growth forecast for 2014 to 1.2 percent, compared with 1.8 percent in April. Berlin also slashed its projection for 2015 to 1.3 percent, down from the previous 2 percent, blaming crises abroad and a downturn in global growth.

It could just as well have cited energy costs.

“In a highly competitive world, German industry is at an increasing disadvantage owing to the growing energy price disadvantage that it faces,” the market research firm IHS wrote in a study published this year.

Paul Hodges, chairman of International eChem, an industry adviser, estimates that costs for petrochemical companies are now 20 percent to 25 percent lower in the United States than in Europe.

Electricity in Germany already costs about 1.2 euro cents more than the average price across the European Union. Although industries deemed energy-intensive are exempt from many of the surcharges that go toward financing the planned transformation of Germany’s energy sector into one largely dependent on renewable resources by 2050, that exemption is not secure.

The European Union threatened to overturn the exemption this year on grounds of unfair competition, but decided instead to allow it to continue until 2017. That extension, though, added to the uncertainty for big German industrial companies trying to plan for the longer term.

“We are seeing a shift in investment,” said Hubertus Bardt, head of energy at the Cologne Institute for Economic Research. “When we ask big companies what they are doing, about a third say they are holding back on making long-term decisions. They only have security for the next three years.”

Industry leaders criticize Berlin for not adopting policies that might bring down fuel costs, including allowing exploration for shale gas. A big impediment to encouraging shale development is that extracting the gas often involves hydraulic fracturing, or fracking, which environmentalists oppose.

BASF has a unit, Wintershall, that is the largest oil and gas producer in Germany. The company has large exploration tracts for shale gas in the German state of North Rhine-Westphalia. Mr. Schwager, the BASF executive, estimates that fracking could produce enough shale gas to either satisfy Germany’s own needs for 10 years or maintain current gas production levels for a couple of centuries.

But the company has been prevented from drilling for the fuel because of concerns about water pollution and other hazards.

Even its conventional gas operations, Germany’s largest, have been hobbled by a moratorium on fracking, Mr. Schwager says.

Pending legislation would set the bar for environmental standards so high that it would essentially rule out widespread exploration for shale gas. It would, however, allow the resumption of fracking for the extraction of more conventional gas reserves, after a two-year moratorium.

The potential erosion of mainstay industries dismays executives like Mr. Schwager.

Mr. Schwager, 54, who has been at BASF for more than a quarter-century, formerly ran all of the company’s European manufacturing sites, including Ludwigshafen. He is now the top executive for Europe, as well as chief of the company’s sizable oil and gas operations.

Executives of Mr. Schwager’s pedigree and experience have been integral to the German socioeconomic system for decades, working with government and labor to develop the country’s export machine into the global leader, at least by one key measure: Germany’s exports as a share of gross domestic product, at about 40 percent, are by far highest among the world’s 10 biggest economies, according to IHS.

But now, rather than export their products from home, German companies increasingly prefer to make them elsewhere.

Mr. Schwager outlined other big investment plans for the Gulf Coast of the United States, including a plant that will make propylene, which is used in a wide range of products including paints, carpets and diapers, from natural gas. The company is still scouting for a site for the plant, which would be its largest investment in the region, costing more than €1 billion.

“The whole shale gas revolution really has created a renaissance in the petrochemical industry,” said Heidi Alderman, BASF’s senior vice president for North America, who is based in Houston. “Investments that previously might not be considered in North America are now coming to North America.”

Other European companies are also being drawn to the United States.

Wacker Chemie, based in Munich, is building a $2 billion plant in Tennessee to make polysilicon, a material that is used to make solar panels. Wacker’s manufacturing process will rely heavily on chlorine, a chemical whose manufacture requires huge amounts of energy.

In September, the German industrial giant Siemens agreed to buy Dresser-Rand, a Houston-based maker of equipment for the energy industry, for $7.6 billion. Two Austrian steel makers, Voestalpine and Benteler, are building mills on the Gulf Coast in Texas and Louisiana.

“The bad thing from a European perspective, not from a company perspective but for the region Europe, is it’s not only BASF,” Mr. Schwager said. “It is many European companies which are energy-intensive. They are finding out that the benefits of shifting investment from Europe to the U.S. are significant.”

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