We see BASF taking a major risk by reaffirming its 2022 outlook today, as the uncertainty factors, especially in Europe, are rising. This week’s inflation and economic growth data in Europe, suggest an economy that is lowing quickly and the confidence levels in Europe are much lower, as we have discussed already this week. BASF and others will likely continue to push prices, but if consumer spending continues to slow, volumes will disappoint and at some point, there will be pushback on both volumes and pricing. Separately, as we mentioned above, we could see another leg up in energy prices as we approach next winter in Europe, especially if there is no resolution to the Ukraine conflict, which seems likely.
The BASF commentary about the impact of gas cuts in Europe should not be read as specific to BASF, but as we move out of the winter in Europe it is less likely that countries will directly restrict industry in favor of retail customers should gas supplies become limited. While many European countries will try to protect retail customers from hyperinflation in energy costs, their ability to do that for the industry might be more limited as they cannot find the additional gas, and subsidizing everything would be fiscally irresponsible. We expect to see more basic chemicals and derivatives moving from the US and the Middle East to Europe to displace uneconomic local production, but we understand that all shipping capacity is now constrained – liquids, gases, and containers – limiting the volumes that can move. The high end of the cost curve that Europe has occupied for decades in chemicals means that exports from Europe have been very limited and reducing exports is not a balancing act tool that Europe has to play with. We continue to see significant upward pressure on prices in Europe and the jump in inflation in the region, reported today, was dramatic but could accelerate as there are very few corrective levers that Europe can pull right now.