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Have the rules changed on how bad news impacts bottom lines?

History suggests an explosion in Germany may not have the significant financial fallout some investors expect


Pete Carvill

On Wednesday, the world’s largest chemical producer, BASF, released its latest half-year financial report. The timing, in one respect, may have been unfortunate: the day before, over in Leverkusen, in the facility where one of its rivals—Bayer—has large offices, a massive explosion killed at least seven people, injured over 30, and caused the local authorities to tell residents to close their windows because of the potential chemicals released into the air.

While BASF was not involved in this week’s disaster, tragedy did visit in 2016 when an explosion at its site in Ludwigshafen killed five people and injured nearly 30.

Despite BASF being able to report higher-than-expected net profits this week, the events in Leverkusen cast a pall over their release. It was a big blow for the chemical industry and for that area of Germany. According to Chemical & Engineering News, “More than 30,000 people work at the 480-hectare complex, which produces nitration and chlorination products, aromatics, fine chemicals, and silicon chemicals in about 200 plants.”

Another rival, Henkel, also has their main office not far away in Dusseldorf, and it was that region which suffered catastrophic flooding this month.

Positive figures

BASF has made no public statement about the Leverkusen explosion, limiting its announcements to the half-year report. Not that that that should have been expected—this was a sober recalling of financial figures and not an awards show.

The report was good news for BASF. According to a factsheet from the company, sales rose 56% between Q2 2020 and Q2 2021, with EBITDA rising nearly 200% in the same period. Overall sales between H1 2020 and H1 2021 rose by a third. The growth between Q2 2020 and Q2 2021 was attributed by the company to higher prices and volumes across all its business segments.

The results were so good that BASF adjusted its outlook. “As already announced on July 9,” Martin Brudermüller, chief executive, said in a conference call, “we increased our outlook for 2021 based on the strong business development in the first six months of the year. We now expect sales in the range of €74bn to €77bn. EBIT before special items is anticipated to reach between €7bn and €7.5bn. The return on capital employed is expected to be between 12.1% and 12.9%.”

He added: “The considerably increased earnings expectations in the Chemicals and Materials segments are the main reason for the increase of our forecast. We continue to expect a certain normalisation in margins and thus earnings of the upstream businesses in the second half of the year – but to a lesser extent than previously assumed.”

What is the fallout?

But would such a tragedy as that in Leverkusen seriously affect the bottom line of a massive corporation like Bayer?

To answer that question, I pulled out BASF’s annual reports for 2015, 2016, and 2017 to find out what happened before and after the disaster in Ludwigshafen, which happened on 17 October 2016.

According to BASF’s own figures, there was a bump in sales between 2014 and 2015 of 5.2%, which jumped to 18.3% between 2015 and 2015, and by 12% between 2016 and 2017.

Ultimately, it appears as though the disaster did not have much of an effect on the bottom line.

Indeed, as BASF’s authors wrote: “The negative impact on earnings in 2017 caused by the North Harbor accident at the Ludwigshafen site […] was compensated by insurance payments. EBIT rose by €2,255m to €4,208m. Overall, special items did not have a substantial impact.”

The full financial impact on Bayer will not be known for some time, but BASF’s experience offers at least some recent context.

Knock on effect

However, according to the Independent Commodity Intelligence Services (ICIS), run by Lexis Nexis, the 2016 explosion in Ludwigshafen did cause a direct shift in the price of some commodities.

Wrote the site a few days after the disaster: “The effects of the explosion have already been seen in Asia with glacial acrylic acid prices spiked in both China and SE (southeast) Asia. The SE Asian marker climbed to $1,025/tonne on Oct 19 from $1,000/tonne on Oct 5. The CIF (cost, insurance & freight) CMP (China main port) marker spiked to $930/tonne from $855/tonne within the same period. Butyl acrylate prices were on a similar trend.

“The SE Asia marker climbed to $1,025/tonne on Oct 19 from $1,000/tonne on Oct 5. The CIF CMP marker jumped to $1,050/tonne from $982/tonne within the same period. In China, buyers are rushing to purchase spot cargoes, causing a price spike in the acrylic acid and acrylate esters markets.”

So there was a definite, albeit indirect, effect on the market back then.

Shifting back to the present, Leverkusen saw Bayer stock slump to the bottom of the DAX, reported Yahoo! Finance. “By 4:55 ET,” wrote the site, “Bayer shares in Frankfurt were down 2.3%, the worst performer in the DAX and the third-worst performer in the Euro Stoxx 50 index.”

But even this did not occur within a vacuum. The same story says that Bayer’s shares have fallen nearly two-thirds since it announced it was buying Monsanto. If you want to know more about this story and the fallout for Bayer from picking up the toxic US brand, you should read this story from Spiegel International.

Ultimately, no matter how awful events like those in Leverkusen and Ludwigshafen are, they do not seem to present much of a threat to the bottom line of a big corporation. Bad PR and liabilities are worse. Bayer is learning this from its acquisition of Monsanto.

Sustainable pivot

But even more pressing on a firm than bad publicity or rare, intermittent disasters may be that of climate change. This month has seen much of Europe suffering its effects—from the flooding in Germany and London to forest fires in Greece and Spain. Already, the markets and the economic systems are seeming to pivot towards a more-sustainable future. Over half of global AUM is now in funds committed to climate goals.

Earlier this week, I spoke to Tribe Impact Capital’s chief impact officer Amy Clarke. She told me that she felt the recent past, the last eight months to a year, have seemed like a turning point in the dialogue about climate change and its immediate impacts. “I hope this is starting to drive change,” she said, “and the markets are beginning to see that these are not unrelated events.”

Despite the disruption of switching to a green economy, that is where the greatest investment potential is. The question will be who is best positioned to profit from it.