Chemical companies are in a cyclical sweet spot at the moment and none more so than BASF, the largest and most efficient of the commodity producers. The strongest global economic upturn for years has boosted volumes and utilisation rates, while a lack of new capacity has allowed the sector to regain genuine pricing power.
The German group's third-quarter results show just how powerful a combination this can be. Volumes jumped 14 per cent, with growth across all business units and regions. Prices, up 10 per cent at group level and by a stunning 22 per cent at the plastics arm, increased ahead of raw material costs helped by the fact that BASF's oil division, which provides half the group's crude feedstock, serves as a natural hedge against rising oil prices. It is no wonder quarterly operating profits more than doubled to €1bn on a one-fifth gain in revenues, beating all forecasts.
No cycle lasts for ever, but analysts expect almost two more good years until chemical demand peaks in mid-2006 and even BASF will admit to one. Meanwhile, it expects to exceed its cost of capital (which it puts at a very high 10 per cent) this year, which should prompt a dividend increase and even more share buybacks. The stock has nicely outperformed over the past year, but, at around five times next year's earnings before interest, tax, depreciation and amortisation still suffers from a lower rating than rivals such as Dow Chemical and DuPont. That seems unduly niggardly.