German chemicals giant BASF saw its profits surge in the first quarter of 2006 on the back of high oil and gas prices, yet its fine chemicals unit was hit by the increased cost of raw materials and energy, making further price increases in the short term likely.
Brent crude prices shot up 30 per cent in Q1, leading to massive earnings in BASF's oil and gas unit and a 21.5 per cent jump in overall pre-tax profit for the firm from €1.48bn to €1.80bn.
Despite controlling its own oil however, the world's biggest chemical maker was unable to keep costs low enough to protect profitability at its fine chemicals unit where active pharmaceutical ingredients (APIs) and excipients are made.
Higher raw materials costs ate away profit margins in the unit, down from 5 per cent to 2.2 per cent, as earnings before interest and tax (EBIT) were cut by half to €10m.
This was in spite a 13 per cent increase in sales in fine chemicals and a strong performance from Orgamol, a contract manufacturer of APIs, advanced pharmaceutical intermediates and generics, which BASF acquired in October 2005.
Particularly painful for BASF have proved the increased costs of making pseudoephedrine, an active ingredient to treat cold related illnesses and allergies
"In a difficult market environment, our bulk and specialty API business grew despite the challenges of the recent behind-the-counter regulations for pseudoephedrine in the US market," BASF spokeswoman Karin Moeschke told In-PharmaTechnologist.com.
"Our Kollicoat polymer business development in Q1 2006 was positive, supporting the strong growth of our highly functional pharma excipients."
Kollicoat is BASF's film-coating technology offering a range of excipients in the fields of instant release, sustained release and enteric coating.
On the ready-to-use coating system side, BASF said it has made good progress in its marketing cooperation with French industrial chemist firm Seppic, which is jointly developing with BASF and marketing coating systems for film coating of tablets in the drug industry.
In its outlook for the rest of 2006, BASF expects business overall to continue to develop positively based on a predicted average oil price of about $60 per barrel and global economic growth of more than 3 per cent.
Nevertheless, to offset the pressure on margins caused by rising raw material prices, BASF said it will increase its sales prices.
Increasing profitability in its fine chemicals unit will therefore very much depend on BASF's ability to pass on its higher operating costs to its customers.
In December 2005, responding to big cost increases for raw materials, energy and transportation, the company announced it was increasing the prices of all drug excipients globally by at least 10 per cent.