Investing.com -- Jefferies has downgraded BASF SE (ETR: BASFN ) to a “hold” from “buy” rating, citing a deteriorating earnings outlook and ongoing challenges in market fundamentals.

Alongside the downgrade, the brokerage has reduced its price target for BASF shares to €47 from €52.

The downgrade reflects persistent weakness in upstream product spreads throughout the current quarter, which Jefferies sees as a key earnings headwind.

Although internal initiatives such as asset divestments are viewed positively, they are unlikely to fully offset the downward pressure from sluggish spreads and subdued demand.

Jefferies indicates that global chemical spreads, which had shown signs of potential support in late 2024, are now undercut by rising demand uncertainty heading into 2025.

The brokerage warns that BASF’s current spreads are acting as a drag on earnings, and cost-cutting efforts alone will not be sufficient to reverse the trend.

Without a major rebound in demand, global chemical utilization rates are expected to remain soft, hovering near the bottom of the cycle.

One mitigating factor for BASF is its relatively favorable cost position in Europe. Declines in EU natural gas and oil prices have improved the company’s standing on the cost curve relative to other regions, providing a modest offset to weaker volumes and compressed spreads.

Financially, Jefferies notes that BASF is facing peak pressure from the ramp-up of its China Verbund (VIE: VERB ) site, which is estimated to exert a 180-basis-point drag on group return on capital employed (ROCE).

Given the gradual startup schedule extending through the second half of 2025 and a challenging market environment, Jefferies anticipates a delay in both project returns and any meaningful EBITDA improvement.

The brokerage projects that the project’s return will settle in the mid-single digits, well below BASF’s targets.

Jefferies expects BASF to approach full free cash flow (FCF) coverage of its dividend by 2026, with a cash-backed implied dividend yield of approximately 5.5% in that year.

Market conditions are also likely to impact BASF’s efforts to divest its coatings business. Jefferies sees increased volatility as a potential hurdle in realizing full value, estimating a warranted valuation of around €6 billion based on an average 9x EBITDA multiple.

Jefferies identifies several key catalysts for BASF, including the Q2 results (scheduled for July 30), movements in upstream chemical spreads, European feedstock price trends, shifts in end-market demand, and progress on divestments.

The brokerage’s fiscal year 2025 EBITDA estimate of €7.16 billion falls below BASF’s current guidance range of €8 billion to €8.4 billion.