BASF battened down the hatches yesterday as the world's biggest chemical company steadied itself for a storm of declining markets and stockpiling by customers.

In a grim warning, the German industrial group said that it would shed 1,000 staff, reduce capacity and cancel a share buyback plan to preserve cash. Caught in a squeeze between higher raw-material costs and falling demand, BASF's third-quarter operating earnings fell 8 per cent and net profit by 37 per cent.

Jurgen Hambrecht, the chairman, saw no relief in sight: “The impact of the global financial crisis on the real economy is speeding up and hitting harder. The economic skid marks can no longer be ignored.”

The squeeze will put further pressure on a chemical industry that is lumbered with high levels of debt after a long period of corporate wheeling and dealing. Highly leveraged companies, such as Lyondell Basell and Ineos, Britain's biggest private company, are exposed to “a cocktail of overcapacities and weakening economies”, according to Standard & Poor's, the rating agency.

Both companies recently suffered credit downgrades by S&P, which has accorded their debt a “B” rating, indicating a likelihood of default. Basell suffered a huge increase in borrowings when it paid $12 billion (£7.3 billion) for Lyondell a year ago. The interest burden has virtually wiped out the profits of the merged group, which is controlled by Access Industries, the holding company owned by Len Blavatnik, the Russian-born oligarch.

The grim tidings by BASF echo recent comments by quoted rivals, including America's Dow Chemical and Akzo Nobel, the world's biggest paint company. Akzo announced last month it is cutting 3,500 jobs. In Germany, Bayer gave warning that its plastics businesses would suffer further declines in earnings in 2009.

The wheels are coming off the chemicals industry because of a sudden and significant fall in demand that appears to have begun in September. The reversal follows an extended boom said Paul Satchell, a chemicals analyst at ING, the Dutch investment bank. “That's why it is surprising. There has been a sudden and shocking downturn after an extraordinary period of strong demand since 2004.”

The issue, Mr Satchell said, is whether the slump is a result of temporary destocking by the automotive and packaging industries, which are leading consumers of plastics, or a signal of underlying consumer weakness.

BASF is taking the view that skittishness by customers is more than temporary. The German firm is responding with capacity reductions and early shutdowns of plant for maintenance.

The slowdown will have a bigger impact on the profitability of firms with a bias towards bulk commodity chemicals, such as Lyondell Basell and Ineos. These companies transform natural gas and naptha, a by-product of oil refining, into chemical raw materials, such as ethylene, used to make plastics, such as polyethylene. Because of their high fixed costs, they must operate at capacity levels of 95 per cent or more in order to be profitable.

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