Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our analyst and investor conference call on the third quarter of 2018. On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, BASF's Chief Financial Officer. Martin will explain the financial performance of BASF Group in the third quarter and comment on recently announced transactions and agreements, while Hans will present the segment results and financial figures in more detail. Martin will conclude by providing BASF Group's outlook for 2018. Please be aware that we have already posted the speech on our website at basf.com/q3 2018. With this, I would like to hand things over to Martin.
Ladies and gentlemen, good morning, and thank you for joining us. Today, we will provide you with the third quarter 2018 figures, compared with the prior year's quarter on a restated basis. The restatement was necessary due to the signing of the agreement between BASF and LetterOne to merge Wintershall and DEA on September 27, 2018. As a consequence, sales and EBIT of our oil and gas activities are no longer included in the respective figures of BASF Group, retroactively as of January 1, 2018, and with the prior year figures restated. Until closing, Wintershall Group income after taxes will be presented in the income before minority interests of BASF Group as a separate item, income before minority interest from discontinued operations. We expect closing to take place in the first half of 2019. I would like to begin with making a few remarks on the current macroeconomic environment.
In Q3 2018, customer markets of BASF developed below prior expectations. In particular, towards the end of the quarter, we experienced a slowdown in demand from automotives, a very important customer industry of BASF. The current forecast from LMC Automotive clearly reflects this development. At the beginning of 2018, their gross assumption for light vehicle production was 2%. In October 2018, this figure was revised to 1.1%. This development concurs with the increasing uncertainties regarding the world economy in the light of trade conflicts, in particular between the U.S. and China. Turning to BASF's Group financial figures for Q3 2018 compared to the prior year quarter in more detail. Sales in the third quarter of 2018 increased considerably to EUR 15.6 billion. We were able to increase prices by 6%, supported by all segments and divisions. Sales volumes of BASF Group increased by 2%, driven by Functional Materials & Solutions.
Volumes in the Performance Products segment were still negatively impacted by supply shortages in our citral value chain. Currency effects amounted to -1%, mainly due to the appreciation of the euro versus currencies in emerging countries such as Brazil. Overall, portfolio measures had a positive effect of 1% on sales and were driven by the acquisition of Agricultural Solutions business from Bayer. EBITDA before special items decreased by 10% to EUR 2.3 billion in Q3 2018. EBITDA amounted to EUR 2.2 billion compared to EUR 2.7 billion in the prior year quarter. EBIT before special items decreased by 14% to EUR 1.5 billion in Q3 2018, mainly due to considerably lower earnings in chemicals. Earnings also decreased considerably in the Functional Materials & Solutions and Agricultural Solutions segment and fell slightly in the Performance Products segment. In Performance Products and Functional Materials & Solutions, we were able to increase prices by 5%, respectively 4%.
Our measures to increase prices were partially offset by higher raw material costs and higher fixed costs. Earnings in Agricultural Solutions were burdened by the seasonally negative contribution from the acquired businesses. In the legacy business, earnings of our Agricultural Solutions segment increased significantly. Earnings over several segments were negatively impacted by the low water levels of the Rhine River. Throughout the third quarter, this negatively affected our operations in Ludwigshafen. In fact, currently the Rhine is at its lowest water level ever. This required the reduction of capacity utilization of some of our plants due to the restricted raw material supply and insufficient availability of cooling water. In addition, we faced higher transportation costs since we had to switch volumes from barges to other modes of transportation. EBIT decreased by 24% to EUR 1.4 billion in Q3 2018.
Special items in EBIT amounted to minus EUR 75 million and were primarily related to the integration of the acquired businesses. In the prior year quarter, special items were positive and amounted to EUR 122 million. This was mainly attributable to the divesture gains from the transfer of BASF's leather chemicals business to the Stahl Group. The tax rate decreased from 23% to 18%. This was particularly due to the decline in taxable income in Germany as well as reduced tax rates in Belgium. In Q3 2018, income before minority interests for discontinued operations increased by EUR 149 million to EUR 235 million because of higher oil and gas prices and increased production volumes. In the third quarter, the average price for Brent crude was $75 per barrel, $23 higher than in the same period of 2017.
Gas prices on the European spot market were also significantly above the level of the prior year quarter. The increase in volumes was furthermore supported by an offshore lifting in Libya. In 2017, the lifting took place in the second quarter. Net income amounted to EUR 1.2 billion compared to EUR 1.3 billion in the prior year quarter. Reported EPS decreased by 10% to EUR 1.31 in Q3 2018. Adjusted EPS amounted to EUR 1.51. This compares with EUR 1.40 in the prior year quarter. Cash flows from operating activities amounted to EUR 2.9 billion in the third quarter of 2018, compared to EUR 3.8 billion in the prior year quarter. The decline was largely driven by the lower cash inflow from changes in net worth capital. Free cash flow decreased from EUR 2.8 billion to EUR 2 billion.
In August, BASF has closed the acquisition of significant businesses and assets from Bayer, which generated combined sales of EUR 2.2 billion in 2017. The acquisition comprises businesses and assets from Bayer in the area of seed for corn, canola, soybeans, and vegetables. They also include non-selective herbicides, products for seed treatment with nematicides, biotechnology, and digital farming. The integration is well on track. Since closing, we have been supplying our new customers without interruption. The cultural fit and motivation of our substantially enhanced agricultural solutions team is excellent. We are experiencing additional momentum that will make us even more successful in the future. To reflect the expanded scope of our agricultural business, the division has established a new global business unit for seeds and traits and was renamed from Crop Protection to Agricultural Solutions.
In June, the EU Commission started to review the planned acquisition of Solvay's integrated polyamide business in an in-depth investigation. This merger control process is ongoing. To meet the concerns of the EU Commission, BASF has offered to refrain from acquiring certain parts of Solvay's European polyamide business. The EU Commission is now examining this offer and has submitted it for market testing. By complementing the engineering plastics portfolio, enhancing the access to key growth markets in Asia and South America, as well as strengthening the value chain through the back integration into key raw materials, BASF would still achieve its key strategic objectives. The EU Commission will likely take a decision in early 2019. As of now, the transition has obtained merger clearance in 8 of 10 jurisdictions globally.
At the end of September, BASF and LetterOne signed the agreement to merge their respective oil and gas businesses in a joint venture. Closing is expected to take place in the first half of 2019, subject to approvals of several authorities. This transaction will create significant value for both shareholders by forming the leading independent European E&P company, sizing additional growth opportunities, generating synergies of at least EUR 200 million per year, and last but not least, listing Wintershall Dea. We expect that the IPO will take place in the second half of 2020 at the earliest. The exact timing will obviously depend on market conditions. In May, BASF and Solenis signed an agreement to join forces by combining BASF's paper wet-end and water chemicals business with Solenis, a global producer of specialty chemicals for water-intensive industries. Necessary merger control filings have been submitted.
Pending approval by the relevant authorities, we continue to expect closing at the end of 2018 at the earliest. As part of our active portfolio management, we are continuously evaluating whether businesses could unfold their potential even more in a different setup, as for example, in a joint venture or outside of BASF. In this context, we have decided to evaluate strategic options for our Construction Chemicals business to ensure a successful future development. The market currently offers attractive consolidation opportunities. The Construction Chemicals division comprises admixture systems and construction systems. It generates sales of more than EUR 2.4 billion in 2017, operates in more than 60 countries, and has around 7,000 employees worldwide. The outcome of assessing strategic options is open. This means we consider a merger with a stronger partner as well as a divesture. We strive to reach an agreement on a transaction in the course of 2019.
This week, BASF announced Harjavalta in Finland as the first location for battery materials production serving the European automotive market. The plant will be constructed adjacent to the nickel and cobalt refinery owned by Nornickel. With this investment, BASF will be present in all major regions with local production and increased customer proximity, further supporting the rapidly growing electrical vehicle market. This investment is part of BASF's EUR 400 million multi-step investment plan announced last year. Start up is planned for late 2020, enabling the supply of approximately 300,000 full electrical vehicles per year with BASF battery materials. Additionally, BASF and Nornickel have signed a long-term market-based supply agreement for nickel and cobalt feedstocks from Nornickel's metal refinery in Finland. The agreement will establish a locally sourced and secure supply of raw materials for battery products in Europe. With this, I hand things over to Hans.
Thank you, Martin. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment in the third quarter of 2018, compared with the third quarter of 2017. Starting with chemicals, sales in chemicals increased considerably due to higher prices in all divisions. The price increase was particularly pronounced in the petrochemicals division, given the significantly higher oil price. A favorable demand environment for petrochemicals and intermediates compensated for lower demand in isocyanates. Overall, sales volumes of the segment were stable. Lower margins for isocyanates and cracker products, as well as increased fixed cost, among others, due to higher expenditures for maintenance measures, led to a considerable decrease in EBIT before special items. Higher earnings in the intermediates division could only partially offset this decline. Sales in the Performance Products segment were stable.
We increased sales prices in all divisions to pass on higher raw material costs and restore margins. Volumes declined mainly due to limited supply capabilities for nutritional products and aroma ingredients. By October 1st, we were able to lift force majeure for all affected products in our animal and human nutrition businesses. For aroma ingredients, we expect to lift force majeure later in Q4 2018, partly thereafter. Currency and portfolio effects negatively impacted sales. EBIT before special items declined slightly, mainly driven by lower sales volumes, higher fixed costs, and negative currency effects. Stronger margins had an offsetting effect. Excluding the negative currency effects, EBIT before special items was flat year-on-year. Sales in Functional Materials & Solutions grew slightly compared to the prior year quarter. This was mainly attributable to higher prices in all divisions, especially in catalysts and performance materials.
Volumes grew in all divisions except for performance materials, where primarily a lower demand for polyurethane systems led to a slight decline. Sales were slightly weighed down by currency effects. EBIT before special items was considerably below the level of Q3 2017, mainly due to higher fixed costs as well as lower margins in most divisions. However, we increased earnings from quarter-to-quarter over the course of 2018 and continuously reduced the gap to the prior year quarter. Sales in the Agricultural Solutions segment increased significantly compared to Q3 2017. This was due to portfolio effects from the acquisition of businesses from Bayer, higher prices, and slightly higher volumes. Strongly negative currency effects partially offset the increase in sales.
In Europe, sales declined slightly, mainly as a result of lower sales volumes for herbicides and fungicides following the extreme weather conditions and long dry period in Central and Western Europe in particular. In North America, sales considerably exceeded the prior year figure. This was primarily due to portfolio effects from the acquired businesses, as well as to a higher price level. Sales in Asia were up slightly year-on-year as a result of positive portfolio effects and higher prices. Sales growth was tempered by negative currency effects. The region South America, Africa, Middle East posted considerable sales gains. This was mainly driven by higher prices and sales volumes, particularly for fungicides and insecticides. The acquired businesses contributed to the increase in sales. Negative currency effects had an offsetting impact.
Despite the seasonally strongly negative results of the businesses acquired from Bayer, EBIT before special items was down only EUR 26 million on the prior year quarter. Income generated by the legacy BASF business rose considerably compared to the third quarter of 2017. Excluding the negative currency effects, EBIT before special items for the entire business also increased slightly. EBIT before special items in other improved from minus EUR 203 million to minus EUR 83 million in Q3 2018, mainly due to the release of provisions for our long-term incentive program. Now to cash flow. In the first nine months of 2018, cash flows from operating activities decreased by EUR 1.2 billion to EUR 6.4 billion. This was largely due to a negative swing in changes in net working capital. At EUR 10 billion, cash outflows from investing activities were EUR 6.6 billion higher than in the first nine months of 2017.
The increase was driven by the businesses acquired from Bayer. Free cash flow came in at EUR 4 billion compared to EUR 5 billion in the same period last year. The decrease was caused by the lower cash flows from operating activities. Financing activities led to cash outflows of EUR 127 million compared to EUR 1.5 billion in the first nine months of 2017. Now to the balance sheet as of September 30th compared to year-end 2017. Total assets increased by EUR 6.8 billion to EUR 85.6 billion. The acquisition of a range of businesses and assets from Bayer contributed EUR 8 billion to this increase. Non-current assets decreased by EUR 5.4 billion, mainly attributable to the reclassification of the fixed assets in our oil and gas business to current assets following the signing of the agreement to merge Wintershall and DEA.
Current assets amounted to EUR 43.3 billion compared to EUR 31.1 billion at year-end 2017, due to the reporting of our oil and gas assets as a disposal group. Total liabilities increased by EUR 4.9 billion to EUR 48.9 billion. Current liabilities were up by EUR 7.2 billion to EUR 22.1 billion, primarily because of the reclassification of the non-current liabilities and provisions of our oil and gas activities to the liabilities of the disposal group. Financial debt was up by EUR 2.5 billion to EUR 20.5 billion. Net debt amounted to EUR 18 billion compared to EUR 11.5 billion at the end of 2017. This due to the purchase price payment to Bayer. Our equity ratio was 43% at the end of September 2018. And with that, back to you, Martin, for the outlook.
Global economic risks increased over the course of 2018, driven by geopolitical developments and the trade conflict, in particular between the U.S. and China. They are causing a slowdown in economic growth in Asia, in particular in China. Our GDP forecast remains unchanged. Despite a slight softening in Europe and volatile developments in many emerging economies, we maintain our assumption of 3% of GDP growth in 2018. Stronger growth in the U.S. compensates for the slowdown in other regions. Overall, industrial production, and especially the global automotive production, developed below prior expectations. In Europe, particularly the introduction of the new vehicle emission standards weighed on the automotive production. While most of the impact is expected to be temporary, we have reduced our 2018 growth expectations for global industrial production from 3.2% to 3.1%, and for chemical production from 3.4% to 3.1%.
As a result of the change reporting of Wintershall Group following the signing of the agreement to merge Wintershall and DEA, BASF Group's outlook for the full year 2018 was adjusted on September 27. We continue to expect a slight increase in sales compared to the adjusted 2017 numbers. We expect a slight decline in EBIT before special items compared to the adjusted 2017 figures, while EBIT is expected to decline considerably. To conclude, the macroeconomic environment is becoming more challenging. The continued low water levels of the Rhine are also a challenge. Our third quarter results clearly reflect this. We are neither satisfied with our current business performance nor with our share price development. At our Capital Markets Day on November 20, we will focus on how we will better position BASF and explain specific measures we are taking.
Hans and I look forward to welcoming you on that occasion in Ludwigshafen. Now, we are happy to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their touch-tone telephone. If you wish to remove yourself from the queue, you may press star followed by two. For the best sound quality, we kindly ask you to be sure to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask his or her questions. The first question now comes from Thomas Wrigglesworth from Citi. Thomas, please go ahead.
Thanks, Stefanie. Good morning, gentlemen. First question, if I may. Just with regards to the developments that you're seeing into the beginning of the fourth quarter, could you describe a little bit specifically with regards to the automotive and your industrial chemicals exposure, whether you're seeing a change in order patterns, whether we're just seeing a destocking and that's accelerating, or you think there's something more structural to demand? A second question, if I may. You mentioned fixed costs a lot. Specifically with regards to FMS surprise, given that there was volume growth, that you were also seeing fixed costs. Could you just elaborate by division what was driving the fixed costs? I think we can understand the component in chemicals quite clearly, but in the other divisions, it's not quite clear to me what the fixed cost driver is there. Thank you.
Well, Thomas, a little bit more on the automotive. We have seen, particularly in September, with basically 9% down, a significant production reduction in automotive. I think there is no stocking or destocking effects in that very short period of time. I think it directly translates into consumption of major chemicals. As you know, we are basically with a relatively broad portfolio in the car. We paint the cars, but we have also a lot of plastic materials in the car, and we certainly have also fluids, and we have also the catalyst in there. With this, it is impacting a wider part of business. You also know that automotive is our most important customer industry, with more than 18% of sales. With that, we see also basically an immediate impact here.
Let me also mention, and this is why we have written it like this, it is very much the automotive industry that is affecting us here, while the other markets are still in good shape.
Thomas, this is Hans. Good morning. Your question with respect to fixed cost development in the BASF Group and the drivers for fixed cost increases. Biggest driver for fixed cost increase that we have is the Bayer acquisition that we made. If you recall, we closed that in August. That is driving up fixed cost significantly, at a point in time where there were hardly any sales of the new Bayer products in our portfolio in Q3. In the other segments, you have a mix of new activities or new plans that came on stream, such as, for example, new catalyst plans or new catalyst lines in Functional Materials & Solutions. We also increased coating capacity. That brings a certain full-year effect. It is also in Functional Materials & Solutions. We had some smaller turnarounds in the Performance Products segment.
All of that in the combination leads to an increase in fixed cost. What is also reflected in the fixed cost, at least to a certain extent, are the costs that come with the low water levels of the Rhine River. That is something that we are coping with since, I want to say, the middle of June, that has increased cost, also by way of underutilization cost, because we had to throttle back some of our plants due to raw material supply situation.
Sorry, just as a follow-up, Hans. Could you help quantify, dimensionalize the size of those one-time items in the fixed costs for the third quarter?
The one times that we have, if I think about the cost resulting from the low water levels affecting activities and operations in Ludwigshafen, plus then turnarounds is in the area of a higher double-digit million figure.
Okay. Thank you both. Thank you very much.
The next question is from Andrew Stott, UBS. Andrew, your turn.
Morning. Thanks, Steffi. Good morning, Martin and Hans. Couple of questions. First of all, the strategic decision to look for a partner or indeed sell Construction Chems. I'm just wondering what it is you would look for in a partner, or indeed, why would you separate the asset when, I guess it's not a question of scale. I mean, you're number one globally in admixtures, number four in construction systems. You've owned the asset, what, 12 years since the Degussa deal. You've got long experience in the business before the Degussa deal. What is it that you feel isn't right with BASF fully owning the asset? Second question is more straightforward on the numbers. I saw with the Bayer press release this week that EUR 300 million of sales have gone to you, so I've got the answer on the acquisition effect for Q3 in Ag.
On the losses, I was running with sort of EUR 60 million to EUR 70 million in my head for Q3. I just wondered if you could confirm if that's a ballpark number. Thank you.
Andrew, on the strategic decision of EB, I think you're right. This is two businesses. One is the business is admixtures. This is also a business that is differently driven than the other part, which is the construction systems. The first one is very much a project-based business. This is also something that is innovation-driven. I think we have the leading admixture technology here. I think with this, you are right, we are the number one, and I think this is totally fine and you can run the business. On the other hand, the construction systems business is a relatively complex business. It has a very individual situation by countries. We have, for example, a different regional or local setup than others of our competitors.
I think we have mentioned also in the past that our business is relatively strong in the Middle East area, where there are currently, I would say, with the situation over there less construction activities. That's why we are burdened there. I think in the current situation simply, where others also are offering their businesses and it offers consolidation opportunities. Particularly in the construction systems business, I think it is a positive thought to bring businesses together, and this is also on a country and a local basis on one hand, but also on a sub-segment level in construction system, which is a very complex business with different segments. There are opportunities to have a better market positioning as well as also a cost reduction potential on the local level.
You know that we have done some smaller acquisitions to strengthen ourselves on the country level, like the Thermotek acquisitions in Mexico, for example. It's a relatively tough work also to do that country by country. I think the opportunity is here to be part of such a consolidation to really position the business better. You also know that by the style or the kind of business, it is a rather unusual business for BASF. It is more on smaller orders. It has a relatively high complexity. I think with this, it could really gain momentum if we use this opportunity of consolidation in the market, and that is why we have decided to really check the opportunities here. On the Bayer side, Hans?
Yeah. Morning, Andrew. Your question with respect to your sales, then you said losses with respect to the Bayer business, you were kind enough to give a figure. Ballpark-wise, that is okay. It is slightly higher than what you suggested.
Okay, perfect. Thanks, Hans. Thanks, Martin.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead, Christian.
Yes, good morning, Steffi. Good morning, Martin and Hans. Two questions, if I may. First of all, coming back to the low water levels, in terms of costs pertaining to those water levels. Looking at Q4 and the even more severe situation, at least at present versus Q3, can you comment on the cost increases and your ability to produce for Q4? My understanding is that your cracker is currently running at 60% or so. Is that correct? Second question, pricing in Ag chems was up by +18%. How much of that is underlying and how much of that price push is related to compensation for weaker currencies? Thanks.
Good morning, Christian. Some more information on the water level. First of all, it's a very unusual long period we are bothered with this. We had this in the past happening one or two weeks, but this is now a situation that basically since summer is accompanying us. Very much on two issues. The one was in the summertime, very much on the cooling water because you have kind of temperature restrictions to bring the water back to the river. Now, which is becoming even more fearful, is really the transportation issue. Basically shipping is almost not possible anymore, even if you reduce the load. That was the first measure you take. You go from 100%, 50%, 25% load, but now water levels are so low that basically it stopped.
We have worked significantly to bring it more to road and rail, but that has its limit because it's 2,500 ships over the year. You simply cannot bring all the volumes to rail and to road. With this, we have now more a material issue and a supply issue than the cooling water part. With this, the impact will over the next months get slightly more severe, I would say. You can imagine that Hans and I myself pray to the water god to give us rain, because that would ease the situation very quickly. What we actually have done now is that we have indeed reduced the level of utilization in the cracker. We took it down to about 60%, and that is more or less what we can cope with bringing the raw materials in by rail and road.
This is more, I think now, a stable situation going forward, but that certainly means also that the consuming plants down in the value chains, they suffer. The other part which really driving now also cost is one hand underutilization, but the other part is also higher transportation costs by bringing to rail and road versus the ship. It could ease easily from one week to the other if we get significant rain. If not, we have to go on a bit about this utilization.
Morning, Christian. This is Hans. Your question with respect to prices in ag. We have significant price increases. They are to a large extent driven by mix. Overall, season started a little bit earlier than we had last year in South America. Price is up significantly, as I said, driven by mix. Currency impact is, as you've seen, at -10%. You've seen the development of the Brazilian real and the Argentinian peso. Business is to a large extent dollarized, but there is unfortunately also a significant impact that we have there from FX actually adjusted for FX. Our earnings for the entire business, including the business acquired from Bayer, would have been higher in Q3 than in the prior year quarter.
Okay. Thank you very much.
The next question is from Paul Walsh. We will then have Tony Jones and then Patrick Lambert. Now Paul Walsh from Morgan Stanley. Please go ahead.
Morning, Stefanie. Morning, Martin and Hans. Two questions. Firstly, on the chemicals business, just thinking about the run rate of profitability, I am curious to know if you think Q3 was a fair reflection of the reset in petrochemical margins and in polyurethanes, and maybe any other comments you have got on the other major product chains, whether it is acrylics or the nylon chain and so on, how they are panning out from here. Second question, just around the Construction Chems business. Am I to assume the margin of that business is lower than the divisional average? How should I think about the profitability of that business? Thank you.
Paul, chemicals business. Let me start with the major lever for change here, isocyanates. You know that we had last year, a very special situation. A very nice one, I have to say. We expected that this cannot proceed forever like this. It somehow has to normalize. We have been somehow lucky that the first two quarters that was more or less stronger, and this very special period took longer than we thought. We clearly see now that in the third quarter that there is this normalization going on. TDI and MDI prices have come down significantly in almost all regions in the world. That has also to do that additional capacity coming on. We have now also in these months, rather from a seasonal point of view, weaker months for the isocyanates.
The next two, three months are normally in the periodic or in the comparison with other years, should be stronger months. That is certainly the most important factor on chemicals. The other part that is impacting us is the cracker margin situation, which is particularly in the U.S. stressed because there is an ethylene oversupply, which is also not going away for quite some time. These are the two major impacts which we see. On the other hand, we have rather a nice stability on most of the other parts. You mentioned acrylic acid, which is a strong leg of BASF, which is, I would say a relatively sound demand and also from the margin of our integrated production, you know that we are very strong in this.
It is expected on very healthy level. Also most of the other products, there is nothing significant shifting. We have these two effects now going forward. Overall, in the basic chemical products and raw material side, it's rather getting a little bit more constrained going up, whereas, in this situation, the pricing for our product is in a kind of a medium situation. That is how I would describe chemicals in the moment.
Okay. Thank you. Just on the Construction Chems margin.
Your question, actually, the second part I didn't get.
It was just, yeah, sorry about that. Just the Construction Chemicals margin, the EUR 2.4 billion in sales that goes with that business. How should we think about the profitability of that business as you seek to look for alternatives for it?
Overall, as we said, it's a good growing, it's a well-positioned business. As you know, we don't disclose results below the segment level. I think, Paul, we would like to stick to that.
Above or below segment average or division average?
For Functional Materials & Solutions, as you know, heavily affected by the pass-through cost that we have for precious metals. I think with that, I leave it.
Thank you very much.
The next question is from Tony Jones, Redburn. Please go ahead.
Thanks, Stefanie. Good morning, everybody. I had two. Firstly, on cracker margins, is there anything strategic you could do, perhaps with a third party or tactically by adjusting the feedstock mix to improve the regional cracker margins? Then also on China, how are you seeing the opportunity for China in 2019 and maybe longer term, given some of the issues you call out? What does that mean, if anything, for BASF's long-term investment plans? Thank you.
Tony, cracker business, I think there's not so much we could do on a short-term basis here. First of all, let me mention that the Port Arthur cracker is totally or relatively strongly flexibilized in terms of feedstock. That was a project we have established quite some time ago, so we can actually flip from a kind of a pure naphtha-based to a kind of a mixed feed. That is also the same thing we address on the Antwerp side to flexibilize. These are the two major assets here. On the other hand, I think in Ludwigshafen, this is limited, I have to say, but that is also with the supply situation, not so easy and tank farm situation. By the way, here also in Ludwigshafen, we need the split we have because that is also the consumption pattern of the downstream.
I think there's not so much to do. You know that we have a strong buyer position there on ethylene because we usually use the other products more intensively like ethylene. Overall, I think we are tied into a grid. You know that also from Ludwigshafen, we have two pipes going north and south, so we can also manage there to stimulate this by the respective contracts and discussions with our partners or clients here. I think there's not much more we can do, but we definitely benefit already today from the feed flexibilization. Your question about China long-term, I think what you clearly see, and this is what I also mentioned in the current situation and also a little bit in the outlook, that China is certainly suffering from the trade frictions with the U.S.
I, on the other hand, lived long enough in China that I know, first of all, that the Chinese will not give up in that conflict. The other part, I would say they are rather smart and creative in finding measures to somehow cope with this. Certainly, they are bothered now by exports to the U.S. in the moment. This is why you see a slowdown over there. On the other hand, you might have heard also that the government has now recently announced tax reductions. I have to say this, living there 10 years in the past, that's typical China.
They take a measure, this is a state system where there's one man at the top and he says, "Now it's going to happen this," they reduce the taxes, with this they will increase the consumption power, in China, that will be very quick. That doesn't take months to be established. Sometimes that goes overnight. I think this is one measure to stimulate now in the coming months, consumption pattern. For that reason, could be very well that we see already an uptick with these measures also in Q4. That's exactly, I think, the intention they have. In that respect, yes, they are in a difficult situation, but I honestly spoken, I believe in pragmatic solutions and somehow I think the U.S. and China, they will find a solution that no one loses the face.
I'm also pretty optimistic that the Chinese have a policy mix, in taking measures to somehow stabilize their economy. That's why long-term, I'm not so much worried.
Thank you. The investment plans are unchanged as well?
Yes, because, Tony, you know, if we talk about thinking now about the big cracker project in Guangdong, we really think long-term.
Sure.
That is something you have to figure out whether you do the right step. You have to figure that out for decades actually, because planning and building this, you have maybe asset lifetimes of 40 or 50 years, and I think if you have once a big site, you have it forever. We believe in the pattern and the big consumption pattern in China, that is why we are not worried in changing actually, a little bit our strategy now because times are a little bit rougher. You might know that this is in Guangdong, in Zhanjiang, which is a 7 million city in the south on the way to Hainan. If you look on the figures of Guangdong, this is the largest province in terms of inhabitants, 110 million people. They passed the GDP of Russia this year. Strong double-digit growth.
This is the industrial center and heart, by the way, they import 20 million tons of chemicals. I think the strategic setup fits perfectly, and we will not change this only because now a few quarters are maybe a little bit more difficult.
Perfect. Thank you very much.
The next question is from Patrick Lambert, Raymond James. Patrick?
Yep. Thanks, Stefanie. Good morning, everyone. Two questions also on my side. The first one on ags, more looking at Q4 dynamics are, and basically are we pretty similar to what we've seen in Q3 in terms of contribution of Bayer's assets, and also in terms of what you see on pricing dynamics there, the mix as you commented. First question about ags. The second, sorry to come back on the Rhine issue. On my calculation, the impact would be in Q3, like mid double digit at a big level. How do you see Q4, in terms of maybe some early estimates of the impact of underutilization and logistics issue, maybe a worst-case scenario there, if you could help us figure that out. Thanks.
Patrick, as I mentioned earlier, I think the taking down the utilization just happened now. I explained a little bit the different ingredients. We had the cooling water effect, now more the transportation and the shortage on the raw materials. You can imagine if that continues or it theoretically would continue the whole fourth quarter, the impact would be significantly higher. It is also relatively normal that in November latest it rains in Germany. We still think if we look in normal weather patterns, which has been unusual the last months, but if we think in that direction, it basically can come down and normalize relatively quickly, within days even. I would say if you want to have an assumption, if you take worst case, your mid-size double-digit million impact on the earnings is right for the Q3.
If it continues for a whole Q4 like this, it is significantly higher. On the other hand, the probability that it will rain and it will normalize, I would say is higher than the first scenario, then it would be definitely smaller.
Just on a follow-up.
Yeah, good morning.
Sorry, maybe I just ask on, I saw some force majeure already on a few plants. That could mitigate part of the impact in case of it doesn't rain?
Well, I think if it doesn't rain, we stay on allocation, and the force majeure stays for some more time. yeah, we have basically a
A lower business than we could have by the demand of our customers. That's the normal consequence out of it. As I said, one day of strong rain, two days of strong rain, it normalizes quickly.
We'll look at the weather then.
Yes. That's what we every day look.
If you want to, you listen tonight to a famous song of the man who used to be called Prince and then was The Symbol.
Sounds good.
Sorry. Your question on Ag. We definitely expect a stronger Q4 season in South America will be in full swing. Indication the beginning of the season, I already alluded to what we've seen towards the end in Q3. You've seen our comment on the legacy BASF business. We have a good start to the season in the southern hemisphere due to the nature, and I think you asked also with respect to the acquired assets, due to the nature of that business, expect a similar impact on the Ag segment's result as we've experienced it in Q3.
Excellent. Good. Thank you.
The next question is from Gunther Zechmann, Bernstein. Since we have 5 more analysts on the line, I would suggest if you could keep it short, perhaps with 1 question that would help to stay within the time limit.
Good morning, Gunther Zechmann from Bernstein. My 1 question is on the macro outlook. The chemical production that you've updated, you don't expect any longer that this will outgrow the industrial production and GDP. Can you just take us through what the key drivers are for the reduced macro guidance? You've also been quoted on Bloomberg this morning saying that you hope automotive will pick up in the coming months. Is that a general optimism or have you seen some tangible signs that you've troughed in that end market? Thank you.
Gunther, this is Hans. To be honest with you, September was a little bit of a surprise to us. The developments that we saw there, we had gone into the month of September after July and August considering the seasonal effects looking very normal. We saw this dip in demand in the month of September. You're very familiar with the developments in particular in the Western European automotive markets, new emission standards. The producer can't test their cars quickly enough. That has certainly led to a number of issues. We've also seen a certain slowdown in Asia and they are most pronounced in China. What's going to happen there in Q4 remains to be seen. Overall, we came to the conclusion to reduce our figures for industrial production and for chemical production, I want to say slightly.
This is an adjustment that we made there, yes, do not over interpret that, please. It remains to be seen how things will actually develop in Q4. Martin already alluded to the tech stimulus in China, which may very well play a role in the Western European auto markets. Let's see whether there is pent up demand that will be satisfied then during Q4. A number of things that can impact Q4 remains to be seen. I think it is fair to say we do not see any type of structural issues. We see a dip in demand in September and we take it from here.
Just to follow up on the comment that the auto slowdown will pass in the coming months, is this something you have actually seen in your order books?
I want to say that is too early to say. When I look at our order books, that looks solid, that looks okay. Volumes were then slightly slower and that has also let you've seen in our cash flow, the dip that we had there. We simply at the end of Q3 as a result of this dip in demand, in particular in auto in September, we sat there with inventories which were too high. The order books look okay.
Thank you.
Okay. The next question is from Andreas Heine, MainFirst. We will then have Sebastian Bray and Laurent Favre. Now it's Andreas Heine, MainFirst. Please go ahead.
Only one question on the outlook. At least in my forecast given the high base of Q4 2017 and the low end of the guidance range you've given, how comfortable are you with your guidance and what should not happen that you stay within your guidance in Q4?
Andreas, good morning. If you look on the mathematics, we are basically now 6.5% below the level of Q3 2017. If you look on the businesses, I think Hans alluded on the agricultural situation. We said this also last time, and I think if you see on the price development everything, we still expect that there will be a gradual improvement
In the PP and in the functionalized material solutions segment that they could accelerate in the fourth quarter. That will be certainly upset or offset by a decline in the chemicals arena, because we have also to compare here against a very strong Q4 driven by the isocyanates. If we expect, that's what we expect, that the Q4 will be certainly lower than the last year's Q4, but still reasonable, we are still in our budget guidance. That is actually what we also confirmed today. That is our expectation, that Q4 will be weaker in 2017, but it is still for the over year in the guidance. That's why we do not correct anything, because that is what we currently can see. I think Hans alluded on the situation of the auto industry. We have in the outlook also only particularly taken reference to the auto industry.
We did not talk about other industries because we cannot see in the moment significant downturn on the other industry. It is really very much on automotive in the moment. With all these effects, which I just talked about, we still think from today's point of view that we are in the guidance.
Thanks a lot.
Now it's Sebastian Bray from Berenberg. Please go ahead.
Hello, thank you for taking my questions. I would just have one, please. There seems to be, across the value chain in chemicals, a tendency towards higher raw material costs. I'm thinking in particular of power and carbon pricing, particularly in Europe. Does BASF think of higher carbon prices, and they've more than doubled this year, in 2018 and 2019 as a particular headwind? Any idea of quantification as far as you can give it would be helpful. Thank you.
Sebastian, thank you for your question. This is Hans. We certainly experienced higher raw material prices. Obviously not only driven by carbon prices. You referred to power. Interesting situation there. Not only the river level of the Rhine is low, also there was less power generated by renewable than what was expected, and that led to high power prices in Q3. We have overall raw material cost increase in Q3, which is predominantly driven by oil price. Keep in mind, roughly two-thirds of our raw materials are hydrocarbon-based. We've seen an increase in raw material prices in Q3 out of magnitude 13%-14% that we had to cope with. Power, more expensive, at least in Germany, we produce a lot of the power ourselves, the gas prices have also increased significantly. That plays a role there.
The CO2 certificates have moved up in price from EUR 8 to, I think yesterday it was slightly below 20. That's also a cost driver. Please understand that I will not give you a specific figure on CO2 certificates and what kind of cost that means for competitive reasons. Thank you.
Thank you.
The next question is from Laurent Favre, Exane. Please go ahead.
Thank you, Steffie, good morning, everybody. The question is really regarding the strategic review. Should we take today's announcement on Construction Chemicals as the result of the overall strategic review in terms of portfolio that is, or should we expect more, especially regarding Performance Products? I was a bit surprised that you talked about the challenges of running Construction Chemicals in terms of small quantities and complexity of the portfolio, given that this is exactly what We Create Chemistry was about. I guess in Performance Products, there have also been assets where you have had some challenges. Thank you.
Laurent. I think this announcement about Construction Chemicals, I think it fits totally in the line what we have done so far. I think you know also our chart, which in the equity story, that we are pretty active in terms of in acquiring and divesting. It's just one more thing we want to do. I think if you put it in line, water chemicals and one hand, and then you saw leather and textile in the past. Now you see with Wintershall, now EB comes. I think it just shows that we continuously put all these portfolio parts on the block and review them continuously. If there is an opportunity and if we come to the conclusion that the business could be maybe better outside of BASF, and we do a value-enhancing step by following such an opportunity, then we will do.
I think it is a consistent work of that, and you should also expect that going forward. On the other hand, I think all over the measures which we will take in place to reposition and position better BASF in the future, that is what Hans and I am going to tell you all on November 20th. I will not take anything on the measures now today. You expect that we have done, I think, a good portfolio job in the past and we continue step by step in looking into this. You should not see any policy change as the point of now and just maybe have a little bit patience until November 20. Thanks.
Excellent. Thank you.
Okay. Now we have three more on the list. Please really limit yourself to one question. It's first Peter Clark, then Chetan Udeshi, then Markus Mayer. Now Peter Clark, Societe Generale, please go ahead.
Yes, thank you. Thank you, good morning, everyone. Very quickly on the Functional Solutions and the raw material trends. It looks like Performance Materials has gone over the hump with the isocyanate price coming back. I see that coatings obviously under a lot of pressure, a bit like, I guess, in the OEM, you're under pressure there on the auto side in particular, also Construction Chemicals. Just wondering when you see the inflection point now for the segment as a whole, on the raw material side against pricing. Will it be Q1 next year, do you think? Or let's see.
Well, a quick answer on this. First of all, let me really repeat. I think on the pricing side, we have done a good job over there now in several quarters. Yes, I think you're right. You mentioned the two major points here, coatings and also Performance Materials as the two ones who feel that pressure. I think that they will continue on that path in Q4. With this, I think we will come up also with the earnings. That is what is part of our expectation for Q4.
Okay. The inflection point, you think, is early next year, hopefully early next year?
Well, as I said, I think we continuously improved our position here over the recent quarters. We have also closed the gap, basically. With this, it just continues in that respect.
Okay
It's the higher raw material cost, which comes in and that should come also at a certain point to an end, that we get more margin and a better pricing power.
Okay. Thank you.
It's Chetan Udeshi from J.P. Morgan. Please go ahead.
Hi. Thanks for letting me on. Just two quick ones. One on monomers. You've talked about lower sales volumes in the isocyanates business. Can you explain why were your volumes lower given that I believe you are now ramping up your new TDI plant in Germany? That's number one. Number two, just looking for full year now in Q4, you still say slight, which is up to 10% decline. Do you have any specific numbers that we should be thinking in mind for full year now, given that first three quarters are already reported? When you look at the historic seasonality in your business, Q4 is down quite significantly versus Q3. Is there a reason why this time Q4 is going to be different from the usual seasonality? Thank you.
Well, there's no more information on that one than I gave already on the question of Andreas. You know also the wording of slight and significantly, and you see the wording we have. We keep the guidance, and this is why we think the mathematics goes in this direction. On the sales volume of isocyanates. If you have a situation like this where the prices for TDI and MDI in all regions go down relatively steeply, you play in your policy the role between volume and margin. That is something every producer does differently, and it depends also on your customer portfolio. For us, this is the situation that this is the best maximum value optimization situation we do, and the second part, you already know that is the TDI plant here in Ludwigshafen. We have also some restrictions with the Rhine at the moment.
That is the best way to guide that business for us at the moment.
Understood. Thank you.
Okay. Now the final question from Markus Mayer, Baader Helvea. Please go ahead, Markus.
Thank you for the final question. On Construction Chem again. Given your strong position at admixtures, but your preference to combine your business with a strong partner, are there any antitrust issues at admixtures with any other players, or do you think that should play out well to combine this business with anyone else?
Difficult to answer, Markus. We are at the very beginning of the process. You look at the competitive environment and could there be issues in certain combinations? Yes, there could be. In others, there are none. I'm sorry. There's not much more that I can say at this point in time.
Okay. Thank you.
Thank you.
Ladies and gentlemen, this brings us to the end of our conference call. We hope to welcome you at our Capital Markets Day in Ludwigshafen on November 20. If you have not sent the completed registration form back to us yet, please do so at your earliest convenience. The deadline is actually today. Should you have any further questions, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye for now.