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 Rudamala, Chairman of the Board of Executive Directors and Hans Engel, BRSF's Chief Financial Officer. Martin will explain the financial performance of BASF Group in the third quarter and comment on recently announced Transact and agreements, while Hans will present the segment results and financial figures in more detail. Then marking 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 slash 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 quarter on a restated basis. The restatement was necessary due to the signing of the agreement between BASF and Letter 1 to merge Wintershall and DEA 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. Waitroactively, as of January 1, 2018, with the and with the prior year, the efficacy stated.
Until closing, windows are grouped in income after taxes will be presented in the income before minority interest 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 twenty nineteen. I would like to begin with making a few remarks 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 automotive, a very important customer industry of BASF. The current forecast from LMC Automotive clearly reflects this development.
At the beginning of 2018, their close 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 conflict in particular between the U. S. And China.
Turning to BASF's group financial figures for Q3 2018, compared to the prior to 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 And Solutions. Morumes in the Performance Products segment were still negatively impacted by supply shortages in our withdrawal value chain. Currency effects amounted to minus 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 2,300,000,000 in Q3 2018. EBITDA amounted to 1000000000 compared to 1000000000 in the prior year quarter. EBIT before special items decreased by 14 percent to 1.5000000000 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 And Solutions we were able to increase prices by 5%, respectively, 4%. However, 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 Lutexar. 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 percent to 1,000,000,000 in Q3 2018.
Special items in EBIT amounted to minus 1,000,000 and were primarily related to the integration of the acquired businesses. In the prior year quarter, special items were positive and amounted to 1,000,000 and this was mainly attributable to the divestiture gains from the transfer of BASF Leather Chemicals business to the Style 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 149000000 to EUR 235000000 because of higher oil and gas prices and increased production volumes.
In the third quarter, the average price for Brent Crude was USD 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 2nd add to EUR 1,300,000,000 in the prior year quarter. Reported earnings per share decreased by 10% to in Q3 2018. Adjusted EPS amounted to This compares with in the prior year quarter.
Cash flows from operating activities amounted to 1,000,000,000, excuse me, in third quarter of 2018, compared to 1000000000 in the prior year quarter. The decline was largely driven by the lower cash cash inflow from changes in network capital. Free cash flow decreased from 1000000000 to 1000000000. In August, BASF was close has closed the acquisition of significant businesses and assets from Bayer, which generated combined sales of EUR 2,200,000,000 in 2017. The acquisition comprises business 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 had been supplying our new customers without interruption. The cultural fit and motivation of our substantially enhanced agricultural solutions team is excellent. And we are experienced 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 the 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 markets, 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 And P company, sizing additional growth opportunities generating synergies of at least EUR 200,000,000 per year. And last but not least, listing Wintershall Dea.
We expect that In May, BASF and Solaine has signed an agreement to join forces by combining BASF's paper wet end and border 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 continue to expect closing at the end of 2018 at the earliest. As part of our active portfolio management, We are continuously evaluating where the 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 1,000,000,000 in 2017 operates in more than 60 countries, and has around 7000 employees worldwide. The outcome of assessing strategic options is open.
This means we consider a merger with a stronger partner as well as a divestiture. We strive to reach an agreement on a transaction in the course as the first location for battery materials production serving the European Automotive market. The plan will be constructed adjacent to the nickel and cobalt refinery owned by Noren's nickel. 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 400,000,000 multi step investment plan announced last year.
Startup is planned for late 2020, enabling the supply of approximately 300,000 full electrical vehicles per year with BASF battery materials. Additionally, BASF and Nor nickel have signed a long term market based supply agreement for nickel and cobalt feedstocks from no nickel'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.
Yes, 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 product as well as increased fixed costs 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 was stable We increased sales prices capabilities for nutritional products and aroma ingredients. By October 1, 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 And Solutions grew slightly compared to the prior year quarter. This was mainly attributable to higher prices in all divisions, especially in Catalyst And Performance Materials. Also, 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 q332017, 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 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 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 in 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 26,000,000 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 in Q3 2018, mainly due to the release of provisions for our long term incentive program. Now to cash flow. In the 1st 9 months of 2018, cash flows from operating activities decreased by 1,000,000,000 to 1,000,000,000.
This was largely due 1000000000 higher than in the 1st 9 months of 2017. The increase was driven by the businesses acquired from Bayer. Free cash flow came in at EUR 4,000,000,000 compared to EUR 5,000,000,000 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 1,000,000 compared to 1,000,000,000 in the 1st 9 months of 2017.
Now to the balance sheet as of September 30, compared to year end 2017. Total assets increased by 1,000,000,000 to 1,000,000,000. The acquisition of a range of businesses and assets from Bayer contributed 1,000,000,000 to this increase. Non current assets decreased by 1,000,000,000, 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 1,000,000,000 compared to 1,000,000,000 atyearend 2017.
Due to the reporting of our oil and gas assets as a disposal group. Total liabilities increased by 1,000,000,000, to 1,000,000,000. Current liabilities were up by 1000000000 to 1000000000 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 1,000,000,000 to 1,000,000,000. Net debt amounted to 1,000,000,000 compared to 1,000,000,000 at the end of 2017.
This due to the purchase price payment to Bayer. Our equity ratio was 40 3 percent 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 percent 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 18 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 sign signing of the agreement, to merge Windows Al 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 fixtures fixed costs.
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 Market Day on November 20, we will focus on how we will better position BASF and explain specific measures we are taking. Hunter and I look forward to welcoming you on that occasion in Ludwigshafen. And now we are happy to take your questions.
Ladies and gentlemen, I would now like to open the sure to unmute your phone and use your headset. The first question now comes from Thomas Wrigglesworth from Citi. Thomas, please go ahead.
Thanks, Stephanie. Good morning, gentlemen. First question, if I may, just with regards to the the developments that you're seeing in into the beginning of 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 you think there's something, whether we're just seeing a destocking and that's accelerating or you think there's something more structural to demand? And the second question, if I may, the, you mentioned fixed costs a lot, specifically with regards to FMS, surprised given that there was volume growth that you were also seeing fixed costs.
Could you just elaborate, by division, what 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 clearly what the fixed cost driver is there. Thank you.
Well, Thomas, a little bit more on the automotive. I mean, we have seen particularly in September with basically 9% down a significant production reduction in automotive. I think, there is no stocking or destocking in that very short period of time. I think it directly translates into consumption of major chemicals. And as you know, we are basically with relatively broad portfolio in the car.
So 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 catalysts in there. So with this, it's impacting a quieter part of business and you also know that Automotive is our most important customer industry with more than 18% of sales. And with that, we see also basically an immediate here. But 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, why does 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. Our biggest driver for fixed cost increase that we have is by acquisition that we made, if you recall, we closed that in August. So that's driving up fixed cost significantly at a point in time where there were hardly any sales of the new buyer products in our portfolio in Q3.
In the other segments, you have a mix of new activities or new plants that came on stream such as, for example, new catalyst plans or new catalyst lines in, function materials and solutions. We also increased, coating capacity, that brings a certain full year effect. It's also in Functional Materials And Solutions. We had some smaller turnarounds in the performance products segment and all of that in the combination leads to an increase in fixed cost and was also reflected in the fixed cost at least a certain extent, are the costs that come with the low water levels of the river Rhine. That's something that we are coping with since, I want to say, the mid of June, and that has increased cost also by way of underutilization costs because we had to throttle back some of our plants due to raw material supply situation.
Sorry, just as a follow-up, hence, 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 in and operations in Lutrisafem, plus then, turnarounds is in the area of a higher double digit million figure.
The next question is from Andrew Stott, UBS. Andrew Your turn.
Yeah, good morning. Thanks, Teddy, and 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, your number 1 globally in admixtures, number 4 in Construction Systems, you've only asset what 12 years?
Since the Tagussa deal, you've got a long experience in the business before the Tagussa deal. So what is it that you feel isn't right, with BASF fully owning the asset? 2nd question is more straightforward than the numbers. I saw with the buyer press release this week that $300,000,000 of sales have gone to you. So I've got the answer on the acquisition effect for Q3 in AG.
But, on the losses, I was running with sort of 60 70,000,000 in my head for Q3. I just wondered if you could confirm if that's a ballpark number.
Andrew, on the strategic decision of E. B, I mean, I think you're right. This is 2 businesses. The one is the business is admixtures. This is also a business that is differently driven than the other part, which is the construction systems.
So the first one is very much a project based business. This is also, something that is innovation driven. I think we had the leading admin technology here. I think with this, you are right, we are on the number 1 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. So we have, for example, a different regional or local setup than other of our competitors. I think we have mentioned also in the past that our business is relatively strong in the Middle East area where they are currently I would say with the situation over there, less construction activities, that's why we are burdened there. And 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 end, 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 Tamotech acquisitions in Mexico, for example, but it's a relatively tough work also to do that country by country. And 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 is a relatively complexity. And I think with this, it could really gain momentum if we use this opportunity of consolidation in the market. And that's why we have decided to to really check the opportunities here. On the payer side, Hans?
Yes, good morning, Andrew. Your question with respect to sales. And 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.
The next question is from Christian Faitz, Kepler Cheuvreux. Please go ahead,
Yes. Good morning, Stephanie. Good morning, Martin and Hans. Two questions, if I may. First of all, you're coming back to the low water levels.
Terms of cost 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? And then second question, pricing in ad cams was up by +18 percent.
How much of that is underlying and how much of that price push related to compensation for weaker currencies? Thanks.
Some more information on the water level. I mean, first of all, it's a very, very unusual long period. We are bothered with this. We had this in the past happening 1 or 2 weeks, but this is now a situation that basically since summer, is accompanying us very much on 2 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.
And now, which is becoming even more fierce when it's really the transportation issue. So basically shipping is almost not possible anymore, even if you take 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 the to road and braille, but that has its limit because, I mean, 2500 ships over the year, you simply cannot bring all the volumes to rail and to road.
So with this, we have now more, a material issue and a supply issue than the cooling water part. And with this, the impact will over the next months get a slightly more severe, I would say. You can imagine that Hans and I myself prayed to the water god to give us rain because that would ease the situation very quickly And 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.
So this is more, I think, now a stable situation going forward, but This certainly means also that the consuming plants down in the value chains, they suffer. And the other part there, which, really driving now also costs is one hand underutilization, but the other part is also higher transportation costs. By bringing to rail and road versus the ship. So it could ease easily from 1 week to the other if you get significant rain But if not, we had to go on a bit about this utilization.
On the suns, 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 earlier in 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 minus 10%.
You've seen the development of the Brazilian real and the Argentinian peso business is to a large extent, dollar wise, 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. Okay, sorry. The next question is from Paul Walsh. We will then have Tony Jones and then Patrick Lambert. So now, Paul Walsh from Morgan Stanley.
Please go ahead.
Good morning, Stephanie. Good morning, Martin Hans. Two questions. Firstly, on the chemicals business. Just thinking about the run rate of profitability.
I'm curious to know if you think Q3 was a fair reflection of the reset in petrochemical margins and in polyurethanes. Maybe any other comments you've got on the other major product chains, whether it's acrylics or the nylon chain and so on, how they're planning out from here. And second question, just around the construction chems business, might you assume the margin of that business is lower than the divisional average? How should I think about the profitability of that business? Thank you.
So Paul, chemicals business, I mean, let me start with really, I think, the major level for change here isocyanates. I mean, you know that we had the last year 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. I think 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 saw it.
But we clearly see now that in the third quarter that there is this normalization going on. So TDI and MDI prices have come down significantly in almost all regions. The world that has also to do that, basically additional capacity coming on. We have now also in these months, a rather from a seasonal point of view, weaker months for the isocyanates, we also expect, however, that the next 2, 3 months are normally in the periodic or in the comparison with other years should be stronger months, but that is certainly the most important factor on chemicals. And the other part that is impacting us, I think it's a cracker margin situation, which is particularly in the U.
S. Stress because I mean, there is an ethylene oversupply, which is also not going away. I think for quite some time, So these are the 2 major impacts, which we see. On the other hand, we have, we have rather nice stability, I think, on most of the other parts. And for Para, you mentioned acrylic acid, which is a strong lack 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 think it is expected on very healthy level. I think also most of the other products, I think there is nothing significant shifting. So we have these 2 effects now, going forward. Overall, I think in the basic chemical products on raw material side, it's rather getting a little bit more constrained, going up whereas, I think in this situation, the pricing for our products is in a kind of a medium situation.
So that is how I would describe chemicals in the moment.
Okay, thank you. And just on the construction chem's margin,
your question, actually, the second part I didn't get,
from the overall growth in that.
Yes, sorry about that. Just the Construction Chemicals margin the 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?
It's 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. And I think Paul, we would like to stick to that.
And above or below segment average or division average?
For Functional Materials And Solutions, as you know, heavily affected by the past due cost that we have for precious metals. And I think with that, I'll leave it.
Thank you very much.
So the next question is from Toni Jones, Redburn. Please go ahead.
Thanks, Stefanie. Good morning, everybody. I had 2. 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 And 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. And what does that mean if anything for BASF's long term investment plans?
So, Tony, a cracker business, I think there's not so much. I think we can do on a short term basis here. I mean, 1st of all, let me mention that the Port Arthur Gregor is totally or relatively strongly flexibleized in terms feedstock. That was a project we have established quite some time ago. So we can actually flip from a kind of a pure NAFTA based to a kind of a mixed feed.
That is also the same thing we address on the envelope side to flexibilize. These are the 2 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 and tank tank farm situation. So and by the way, here also in Ludwig, we need the split we have because that is also a consumption pattern of the downstream.
So I think there's not so much to do. You know that we overall in we have a strong buyer position there on ethylene because we are usually use the other products more intensively like ethylene. So overall, I think we are tied into a grid. You know that also from Ludwig South, we have 2 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?
What I think there's not much more we can do, but we definitely benefit already today from the fleet flexibility. 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.
And the other part, I would say they are rather smart and creative in finding measures to somehow cope with this. And certainly they are bothered now by exports to the U. S. In the moment. This is why you see a slowdown over there.
But on the other hand, you might have heard also that the government has now recently announced tax reductions. And that is, I have to say this, living there 10 years in the past, that's typical China. They take a measure and this is a state system where there's one man in the top when he says, now it's going to happen this and they reduce the taxes and with this, they will increase the consumption power. And in China, that will be very quick. So that doesn't take months to be established.
Sometimes that goes overnight, And I think this is one measure to stimulate now in the coming months, consumption pattern. And, for that reason, could be very well that we see already an uptick, with these measures also in Q4. And that's exactly, I think, the intention they have So in that respect, yes, they are in a difficult situation, but I honestly spoken, I believe, in pragmatic solutions and some are somehow I think the U. S. And China, the military find is our solution that no one loses the face.
And I'm also pretty optimistic that the Chinese have a policy mix in taking measures to somehow stabilize the economy. So that's why long term, I'm not so much worried.
Thank you. And the investment plans are unchanged as well.
Yes, because, Tony, you know, I mean, if we talk about thinking now about the big cracker project in Guangdong, we really think long term because that is something you have to figure out whether you do the right that 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, have it forever. So we believe in the pattern and the big consumption pattern in China. So that is why we are not worried and changing actually a little bit our strategy now because times are a little bit rubber. And you might know that this is in Guangdong in Changdong which is a 7,000,000, city in the south on the way to Hainan.
And if you look on the figures of Guangdong, This is the largest province in terms of inhabitants, 110,000,000 people. They passed the GDP of Russia this year. Strong double digit growth. This is the industrial center in heart. And by the way, they import 20,000,000 tons of chemicals So I think the strategic setup is it 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?
Yes. Thanks, Tiffany. Good morning, everyone. Two questions also on my side. The first one on AGS, more looking at Q4 dynamics are And basically because are they pretty similar to what we've seen in Q3 in terms of contribution of buyers' assets, and also in terms of what you see on pricing dynamics there, the mix as you commented.
So first question about ags. And the second So if you come back on the Rhine issue, if on my calculation, the impact would be in Q3, like mid double digit at EBIT level. How do you see Q4 in terms of maybe some early estimates of the impact of underutilization and stick issue. Maybe a worst case scenario there, if you could help us figure that out.
I mean, Patrick, as I mentioned earlier, I think the utilization taking down the utilization just happened now And I explained a little bit the different ingredients. We had the cooling water effect now more the transportation and the shortest on the raw materials. Can imagine if that continues or it theoretically would continue the whole fourth quarter, the impact would be significantly higher. However, it is also relatively normal that in November latest, it rains in Germany. So we still think if we look in normal weather patterns, which has been unusual the last month.
But, if you think in that direction, it basically can come down and normalize relatively quickly within days even. So, I would say, if you want to have an assumption, if you take worst case, your mid sized 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. But on the other hand, the probability that it will rain and it will normalize, I would say, is higher than the first scenario, and then it would be definitely smaller.
Just on the footnote, sorry, maybe I just ask on as to some force measures already, on a few plants. That could mitigate part of the impact in case of it doesn't weigh in?
Well, I think if it doesn't rain, we stay on allocation, in the 4th March year stays for some more time. And then, yeah, we have basically a lower business, than we could have by the, by the demand of our customers. That's the normal consequence out of But as I said, I mean, one day of strong rain, 2 days of strong rain, it normalizes quickly.
So we'll look at the weather then.
Yes. And that's what we are everyday look.
Or if you want to, you listen tonight to a famous song of the man who used to be called prints and then was the symbol. So Sounds good. Sorry. Your question on AG we definitely expect a stronger Q4 season in South America will be in in full swing, actually indication the beginning of the season. I already alluded to what we've seen towards the end in 3, you've seen our comment on the legacy BASF business.
So we have a good start to the season in the Southern Amisphere 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 X segments result as we've experienced it in Q3.
The next question is from Gunther Sechmann, Bernstein. It seems we have 5 more analysts on the line. I would suggest if you could keep it short perhaps with one question that would help to stay within the time limit.
Good morning, Gunther Sechmann from Bernstein. My one question then 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. And you've also been quoted on Bloomberg this morning saying that you hope automotive will pick up in the coming months.
So is that a gender optimism, or have you seen some tangible fines that you troughed in that end markets? Thank you.
Gunther, this is Hans. Well, 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 August looking, considering the seasonal effects looking very normal. And then when 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, but we've also seen a certain slowdown in Asia and they are most pronounced in China.
Now 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, but don't over interpret that, please. And it remains we've 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 during Q4.
So a number of are things that that can impact Q4 remains remains to be seen. But I think it's fair to say we don't see any type of of structural issues. We see a dip in demand in September and we take it from here.
And just to follow-up on the comments that the auto slowdown will pass in the coming months. Is this something you've actually seen in your order book
That is, I want to say, that is too early to say when I look at our order books, that looks solid. That looks okay. But, 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, but the order books look okay.
Thank you.
Okay. So the next question is from Andreas Heine, MainFirst. We will then have Sebastian Bray and Laurent Fabre. So now it's Andreas Heine, MainFirst. Please go ahead.
The only one question then on the outlook. At least in my forecast given the high base of q44 2017, mind 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.
Andrea, it's good morning. Yeah, I mean, if you look on the mathematics then basically, we have now 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, I we said this over the 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 Financialized Materials Solutions segment that they could accelerate in the 4th quarter. That will be certainly, offset or offset by a decline in the chemical arena because we are able to compare here against a very, very strong Q4 driven by the, by the, isocyanates. So if we expect, and that's what we expect that the Q4 4 will be certainly lower than the last year's Q4, but still reasonable.
Then we are still in our in our budget guidance. And 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, included on the situation of the auto industry, we have in the outlook also only particularly taking 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. So with all these effects, which we, which I just talked about, we still think from today's point of view that we are in the guidance.
Now it's Sebastian Bray from Berenberg. Please go ahead.
Hello, and thank you for taking my questions. I would just have one please there seems to be across the value chain in chemicals, the tendency towards higher raw material costs. And I'm thinking in particular power and carbon pricing, particularly in Europe, does BSS think of higher carbon prices and they've more than doubled this year in 2018 2019 as a particular headwind? And any idea of quantification as far as you can give would be helpful. Thank you.
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, but 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 2 thirds of our raw materials are hydrocarbon based we've seen a an increase in raw material prices in Q3 out of magnitude 13% to 14%. That we had to cope with power more expensive, but then at least in Germany. We produce a lot of the power ourselves, but the gas prices have also increased significantly. So that plays a role there. The CO2 certificates have moved up in price from to I think yesterday It was slightly below 20.
That's also a cost driver, but 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, Stefanie, and good morning, everybody. The question is really regarding the strategic review. Should we take today's announcements on Construction Chemical as the result of the overall strategic review in terms of portfolio that is, or should we expect more, especially regarding Performance Products? 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. And I guess in performance, there have also been assets where you have had some challenges.
Thank you.
Laurel, I think this announcement about construction chemicals, I think totally in the line what we have done so far. And I think you know also our chart which in the equity story that we are pretty active in terms of acquiring and and divesting. And, and it's just one more thing we want to do. And I think if you put it in line water, water, chemicals and one hand and then you saw a level and textile in the past. Now you see with Wintershall now EV comes.
I think it just shows that we continuously put all these portfolio parts on the block and review them continuously. And 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 so 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 20 So I do not take anything on the measures now, today, but, yeah, you expect that we have done a I think a good portfolio job in the past and we continue step by step in looking into this. So you should not see any policy change as the point of now.
And just maybe have a little bit patience until November 2020? Thanks.
Excellent. Thank you.
Okay. So now we have 3 more on the list please really limit yourself to one question. It's first Peter Clark, then Chetan Udeshi, then Markus Mayer. So now Peter Clark, Societe Generale. Please go ahead.
Yes, thank you. Thank you, and good morning, everyone. Very quickly on the Functional Solutions and the raw material trends. I mean, it looks like Performance Materials gone over the hump with the ISO signee 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, obviously 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. I mean, first of all, let me really repeat. And I think on the pricing side, we have done a good shop over there are now in several quarters. Yes, I think you're right. You mentioned the two major points here, coatings and also performance materials as the 2 ones who feel that pressure.
I think that they will continue on that path in Q4. And with this, I think we will come up also with the with the earnings. That is what is part of our expectation for Q4.
Okay. And so the inflection point you think is early year, hopefully, early next year?
Well, I mean, as I said, I think we continuously improved our position here over the recent quarters. We have also closed in the gap basically. And with this, it just continues in that respect. And Yes. It's the higher raw material costs, 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.
Now it's Chetan Udeshi from JPMorgan. Please go ahead.
Yes, hi. Thanks for letting me on. Just two quick ones. 1 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 1. And number 2, just looking for full year now in Q4, you still see a slight, which is still up to 10% decline. Do you have any specific numbers that we should be thinking in mind for full year now given that 1st 6 quarters are already reported. And when you look at the historic seasonality in your business, Q4 is down quite significantly versus Q3 So 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. And then I gave already on the question of Andreas. You know also the wording of slight and significantly, and I, 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, I mean, if you have a situation like this where the the prices for TDI and MDI in all regions go down relatively steeply. You play in your policy the role between volume and margin.
And that is something every customer, every producer does differently. And it depends also on your customer portfolio. And 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 Ludwig Avenue have also some restrictions with the Rhine in the moment. So that is the best way to guide that business
final question for Markus Mayer, BARDA, Headwea. Please go ahead, Markus.
Yes, thank you for the final question. On came again. Giving you a strong position at Equinix just, but your preference to combine new business with a strong partner are there any antitrust issues at ExtMixtures with any other players or do you think that should be well play out well to combine this business as anyone else? Yeah. 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. And 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.
Ladies and gentlemen, this brings us to the end of our conference call. We hope to welcome you at our Capital stay in lutexhalfton on November 2020. 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 DBI's IR team. Thank you for joining us today and goodbye for now.