Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the third quarter 2021 results. Throughout today's recorded presentation, all participants will be in listen only mode. The presentation will be followed by a question and answer session. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of the board of executive directors and currently available information. Forward-looking statements are not guarantees of the future developments and the results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, and they are based on assumptions that may not prove to be accurate.
Such risk factors include those discussed in Opportunities and Risks of the BASF Report 2020. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors, and Hans-Ulrich Engel, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/q32021. This brings us to the point where I give the floor to Martin Brudermüller.
Yeah, good morning, ladies and gentlemen. Thank you for joining us today. I would like to begin with the highlights of the third quarter of 2021. Demand remained solid over the summer, enabling us to continue to grow profitably. Compared with the third quarter of 2020, we increased prices by 36% and volumes by 6%. Increases were realized especially in the Chemicals, Materials, and Industrial Solutions segments. EBIT before special items rose by around EUR 1.3 billion compared with the weak third quarter of 2020 to reach EUR 1.9 billion. This is considerably above the pre-pandemic level of EUR 1.1 billion in Q3 2019.
With strong earnings contributions from the Chemicals and Materials segments, the earnings mix in the third quarter of 2021 was comparable with the second quarter of 2021. Overall margins in the upstream business remained at high levels, but softened slightly compared with the Q2 2021. Our downstream businesses are still confronted with further rising raw material, energy, and freight costs. Price increases in most of the downstream businesses could only partially offset these higher costs. In addition, higher fixed costs weighed on earnings. The semiconductor shortage severely hampered the global automotive industry in the third quarter. Temporary shutdowns and lower run rates in production have negatively impacted our automotive-related businesses, particularly in the Surface Technologies segment. At the beginning of the year, IHS Markit projected global light vehicle production would reach 87.6 million in 2021.
In the meantime, LMCA has revised its forecast to 76.7 million units. We do not rule out the production of only 75 million units in 2021. We expect the semiconductor shortage to persist at least in the first half of 2022. It is interesting to note that the production cuts are predominantly related to vehicles with internal combustion engines and not battery electric vehicles. Let's now turn to the macroeconomic data. According to the currently available estimates, global chemical production increased by around 4% in Q3 2021 compared with the prior year quarter. All regions recorded growth. It was most pronounced in Europe and in Asia, excluding China.
However, several temporary factors, such as the global semiconductor shortage, Hurricanes Ida and Nicholas in the U.S., as well as power cuts in some provinces in China, led to overall lower growth rates compared with Q2 2021. The slowdown was particularly evident at the end of the quarter. With an increase in sales volume of 6%, BASF Group again grew faster than the global chemical production in Q3 2021. This slide shows our volume growth by region. Sales volumes are compared with the volumes in the respective prior year quarters. In Q3 2021, volumes grew considerably in North America and in Europe. The prior year quarters in these regions was still heavily impacted by pandemic-related restrictions.
In Greater China, we recorded a slight volume decline compared with the very strong prior year quarter when we had achieved growth of 17%. The volume decline was almost entirely due to lower volumes in our mobile emissions catalysts business in Greater China associated with the decrease in automotive production. In Q3 2020, the introduction of China 6 emission standards for light-duty vehicles had re-supported volume growth. Let's move on to the volume development by segment. In the third quarter of 2021, we increased volumes in all our segments except for Surface Technologies. The automotive industry, which is currently strongly affected by the semiconductor shortage, is the dominating customer sector for this segment. The volume growth was most pronounced in the Chemicals, Industrial Solutions, and Materials segments.
Volumes in Nutrition & Care and Agricultural Solutions grew by around EUR 100 million each. Overall, volumes increased by 6% or EUR 872 million in absolute terms compared with the prior year quarter. We now look at our sales development compared with the third quarter of 2020. Sales of BASF Group increased by EUR 5.9 billion to EUR 19.7 billion. Considerably higher prices and volumes were the main driver for this. In total, organic sales growth amounted to 42% compared to the prior year quarter, which was weak due to the pandemic. Currency effects of +1% were mainly related to Asian currency. Portfolio effects influenced sales by -1%. They mainly result from the sales of the pigments business. This slide shows the growth in EBIT before special items by segment.
As already mentioned, we achieved considerably higher earnings in the Chemicals, Materials, and Industrial Solutions segments. In the downstream businesses, price increases were not yet sufficient to compensate for the higher raw material, energy, and freight costs. Compared with Q3 2020, EBIT before special items in other improved considerably. This was mainly due to the adjustments of bonus provisions as they were allocated to the divisions. I will now provide you with further details regarding the unsatisfying earnings development in some of our downstream businesses. In the Surface Technologies segment, we were confronted with the unexpectedly low demand from the automotive industry. According to LMCA, global light vehicle production declined by 16% compared with the prior year quarter. Despite lower automotive volumes, sales in Surface Technologies increased on account of higher prices.
Price increases were mainly related to the precious metals trading and mobile emissions catalysts businesses. EBIT before special items declined due to significantly lower earnings in the Coatings division. Higher fixed costs and increasing raw material prices could only partially be passed on in such a deteriorating OEM business environment. The Catalysts division was able to slightly increase EBIT before special items on account of higher margins. These resulted from, among other things, a favorable product mix. In the Nutrition and Care segment, sales increased because of higher volumes in both divisions and price increases in the Care Chemicals division. By contrast, prices were flat in Nutrition and Health. EBIT before special items declined due to significantly higher or increased raw material, energy, and freight costs, which could only be partially passed on to customers as well as higher fixed costs.
Let me also address an underlying challenge in our Nutrition and Health division. Our vitamin A plant expansion successfully came on stream in late summer. Still, we are struggling with the production challenges for vitamin A 1000 since the ramp-up of the animal nutrition formulation plant is ongoing. No commercial volumes from this formulation plant are available due to time needed to ensure stable operations. Therefore, we expect to be volume-restricted for several months to come with a stepwise return into the market. The Agricultural Solutions segment was severely hit by supply constraints in combination with higher input factor costs due to various shortages. Nevertheless, sales increased compared with the prior year quarter, mainly in the seed and trait business in South America and the fungicide business in Europe and South America.
EBIT before special items decreased on account of considerably higher fixed costs, among other things due to a higher bonus provision, as well as higher raw material and logistic costs and an unfavorable product mix. The higher costs could only partially be passed on to customers since prices had mostly been negotiated prior to the season. At this point, I will hand things over to Hans.
Thank you, Martin, and good morning, ladies and gentlemen. I would like to start with an update on our recently concluded portfolio measures. On August 31, BASF and Shanshan formed the joint venture BASF Shanshan Battery Materials. With 51%, the company is majority-owned by BASF. With the completion of the transaction, BASF has reached a significant milestone in executing its strategic roadmap to build up a global battery materials value chain equipped with an industry-leading CAM capacity of 160 kilotons by 2022. On September 1, 2021, BASF completed the purchase of 49.5% of the offshore wind farm Hollandse Kust Zuid from Vattenfall. Construction work on the wind farm started in July 2021. It is expected to become fully operational in 2023.
The electricity from the wind farm will enable BASF to implement innovative low-emission technologies at several of its production sites in Europe, mainly at our Verbund site in Antwerp, Belgium. Following the closing, we have started the process to sell around half of our shares to a financial co-investor, and we aim to sign agreements in the first months of 2022. In the following, I will turn to the financial figures of BASF Group compared with the prior year quarter in more detail. Martin already covered the top-line development, so I will start with EBITDA before special items, which increased by EUR 1.2 billion to reach EUR 2.8 billion. EBITDA amounted to EUR 2.7 billion compared with EUR 1 billion in Q3 2020.
EBIT before special items came in at EUR 1.9 billion compared with EUR 581 million in the prior year quarter. Special items in EBIT amounted to -EUR 43 million compared with -EUR 3.2 billion in the third quarter of 2020. In the prior year quarter, special items were primarily related to non-cash effective impairments in all segments due to the economic effects of the pandemic and to restructuring measures. Consequently, EBIT came in at EUR 1.8 billion in Q3 2021, compared with -EUR 2.6 billion in Q3 2020. At EUR 86 million, net income from shareholdings improved by EUR 133 million in the third quarter of 2021. The improvement is mainly attributable to the earnings contribution of Wintershall Dea of EUR 97 million. In the prior year quarter, its contribution was -EUR 3 million.
Net income amounted to EUR 1.3 billion compared with -EUR 2.1 billion in the prior year quarter. The tax rate was 20%. Reported earnings per share increased from -EUR 2.31 in the prior year quarter to EUR 1.36 in Q3 2021. Adjusted EPS increased to EUR 1.56 in the third quarter of 2021. In the prior year quarter, it was EUR 0.60. I will now move on to our cash flow development in Q3. Cash flows from operating activities reached EUR 1.9 billion, a decrease of EUR 204 million compared with Q3 2020.
The main reason for the decline was the higher net working capital requirement of our strong business in Q3 of this year, while net working capital released almost EUR 800 million in the prior year quarter, which was heavily affected by the pandemic. Cash flows from investing activities amounted to minus EUR 1.8 billion compared with plus EUR 1.9 billion. In Q3 2020, cash inflows from acquisitions and divestitures amounted to plus EUR 2.7 billion and were primarily attributable to the divestiture of the Construction Chemicals business. In Q3 2021, we had a cash outflow of minus EUR 627 million, mainly due to the acquisition of 51% in BASF Shanshan Battery Materials. At minus EUR 819 million, payments made for property, plant, and equipment and intangible assets were EUR 83 million above the level of Q3 2020.
At -EUR 56 million, cash flows from financing activities were almost balanced. In the prior year quarter, the reduction of financial and similar liabilities led to negative cash flows from financing activities. Free cash flow amounted to EUR 1.1 billion, representing a decrease by EUR 287 million due to lower cash flows from operating activities and higher payments made for property, plant, and equipment and intangible assets. Since we are currently receiving a lot of questions about the impact of recent natural gas price developments, I would like to provide you with further information on this topic. As a result of the strong economic recovery, overall lower gas production rates, and comparably low gas storage levels, gas prices in Europe increased significantly, reaching a historical peak in October 2021. In Europe, we require most gas for our Verbund site in Ludwigshafen.
Our second-largest gas consumer is the Verbund site in Antwerp. We use gas to produce electricity and steam in our combined heat and power plants. Furthermore, gas is used as a feedstock to produce, for example, ammonia, acetylene, and hydrogen. As you might have read, we recently had to curtail our ammonia production in Antwerp and Ludwigshafen. Due to the recent rise of natural gas prices in Europe, the economics for operating ammonia plants in the region have become very challenging. To secure our natural gas supply, we have long-term supply contracts with different suppliers in place. The pricing is predominantly based on spot prices. Part of our gas price exposure in Europe is compensated by our shareholding in Wintershall Dea. The remaining exposure is partly hedged through financial instruments.
For our European sites, the additional cost due to higher natural gas prices amounted to around EUR 600 million in the first nine months of 2021, with a significant increase expected following the price hike in October. At BASF group level, this amount is partly mitigated by the above-mentioned measures. With that, back to you, Martin.
Before we turn to the outlook, I would like to share another example that illustrates how BASF is using the transparency of product carbon footprints to reduce the carbon footprint of our customers. Energy efficiency, and more particularly, the insulation of buildings plays a key role in achieving the CO2 reduction targets connected with the European Green Deal. Since 1997, BASF insulation panels made of Neopor have been helping our customers avoid CO2 emissions. An analysis performed by BASF showed that the volumes of Neopor sold in 2019 helped our customers avoid 37 million metric tons of CO2 emissions over the entire product life cycle when used to insulate existing buildings. To offer our customers products with an even better environmental profile, BASF has started to sell Neopor BMB.
Using the biomass balance approach, 100% of the fossil resources needed to produce Neopor can be replaced by renewable raw materials. The use of renewable raw materials reduces the carbon footprint of Neopor BMB by 90% compared with traditional produced materials. Due to tighter regulation requirements, demand for our product, Neopor BMB, is strong. The example shows how we continuously evolve our innovative products, contributing to a sustainable development and combining sustainability with economic success. Ladies and gentlemen, we will conclude with BASF Group's outlook. Overall, we expect solid demand in the different businesses until year-end and beyond. Automotive will remain challenging with production levels far below customer demand for cars. The final number of cars produced will continue to depend on the availability of semiconductors. We expect the supply challenges to last at least until the mid of next year.
Margins in the upstream businesses are slowly normalizing from a very high level with improving availability, but largely stable demand. Throughout basically all value chains, our suppliers, our customers, and we ourselves continue to be confronted with increasing raw material, energy, and transportation costs, supply chain constraints, and the related and largely unforeseeable issues with material availability. The situation requires an elevated level of coordination and close customer and supplier contact. Despite these challenges, we express our confidence for Q4 by increasing our outlook for 2021 in accordance with market expectations. We now expect sales in the range of EUR 76 billion-EUR 78 billion. EBIT before special items is anticipated to reach between EUR 7.5 billion-EUR 8.0 billion. The return on capital employed is expected to be between 13.2%-14.1%.
Accelerator sales are expected to reach between EUR 21.5 billion and EUR 22.5 billion. We maintain our forecast regarding the expected CO2 emissions. Our adjusted outlook is based on the following assumptions regarding the global economic environment in 2021. We now assume gross domestic product to grow by 5.3%. Industrial production and chemical production are now both expected to grow by 6.0% instead of 6.5% for the full year. Our assumption for the average exchange rate of the US dollar per euro remains unchanged. With an average annual oil price of $70 per barrel Brent crude, we increased our expectations for 2021. Now we are glad to answer your questions.
Now, 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 touchtone telephone. For the best sound quality, we kindly ask you to be sure to unmute your phone and use your headset when asking your questions. Please limit your questions to only two at a time so that everybody has a chance to ask their questions. We will begin with Christian Faitz from Kepler Cheuvreux. The next one will then be Andrew Stott, followed by Tony Jones. Now it's Christian Faitz, Kepler Cheuvreux. Please go ahead.
Yes, thank you, Stefanie. Good morning, Martin and Hans. Two questions, please. First, what, if any, signals are you getting from your key automotive customers in terms of production plans heading into 2022? The second question, do your own assets face any noteworthy logistical or supply challenges at this point in time? Thank you.
Christian, good morning. I mean, the signals we get from the OEM producers is actually they live from hand to mouth with, when it comes to semiconductors. Every week, they basically decide on the availability of the semiconductors, what the next week's production is. That is also why short work schemes has partly come up again. We feel that most prominently and directly in the coatings business because some of the OEMs have actually produced cars where you lack components. They are actually in the yard and wait to be completed, but you cannot produce a car without painting it. That is why we have a pretty good sensor here. What you hear from that, it's connected to two or three incidents, you know that.
I mean, it is the overwhelming demand, which is also coming with all the devices you need for digitalization. Semiconductors as such are short. I think they all work on capacity expansions, which you also know that takes 2-3 years. That is not a long time since that became evident after the recovery. Then there were also two outages, actually, the one in Malaysia, which was related to COVID, which are basic chips almost in all the cars really hamper their production. Overall, I think the good thing is, Christian, the demand for cars is very high. Every car that is produced is sold. Actually, they could sell many more cars than they actually produce.
We think that takes a little bit until maybe mid of the year, slowly easing step by step. That is something where you have to be really well connected with the customer. It's not overall totally depressed, but I think the hopes that this year will have significant production increases towards 2020 will not fulfill. We will be about the level of that and then slowly coming up in 2022.
Okay. Very helpful. Thank you.
Yeah.
Christian, this is Hans. Thanks for your question on the supply chain challenges. I mean, I could start with the beginning of the year, the freeze at the U.S. Gulf Coast, continue with the Suez Canal, go to the COVID-related closures of Chinese ports on the East Coast, congestion at the U.S. Pacific Coast. I could go on and on, throw the hurricanes Ida and Nicholas in there. This is a continuous challenge that we are facing. This may be the wrong place, but it's maybe the right time to say a big thank you to the BASF team, how we've handled and the team has handled the entire situation. Are we affected? Yes, we are affected. Just give you one idea.
The freeze in the U.S. Gulf Coast has led to shutdowns of chlorine plants, and these issues with that continue have an impact on isocyanates production in the U.S., force majeure as a result of that declared and still ongoing. We have a number of force majeure situations due to supply chain issues that unfortunately our customers are very much aware of. We're doing what we can. Has this led to situations where we had to shut down production? Actually, not really. We were able to cope and manage, but it has clearly an impact on the business.
It's a situation that to a certain extent, when we saw what happened, how quickly demand came back, that we, I don't wanna say had expected, but something that to a certain extent we had at least foreseen going back to the year 2020, sorry, 2010, when due to increased demand there, we've seen lots of similar issues. Can't prepare for them, can only try to handle them in the best possible way, and that's what we're trying to do.
Okay. Thank you very much.
Okay. The next question is coming from Andrew Stott, UBS. Your turn.
Thanks, Stephanie. Morning, Martin and Hans. A couple questions. First one is on energy costs. My rather rudimentary back of the envelope gave me a much bigger number than the energy inflation you pointed to in the slides. My question is, to what extent has hedging protected you so far? And is there a broad guidance you could give for 2022 on energy costs if we just assume spot persists, which I get may not happen. That's the first question, a rough guidance on current sensitivities. The second question is more broad-brushed around China. I saw at the weekend the Chinese government, or the NDRC, more specifically, put out some targets for closures across the petrochemicals industry. I just wondered what your first thoughts are on this policy. Thank you.
Thanks, Andrew, for the question. Rough guidance on energy costs, that's actually a good one. What have we provided you with? We have provided you with EUR 600 million in additional costs that only relate to European gas purchases. That's what we've given you. You're right. In total, when we look at the situation, the cost impact is obviously on the energy side, but also if I go broader, on the raw material side, much higher than that. If I look at raw materials in total, and I only compare Q3 this year with Q3 last year, and this is only the price impact, there's about EUR 2 billion price impact.
In other words, cost impact if you leave raw material volume at the same level that comes here from prices. That puts a lot of pressure obviously on the system, but also on our businesses because clear expectation is that these prices are passed on. With respect to Q4, giving guidance is extremely difficult. Coming back to natural gas prices in Europe, you've seen natural gas prices in Europe during the course of this month, spot prices at levels of EUR 140-150 per MWh. Currently, we're sitting at a level of EUR 88 per MWh, so significant decline.
This is 6-7 times, if I think back, where we were in the beginning of this year. Due to the volatility, please understand that I can't give you specific guidance. It is a very interesting situation that we are in, that we have to cope with. There's significant cost pressure coming from raw materials in general, natural gas in particular, and with that, energy, and it's also clearly reflected in the results. So far, if you look at Q3 earnings, as I said, we're able to cope with it.
Andrew, I'm not totally sure what exactly you mean, whether this is the energy-related topics NDRC communicate, because they communicate continuously something that.
Sorry, Martin. It was specific to some of the decarbonization plans. They talked about potentially, and emphasized potentially closing smaller facilities across China, mainly in ethylene and ammonia, but just wondered if you had any thoughts on that?
Yeah, yeah. This is what I just said, this energy intensity. I mean.
Yeah.
Overall, I would say this is a positive development. I actually would also say the energy shortages are to a certain extent also a positive sign from China because we are complaining now, but that is actually also showing that they take CO₂ reduction and energy intensity serious. I mean, that they shut down partially their industry knowing that goes at the cost of GDP because, let's say the guidelines and the KPIs for energy consumption and they set also for CO₂ emissions have actually been overtaken. I think this is a very good sign. They go on the energy intensive industries and chemical industry is one of those, and there are tremendous inefficiencies in the chemical production landscape in China.
There's a lot of coal-based chemistry, and I like that actually as one more step build among many to basically go for structural improvement of the chemical industry. That means clustering them, shutting down those who are inefficient. That is all overall great for us, Andrew, because that is actually bringing the industry benchmark closer to what BASF is anyway doing. I think we showed you also on our capital markets day how we actually address CO₂, and I have to say, when we have the new site in Zhanjiang, there will be a lot of competitors look pretty ugly when it comes to CO₂ emissions. I'm quite sure it will put pressure on them that they have to do something against this. I like that.
It's a little bit similar like we had 10 years ago with EHS, where we were operating on a high level and the industry was on much lower level. Now in the meantime, EHS is a tough issue in China, so they are forced to produce under the same circumstances. With this we have a more global level playing field. I very much like that and I would say we should acknowledge that China is not only about building coal-fired power plants, but also curtailing CO₂ and energy intensity.
Any of your sites affected, so far?
No. We had one a little bit problems with the new Zhanjiang part because they had some reductions in the provinces that were far above their energy consumption. On the other hand, for example, in Nanjing where we have with the Verbund a very energy efficient setup, we were actually praised because we need much less energy per, let's say, value added in chemicals over there. That is exactly when you are benchmarked there, they also don't shut you down, but they shut down the inefficient ones. That is actually in this environment, really a competitive advantage.
Thank you.
Okay. Now we move on to Tony Jones, Redburn. In the following, we will have Matthew Yates, Bank of America, and then Jaideep Pandya, On Field Investment Research. Now Tony Jones, Redburn, please go ahead.
Hi, good morning. Thanks, everybody. I've got two questions. The first one, there's been some recent headlines, rumors that the EU Commission is sort of changing its stance in terms of border tax for the chemical industry. Could you maybe give your own perspectives on that and whether you see that as a net positive or negative for BASF? Secondly, I wanted to come back to the reallocation of the bonus. Could you help us understand which divisional metrics now will trigger the bonus, or is it still at the group level? The reason why I ask that is, well, it's good to know from a modeling perspective, but it looks like there was a provision in Agricultural Solutions, but the EBIT was lower than we expected. That would be good to know. Thank you.
Tony, on the border adjustment measures, I'm clearly addressing that I don't think that this is an appropriate measure. It is very, very complex, it's bureaucratic, and it does not really help to address the problem because you have then to control also all the consumer products finally that contain certain chemicals with CO₂ emissions. I ask myself how you want to bring that transparency in. It actually invites that you don't play anymore on the basic products, but you import further value-added products into Europe which are not covered at all with the border adjustment measures. That's why we in the chemical industry, in the European, have decided not to really push for participation in the border adjustment measures.
We are now actually only included with ammonia and fertilizers, where it's totally unclear how that actually should work. Just to give you an example, if you don't import ammonia and fertilizer, but you import melamine, which is a downstream product for ammonia, you actually escape already the border adjustment measures. I think it is not an appropriate measure for BASF. The effect is low in the moment as it is designed because you know that our strategy is actually to produce in the regions for the regions. That means we don't have a big product flow for these kind of basic products. We don't export ammonia into other regions.
Certainly we will be affected a little bit with those products, where ammonia is directly, let's say, the cost impact there. You know, a lot of our ammonia is actually used internally in the Verbund. So we go further down to amines. We use it for the production of isocyanates, which have huge margins. So, in that respect, we will be fine and not so much exposed. I think this whole instrument will be a bureaucratic monster and at the end it will also not be WTO conformed. Is this the bonus, Hans?
Yeah, Andrew. No. Sorry, Tony. Thanks for your question on the bonus. Let me try to put things in perspective. The bonus that we pay, the variable compensation at BASF is based on the group's return on capital employed. That's the basis for the bonus payment. And then there is an individual component in the end when it comes to the individual employee. But
Irrespective of which part of BASF you're in, the basis is that the bonus pot gets filled on the basis of return on capital employed. Last year was a year where due to the very low results that we generated, we paid out bonus in the order of magnitude of EUR 400 million. EUR 400 million for the year 2020. At target, we are at, let's say round about, EUR 1 billion. That is when the return on capital employed is at 10%. This year we have accrued so far EUR 1.3 billion. If you compare 2020 to 2021, there is an additional round about EUR 1 billion that we have accrued for so far.
How do we do this? We do this typically on a prorated basis. This year, due to the development of our earnings, we made certain accruals also in other, and I hope that with that I'll be able to also answer a question that is most probably to come, what happened in your results for other. We were, this accrual that we had in other of round about EUR 200 million for the third quarter, we reversed then in other and allocated it to the operating divisions. From a personnel cost side, a significant increase as a result of the provisions for the variable compensation, and the sort of odd result that you're seeing in EBIT before special items in other.
The big swing that we have there compared to Q3 is explained by the fact that we had about EUR 200 million of bonus accruals sitting there, which didn't evaporate, but we moved it out of other now, in order to have the divisions properly provisioned, and sort of burden the provisions with this EUR 200 million. Hope that explains the bonus question in general on the one hand side, but then also at the same point in time, what's happening in the results of other in Q3.
Yes. Thank you. That's really helpful. Appreciate that.
Very welcome.
The next question is from Matthew Yates, Bank of America.
Thank you, Stephanie. Good morning, everyone. I'll just ask one question really for Martin, please. When you took over as CEO, you highlighted a desire to change the commercial culture and accountability of the downstream units. Now it's very, very difficult for us to assess that over short-term quarterly numbers, especially given the noise we have at the moment around volatile raw materials. Given this was a quarter when most of your downstream units reported profit declines, can you talk a little bit about how these businesses are operating differently than perhaps they were three or five years ago in trying to systematically demonstrate the sort of pricing power you have in these businesses that can drive higher profitability through cycle? Thank you.
Yeah, Matthew, this is certainly not an easy question to answer. Let me say the first thing. I think when we decided that we go for more differentiation, but on the other hand, also simplification, and then also empowerment by embedding and delegating more to the division, we are very happy with that result. The divisions have actually got more an own, let's say, character to more adapt to what the market is needed. I'm very happy with this development. Coming with this, we said the hunting spirit, you know that BASF was not growing in volume enough for many years. I think if you look now, already in the difficult time of the pandemic, we have done well with the volumes.
Now in this very, let's say, dynamic environment, we are even higher with our own dynamics. You see that with this, we have managed also a different or to implement a different mindset to really go more for the market, fight for volumes, fight for market share. I think that was also helped and underpinned by the embedding. What you see now, on the other hand, is very much the topic, which is not a new one to BASF. You know, always when we have very aggressive raw material price increases, then the downstream struggle to pass it over as quickly as it is needed. We have, I think, talked about that many, many times. They have raised prices. You saw also that all the volumes actually, except those with automotive, have raised greatly their volumes.
They are in the business, they are with the customers, but they struggle with their time, with this time delay in passing over the cost. Because you know that we have, for good reasons, partially prices that are not related to raw material costs, because we actually price for an effect and for a value added on the customer side. That means that, however, if your prices pressure up, you cannot go there and say, now, I have a different logic in this moment, and now I want to raise my price because I have energy and raw material. That is why they need more. On the other hand, it's also very clear the higher the prices get, the more resistance on the customer you have to go for even higher price increases.
That's why I said at the beginning, the good thing is that the overarching demand, actually in all the businesses, we have talked about that last week very intensively. They all confirm that there is actually a strong demand. As long as you have more demand than supply, then even at higher raw, at high prices, you still have some pricing power to go even further. That is actually what has to happen over the next months. Should then the margins normalize, then on one hand, the pressure is easing, and for those who have linked into these prices, they have actually a margin increase because the price will also not go down as fast as the raw material.
It is always this problem on the downstream side, if we have these large changes with a steep slope, that it needs time. Yes, we have the one or the other topic, and we made that also very transparent to you with the Lutavit A 1000 NXT powder, which is an in-house problem of BASF, very clear. That's why we have also highlighted everything other than happy. Beyond that, from an operational mode, also from the feedback we get from the customers using the right instruments, I can actually see that we have rising customer confidence with BASF throughout the businesses. That shows me that the downstream businesses do a better job than they have done in the past in satisfying their customers. I think we have also an exceptional situation now.
Raw material prices is one thing. Energy now, we have talked about that on top. What is also awful, transportation costs. I mean, if you look on what a container costs from Ludwigshafen to China, mind-boggling price increase. Then if you have agreed to the price, you are not even sure you get the container as such. It is a lot on the whole. We are not happy with the earnings mix, very clear. I expressed this also openly. From principle, how they move in doing business, I am really satisfied.
Thank you, Martin. I appreciate the comments.
Okay. Now, Jaideep Pandya, On Field Investment Research. Please go ahead.
Thank you. First of all, thanks a lot for sharing the transparency on the energy cost and natural gas. My first question is actually related to that. When you do IPO Wintershall Dea, and assume eventually you want to exit Wintershall Dea, how are you going to be hedged physically for naphtha and for natural gas, you know, from a long-term point of view? That's my first question. The second question is around ag. Could you just share some color on dynamics which you're seeing in, for instance, canola, given the drought situation in Canada, but also very high prices?
You know, going into sort of 2022 season, do you see sort of a normal ag season, or do you think that extreme weather in Brazil and North America, along with, you know, high fertilizer prices and logistics cost is gonna have a negative impact on farmer demand? Thanks a lot.
Yeah, Jaideep, this is Hans trying to take your first question with respect to a physical hedge without the Wintershall Dea business. I don't see too much of a physical hedge there anymore. This will be a situation where we will have to turn more in the direction of financial hedges to the extent that raw material price developments are not fully reflected in the respective formulas, sales price formulas. On your ag question, what's the situation there? I'll focus on the northern hemisphere and on ending inventories in the sales channels. We have in the ag industry experienced very good demand, strong demand in the northern hemisphere.
As a result of that, now let me quickly think about this. In Europe, it looks like the season-ending inventories are at a, I wanna call this, decent to good level. We're not faced with a situation where there is oversupply sitting in the channel. The same is true, in general for North America, with one exception, and that exception is Canada, where due to the drought situation, the channel inventories are elevated at this point in time. The soft commodity prices, as you know, have moved up significantly compared to the prior year, or you could even say the average of the last five years.
We've seen them coming down from the peaks that they had reached in July a bit, but I would call the prices for soft commodities robust. If you think about soy currently at, I think it's $12.50, you have wheat at about $7, you have corn at about $5. So all compared to average of the last 3-5 years, certainly elevated. That usually leads to good, strong demand. Now, you hinted to what's to be expected as a result of high natural gas prices and high ammonia prices, which are high fertilizer prices. Yes, that may play a role in the decisions that the farmers will make then for the next season looking at what's currently happening in South America, while we're not happy with the result that Ag has generated in Q3, you see us with volume increase of 7%, and that clearly reflects
The good strong demand that we're currently having in South America. With that, I think we will go into what I would call an overall good season then in the year 2022 for the Ag business.
Great. Okay. Thanks a lot for the color.
Yeah, we have five more participants in here listening to ask questions, so if you could reduce to one, would be great. We will now first have Andreas Heine, then Markus Mayer, and then Chetan Udeshi. Now, Andreas Heine, please go ahead.
I will try for two, but very brief. In agro, you said and emphasized this, that the pricing increases can be only done once in the season. Now, going into 2022, especially for your seed business, could you share, just in qualitative terms, how much you might be able to increase prices? That's the first question. The second is on the gas price regime in Europe. I know in historic times it was linked to oil, with a delay of 3-6 months, and now, you have most of that in spot. Would it be ever possible to go back to, let's say, the smoothing kind of process, for you in the gas price contracts? Is that simply impossible and it will always be linked to spot, and if you're not happy with spot, then you have to buy financial hedges? Thanks.
Yeah, thanks, Andreas, for your questions. I'll take the gas price question first. Yes, as we say, most contracts in Europe are now based on spot. That has developed over the last years. As always, can't exclude that this will move back to a more longer-term pricing regime. Can't exclude that, but the markets compared to where it was, let's say five years ago, has changed quite a bit. This is what it currently is. Depending on how you think about it, you have the immediate impact based on a spot price regime. You need to act immediately versus something that comes with a time lag of 3-6 months.
Frankly, I don't know what's better. Always, somebody who's willing to take things head on, so if you need to deal with it, then you deal with it in the very moment that it actually happens. Your first question on Ag,
The price increases.
The price increases. Let me put it this way. We missed the boat now in the second half of this year or in Q3. The task that the team has is very clear. I think there is also, considering the overall cost development for the business, but then also what I refer to, the soft commodity price environment, there is room for potential, and we'll certainly go after that.
Yeah, Andreas? That's fine?
Yeah, that's fine, thanks. Yeah.
Okay. Markus Mayer, Baader Helvea. Please go ahead.
Yeah, good morning. The question from my side would be on your cash flow. You said this negative effect from net working capital outflows was basically the reason for the lower free cash flow. What are your expectations for net working capital outflows in the fourth quarter? And therefore, also then a related question, do you expect to pay a dividend from your free cash flow this year? Thank you.
Markus, thanks for the question. The Q4 is traditionally a strong cash provider for BASF. We expect Q4 of this year to be a strong cash provider for BASF. Do I expect to pay a dividend out of free cash flow for the year 2021? Absolutely.
Okay. Very clear. Thank you.
Okay. Now Chetan Udeshi, JP Morgan. Please go ahead with your question.
Yeah. Hi. Sorry, I also have two, but one very quick. I think there were some comments on IPO Wintershall Dea on Bloomberg, and I just wanted to check what exactly was actually said, because it says IPO Wintershall wouldn't be reasonable in the midterm. Are you guys changing the sort of stance on what you want to do with the ownership of Wintershall? That was the first question. The second question was, again, just going back to the allocation of bonus accruals to individual divisions. I think it's probably the right thing to do because then it improves the transparency in terms of how BASF's divisions are doing versus the others.
I'm just curious, is this something which is going to be a structural change, i.e., are you gonna do that in the same manner in the future? Again, just a related question, and I think you addressed previously that, you know, essentially it's the BASF's performance which is what drives the bonus pot. But I think the question is, shouldn't there be a more nuanced approach to how individual businesses are rewarded? Because just looking at the Ag performance this year, it seems quite, you know, difficult, and I'm surprised that there has been, at least it seems quite a big chunk of bonus accrual that has gone to that business. How do you actually reward individual businesses, especially if all of the, or majority of the bonus accruals are, you know, based on BASF's own group performance? Thank you.
Yeah, thanks, Chetan. I think, compared to what you offered, maximum two short questions, we got to minimum three or four . Let me try to address them. Has our strategy with respect to Wintershall Dea changed? No, absolutely not. I think we've been absolutely consistent in what we said that we want to exit that business over time that we want to IPO the business. You know the reasons why we called the IPO off for 2021, and I think we were also absolutely consistent in what we said. The next communication about the IPO will be at the point in time where we have decided to go live. On the bonus allocation, we're following a consistent approach.
In the end, the bonus allocations will be made to the respective divisions. They are based on the respective headcount of a division. Our biggest division from a headcount perspective is our Agricultural Solutions division. Yes, they are also being burdened there on a relative basis with the highest bonus provision. The discussion about what you do and how you run a group, whether you fill the pot for everyone the same way or you differentiate, is actually one that we had many times. We came to a conclusion that for the BASF Group, it is the best way to have a bonus that's being paid on a similar basis for everyone working in the BASF Group, but then to differentiate in the end based on the performance of the respective business and the performance of the respective individual. I think that has worked very well for BASF.
Thank you.
Now we have Peter Clark on the line, and the final question will be from Rob Hales. Now Peter Clark, Société Générale, please go ahead.
Yes, thank you. A quick one on what you were saying on the downstream divisions and pricing power. If I'm looking at coatings specifically, I mean, it could have been in loss. I can't work out the numbers, but effectively the price at +3%, it does look like you're lagging your peers when you adjust for mix. I'm just wondering the momentum on price going into Q4, given that costs, we're being told, are clearly going up in Q4 as well, and how you see the margins rebuilding to 22%. Just a quick one for Hans, the CapEx. I presume you're still on for EUR 3.6 billion. I know you spent EUR 1.5 billion in the final quarter before. Just want to clarify that. Thank you.
Peter, on the CapEx, EUR 3.6 is the guidance. As it looks right now, we may come in slightly below that, but it remains to be seen what the spend actually in Q4 will be.
Moving on to Rob Hales now, Morningstar. Please go ahead with the final question.
Good morning. Thanks for squeezing me in. Just wondering, on Chemicals and Materials, can you give us an idea of where current spreads sit right now versus historical averages and, you know, what's the extent of industry force majeure right now as well?
Well, that's not so easy to answer for the segment as such, because there's a logic on each and every line. I mean, with many of the key products we are talking about, whether this is MDI, whether this is acrylic acid, whether this is BDO, we have far above, let's say, last five years' average margin. Now, this is what I said at the very beginning. I don't want to now quantify that, but it is partially significant over the five years' average. This is also why this cannot be a new normal to slightly come down. It will come down with more availability.
I mean, I really want to make clear that there is not coming a negative tone now that we run into a disaster with margins upstream, because we just talk about a slight normalization, and we will remain also going forward, at least for the next more months we will see on a very attractive level in the upstream business. Just don't get that in the wrong way. As this is also the last question I answer here, I really would like to use that again to say you see us here in positive mode. You saw that the guidance was taking up, I mean, two years before we now come to a year's end that we raised this again significantly.
Besides the automotive industry, which is a little bit hand to mouth and where no one can say, actually all the remaining business have strong demand, and we see this also continuing in 2022. The only question is now to handle a little bit all of the shortages, everywhere. I think based on that, it's more a production and availability topic and not a demand topic. I think we should really finish with that view, which is actually a good one. I would be much more conservative if it's the other way around. We will certainly then update everything in February when we give you the final numbers for 2021 and then also give you an outlook that goes a little bit beyond what I said today.
We should now really say we will get that year over and finished in a very good manner, and we will also start in the next year very well. That's maybe my final message.
Ladies and gentlemen, this brings us to the end of our conference call. Let me take this opportunity to draw your attention to a virtual R&D Webcast we will offer on Thursday, December 9. The webcast is scheduled to begin at 4:00 P.M. CET and end around 5:30 P.M. Melanie Maas-Brunner, Member of the Board of Executive Directors and Chief Technology Officer, will share how BASF researchers are supporting the transition towards a more sustainable development. She will highlight innovations for electromobility beyond battery materials. This will nicely complement our recent investor update on battery materials. Should you have any further questions regarding our Q3 reporting, please do not hesitate to contact a member of the BASF Investor Relations team. Thank you for joining us today and goodbye for now.