Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the third quarter 2022 results. Throughout today's recorded presentation, all participants will be in a 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 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 2021. 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/Q32022 . Now, I would like to hand over to Martin Brudermüller.
Good morning, ladies and gentlemen. Two weeks ago, BASF released preliminary figures for the third quarter of 2022. Today, Hans-Ulrich Engel and I will provide you with further details regarding our business development. Despite the continued strong headwinds from high raw materials and energy prices as well as slowing economic activity, BASF achieved solid EBIT before special items in the third quarter of 2022. Our downstream segments improved earnings considerably. In the upstream segments, however, earnings declined significantly from the very high levels in the prior year quarter. Let's start with a snapshot of the current challenging market environment. Compared with Q2 2022, the global macroeconomic environment was significantly weakened. There are no indications of improvement from the markets in the short term.
High inflation and the sharp increase of energy prices led to a slowdown in consumer demand, particularly in Europe. China recorded growth, but particularly because of a strong base effect due to the power shortage in the prior year quarter, and its economic development continued to be impacted by the restrictions to reduce the spread of COVID infections. Global automotive production was a positive surprise in Q3 2022. It increased in all regions compared with the prior year quarter. Q3 2021 was, however, the quarter in which chip shortages peaked. After the COVID related lockdowns in the second quarter of 2022, automotive production in China developed significantly better than anticipated. IHS Markit has adjusted its forecast for global automotive production in 2022 to 81.8 million units.
Compared with 2021, this would be an increase of around 6%. Central banks have further raised interest rates in recent months. This will more and more dampen construction and consumer spending in the coming months and will likely result in lower growth in 2023. Let's now briefly look at the chemical production by region in Q3 2022 before we turn to the financial performance of BASF. Based on the currently available data, global chemical production grew by 2% compared with the strong prior year quarter. While China and North America recorded growth, chemical production declined in Europe and in Asia, excluding China. According to recently released data, growth in mainland China was surprisingly high, partly due to the industrial power cuts in the prior year quarter of last year.
In Europe, chemical production declined on account of lower demand and high energy prices, which in some cases led to a reduced or temporarily shut down production at different stages of the value chains. Lower demand and increased energy prices were also the main reasons for the decline in Asia, excluding China. Let's turn to the BASF key customer industries. I will selectively comment on the most relevant developments shown on this slide. The transportation industry continues to benefit from pent-up demand globally, particularly in China. As mentioned, global automotive production increased compared with the low level of 2021, but is still restricted by semiconductor availability. In agriculture, the demand environment looks solid overall. However, prices for some crop commodity products have come down recently, but remain on an above average level.
The construction industry, particularly in North America and in Europe, is deteriorating because of interest rates. In China, the overheated residential segments continued to decline. In summary, construction and consumer spending, with the exception of automotive, are weakening. I will now move on to BASF's business development. In the third quarter of 2022, EBIT before special items declined by EUR 17 million and amounted to EUR 1.3 billion. Additional costs for natural gas in Europe are one major reason for this decline. If we look at the segments, the solid EBIT before special items in Q3 came primarily from BASF's downstream segments. They considerably improved earnings, mainly on account of further price increases. In line with our guidance for the full year, earnings in the upstream segments declined considerably with softening demand from the very high levels in the prior year quarter.
Natural gas prices increased further compared with the already elevated levels in Q3 2021. In the first nine months of 2022, the additional costs of BASF's European sites amounted to around EUR 2.2 billion compared with the same period in 2021. To mitigate these higher costs, we have implemented further price increases, and we continue to work on technical optimization projects, particularly at our largest Verbund site in Ludwigshafen. Reduced plant utilization in Q3 2022 also helped to limit the burden of high natural gas prices in cases where the market did not absorb the additional costs. I will now give you additional information on earnings development in the regions.
If you look at the bar for 2015, you can see that Germany, Europe excluding Germany, and the other regions each contributed around one-third to BASF Group EBIT before special items in that year. In the strong year of 2021, Europe, including Germany, contributed only one-third, while the other regions contributed two-thirds. In the course of 2022, earnings have softened further, and we saw a particular deterioration in our German operations. In Q3 2022, we recorded negative EBIT before special items of EUR 130 million in Germany. The lower earnings in Europe and in Germany in particular are due to a variety of reasons. In our recent announcement, we summarized them under the term deteriorating framework conditions. There are essentially three developments. First, the European chemical market has been growing only weakly for about a decade.
In the period from January to August 2022, the chemical market shrank by 2.1% in EU27, and by 6.8% in Germany compared with the same period in 2021. Second, the significant increase in natural gas and electricity prices over the course of this year is putting pressure on chemical value chains. We expect structurally higher and volatile natural gas prices in Europe, also in the mid and long term. Third, uncertainties due to the enormous number of regulations planned by the EU are waiting on the chemical industry. The current development underlines once again the importance of a balanced regional footprint. The challenging framework conditions in Europe endanger the international competitiveness of European producers and force us to adapt our cost structures as quickly as possible and also permanently.
This is why we initiated a cost savings program focusing on Europe and Germany in particular, which we announced on October twelfth. With this program, we aim to streamline non-production units in operating, service, and R&D divisions, as well as in the corporate center. The cost reduction methods will be fully implemented until the end of 2024. Short-term cost savings will be implemented immediately. When completed, the program is expected to generate annual cost savings of EUR 500 million, which corresponds to around 10% of our European costs in these categories. More than half of the cost savings are to be realized at the Ludwigshafen site. We are currently developing further structural measures to adjust BASF Verbund, production Verbund in Europe in the medium and long term to the changing framework conditions. We will thus ensure our future competitiveness and significantly reduce our consumption of gas.
We are actually making great progress on this. We expect to communicate details in the first quarter of 2023. At this point, I want to stress, we cannot stick our heads into the sand and hope that this difficult situation will resolve itself on its own. We as a company must act now. Our cost savings program aims to secure our medium and long-term competitiveness in Germany and Europe. We must take decisive action to fulfill our responsibilities to our employees, shareholders, and society. Now I would like to hand over to Hans for further details on our financial performance.
Thank you, Martin. Good morning, ladies and gentlemen. Let me start with the sales figures for the BASF Group compared with the prior-year quarter. In Q3 2022, sales increased by 12% to EUR 21.9 billion, mainly on account of higher prices and positive currency effects. Sales prices increased by 10%. All divisions contributed except for Catalysts. In this division, lower precious metals prices led to overall lower prices in Q3. Currency effects of +8% also had a positive impact on sales and were mainly related to the US dollar. Portfolio effects of +0.9% were related to BASF Shanshan Battery Materials, which was formed on August 31, 2021. Sales volumes declined by 7%. Except for Agricultural Solutions, all segments recorded lower volumes.
Excluding precious metal volumes, BASF Group sales volumes declined by 5%. Let's move on to our earnings development by segment in Q3 2022 compared with the prior year quarter. The overall decline in EBIT before special items resulted from considerably lower contributions from the chemicals and materials segments. In Q3 2022, these two segments contributed EUR 600 million to BASF Group's EBIT before special items, compared with EUR 1.5 billion in the prior year quarter. As mentioned before, all downstream segments were able to improve earnings, reaching a combined total of EUR 725 million compared with EUR 395 million in Q3 2021. In the following, I would like to provide you with further details of BASF Group's financial figures in the third quarter of 2022 compared with the prior year quarter.
I will start with EBITDA before special items, which decreased by EUR 446 million and amounted to EUR 2.3 billion. EBITDA amounted to around EUR 2.3 billion as well, a decrease of EUR 474 million. At EUR 1.3 billion, EBIT before special items declined by 28%. Special items in EBIT amounted to -EUR 53 million compared with -EUR 43 million in the third quarter of 2021. EBIT decreased by 29% to EUR 1.3 billion in Q3 2022. Income from non-integral companies accounted for using the equity method included a non-cash impairment on BASF shareholding in Wintershall Dea in the amount of about EUR 740 million.
This impairment results from the partial write-down of Wintershall Dea's 15.5% participation in Nord Stream AG, which operates the Nord Stream 1 pipelines. Compared with the third quarter of 2021, the after-tax operational result of Wintershall Dea attributable to BASF rose by EUR 533 million to EUR 630 million. Net income from shareholdings improved by EUR 86 million to EUR 102 million in Q3 2022. Net income amounted to EUR 909 million, a decline of EUR 344 million. Let's now look at the details of our cash flow development in Q3 2022. Compared with the prior year quarter, cash flows from operating activities improved by EUR 405 million to EUR 2.3 billion.
The increase was mainly driven by cash inflows from changes in net working capital. In the prior year quarter, there were cash outflows. Cash flows from investing activities amounted to -EUR 680 million compared with -EUR 1.8 billion in Q3 2021. In the prior year quarter, we had a net cash outflow of -EUR 627 million for acquisitions and divestitures, mainly due to the acquisition of 51% in BASF Shanshan Battery Materials. In the third quarter of 2022, we recorded a net cash inflow of EUR 222 million from acquisitions and divestitures, mainly related to the proceeds from the sale of the Kaolin Minerals business. Payments made for property, plant and equipment and intangible assets rose by 23% to EUR 1 billion.
Free cash flow thus increased by EUR 218 million to EUR 1.3 billion. Turning to our balance sheet at the end of September 2022 compared with year-end 2021. Total assets increased by EUR 9.6 billion to EUR 97 billion. Non-current assets amounted to EUR 54.6 billion, an increase of EUR 2.3 billion. The increase was mainly driven by translation effects due to the depreciation of the euro. Current assets increased by EUR 7.4 billion to EUR 42.4 billion, mainly due to higher inventories as a result of higher raw material prices and increased trade accounts receivable because of higher sales. In addition, other receivables and miscellaneous assets contributed to the increase.
Non-current liabilities decreased by EUR 2 billion to EUR 23.2 billion, mainly due to lower provisions for pensions and similar obligations. These provisions decreased by EUR 4 billion to EUR 2.1 billion because of higher interest rates. Net debt increased by EUR 4.6 billion to EUR 18.9 billion at the end of September 2022. The equity ratio was 50.6% compared with 48.2% at the end of 2021. With that, back to you, Martin.
Yeah, let me conclude with the outlook. In the third quarter of 2022, economic activity weakened more significantly than expected. Against this background, BASF has adjusted its assessment of the global economic environment in 2022. We now expect GDP and industrial production each to grow by 2.5%. Global chemical production is expected to grow by not more than 2%, down from our previous assumptions of 2.5%. We now anticipate an average oil price of $100 per barrel of Brent crude and an average exchange rate of 1.05 US dollars per euro.
Despite the significant weakening of the economic environment since the third quarter of 2022, we confirm BASF Group's forecast for the 2022 business year as published in the half-year financial report of 2022. We are forecasting sales of between EUR 86 billion and EUR 89 billion for 2022. BASF Group's EBIT before special items is expected between EUR 6.8 billion and EUR 7.2 billion. We continue to be confident that we can achieve the upper end of this range.
Even so, this has become more challenging in view of the current macroeconomic and geopolitical developments. ROCE is likely to be between 10.5% and 11%, and CO2 emissions are expected between 18.4 million metric tons and 19.4 million metric tons in 2022. Now we are glad to take your questions.
Ladies and gentlemen, I would now like to open the call for your questions. Anyone who wishes to ask a question may press star followed by one on their 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 now begin with Christian Faitz, Kepler Cheuvreux. We have then Andrew Stott and then Gunther Zechmann. Now Christian Faitz, Kepler Cheuvreux, please go ahead.
Thank you, Stefanie, and good morning, and also good morning, Martin and Hans-Ulrich . Couple of questions around the gas complex. First of all, can you share with us your view on how helpful for your Ludwigshafen plant the first draft proposal of the gas aid scheme by the German government is? On gas in Europe, just wanted to check that my math is right, looking at slide 7 in your presentation and comparing this with your Q1 and Q2 charts. Is it correct that the Q3 gas price burden for Europe year-on-year was just about EUR 500 million? Last question on gas, I promise, can you share with us the rough regional distribution of gas sources for your Ludwigshafen plant at present? Thank you.
Christian Faitz, maybe I start with the first one. I mean, let me first say, this is also what I said in the speech. I think the prime task of companies is to actually help themselves and to improve their structures. That's why I'm very happy that the BASF team, as always in the crisis times, is exceptionally creative. I will not give you a number, but I can only tell you we are significantly down where the critical threshold for gas is. We will then report you and give you more background on that in the Q3. That reduces the Q1 next year.
This reduces the vulnerability of the Ludwigshafen site, first of all because of availability of gas, but then certainly also gives us opportunity to react also on the structural side by shutting down plants and utilization for the main gas consuming products. I mean, ammonia is the biggest one, and you saw that we also adapted over there. Let me clearly say the prime target is certainly that we settle our issues mainly ourselves. Let me also say that we very much welcome the proposals of the Gas Commission, which is also this time clearly also indicating the help for the industry, not only for citizens.
I think it is a little bit early still to say how that works in details because the proposals are great, but they also have a lot of questions when it comes to the details. You have also seen the last days that there was quite a reaction on other EU states. It's also about a level playing field in Europe, in terms of, industry. There's also the state aid rules in Brussels which have to obey to. I think there's still some work to be done and then giving clear interpretations of this. But also clear, if you look also on our customer base and the smaller, SMEs, they really are in difficult situation, which is deteriorating very, very quickly because they come already from a difficult situation from COVID times.
It is really important that this is quick and pragmatic. I also want to say very clearly, we have to ask for flexibility and not too strict rules, because at the very end it has to be a combination of both. Yes, there is public money for those companies who need this support and help, but I think there is also an obligation of each company to adapt its structure going forward because the world is not frozen, and it doesn't make any sense now to give the companies money and say you have to keep your structure, and we wake you up in three years when the energy price or energy crisis is over, and you just continue where you are, where you have actually stopped because the world is moving too.
I think we need this flexibility to our own way, and then we will see whether we at all need it and what the conditions are for the use of public money. Maybe I leave it at that point and give the other two to Hans.
Good morning, Christian. This is Hans. Your first question, I think you did the math correctly, around about EUR 600 million additional cost for natural gas in Europe in Q3. If we look at gas and energy in total, we're talking round about EUR 1 billion per quarter in the first three quarters of the year. Your third question was related to the gas supply sources. We are sourcing in Europe from Western European suppliers. We do not know what their exact supply portfolio is. There's a relatively high likelihood that this is very close to what the overall supply portfolio is in the respective countries of Europe, as well as in Europe. More information than that, we do not have.
Thank you. Very helpful, both.
We move on to Andrew Stott, UBS. Your turn.
Yeah. Thanks, Stefanie. Good morning, everybody. I had two questions. One was really the upstream cycle. In the past you've been pretty good in calling that and just wondered what you're seeing for the next 12 months, both positives and negatives, across some of the key chains. That's the first question. The second question comes back to the previous one from Christian.
As things stand, I know, Martin, you said, things are still up in the air a bit with the gas subsidy package. As things stand, if you were to be able to use that package from the first of January next year, could you estimate what your total cost effect would be? Thank you.
Andrew, I'll start with your second question. I don't have exact calculations on that. If I look at the average natural gas cost in the first three quarters of the year, a rough guess is that the increase compared to the year 2021 should be half of that, if 70% will be supplied at a price of 70 EUR per megawatt hour. Since there is so much uncertainty still around this, we need to see how things in the end shake out. I think we'll provide you with a better and more sound calculation once it's really clear how the gas price brake will work.
I think entrepreneurial freedom is also important. So you asked about how upstream business is going forward. I mean, very difficult to predict, but I mean, as I mentioned, there is no indication that actually there's an uptick in demand, which is eating itself through the upstream part, both I have to say for the internal usage as raw materials for our downstreams, as well as on the market demand. I do not expect that this is significantly changing now over the next months going forward. It is actually a bit of a global effect, but you saw also from the numbers, I mean, it's most severe here in Europe and definitely in Germany.
If you for that reason look into the margins, then they have been coming down significantly, from a very high level, I have to say. If you look on the contribution from these commodities, and we monitor this all the time, every month, then this has come significantly down now to a relatively low level. I don't expect that margins go down much further than we have it there, but I think a positive spark now for going forward might not come from the volumes. The question is really how the energy prices will develop going forward. There is basically not much pricing power now on the commodity side. I hope that helps you.
I think there's not a very positive message on the upstream for the next month to come.
Thank you.
The next in the queue is Gunther Zechmann, Bernstein. We will then have Chetan Udeshi, Laurent Favre, and Peter Clark. Now Gunther Zechmann, Bernstein, please go ahead.
Good morning. Thank you. Martin, if I can just pick you up on one of the points in the deteriorating framework conditions, which is the regulatory uncertainty. Could you just outline what you would need regulators to do to improve those conditions, and if you think that's realistic to happen? The second one, maybe for Hans-Ulrich Engel on the CapEx budget. You've not changed the EUR 25.6 billion CapEx over 2022-2026. With inflation going up and demand weakening, is the way to see it that you're building less capacity for the same amount of money? And if that's the case, then how much less capacity are we looking in that scenario? And if I can sneak a last clarification question in.
In the report, I was very surprised to see that by customer location, Germany is by far the fastest-growing region in Q3, up almost 50%. If you could help me understand that a little bit, please.
Now, Gunther, maybe a quick review on the regulatory side. I mean, process is on its way to implement the European Green Deal basically, totally unaffected from the current economic development. There is no plan B. They think this is a holistic future picture, so all the packages that are coming have no priorities for them. They basically all come at the same time. We currently have already more than 7,000 pages of regulations for the chemical industry. My guess is at the end of the process, we are with 25,000. You can ask yourself how particularly small and medium-sized enterprises want to deal with that. BASF maybe can because of resources, but it is a real challenge.
We approached them and said, "You cannot deny that there is a different economic reality." The question is now whether they use this in the next weeks, and I think we can see already that the national governments and the councils step up. There are many countries where the chemical industry is actually a very important one. It's number 4 in Europe and in many other countries is even number 2 or number 3. You see maybe one indicator that shows how alarming it is. The European chemical industry was actually contributing over decades about EUR 40 billion-EUR 50 billion trade surplus. Since March, this turned around. Europe is importing more chemicals now than exporting, and I think this gives you an indication about this competitiveness. No one really talks about competitiveness in the EU process.
It may be just starts now with the energy part. What should happen? I give you one example without going into details. The Industrial Emissions Directive, that's the last package that actually came out. What is that? That is not only for the chemical industry, but it touches actually existing plants, questioning their permits. You have a plant that is 30 years old and you have an existing permit, and then they basically do a benchmark worldwide. They say there is now a new plant, just 5 years old, new technology that has a new threshold for emissions. That means you have to come down with your old plant and invest to meet this emission threshold of these plants. If you do that, you actually take away the financial strength of the current plants to finance the energy transformation going forward.
We, for example, told them there is no need to open that box now. That, that's one example. I could also talk about REACH and CSS, where we talk about not the what all the time, but also the how you can make things more pragmatic. This is, I think, very much deciding on actually whether there's a business case to invest in Europe. Because if you have a low growth environment, you have high energy costs, you have inflation, and now you have also regulation. What actually gives you the confidence to invest in plants where you need a security for the next 10, 20 years? I hope that helps you a little bit.
I use some of my time for, as the president of Cefic, the European Association in Brussels, to actually work in that direction for the whole European chemical industry.
Thank you for your frank words there.
Gunther, your questions with respect to CapEx plan first. We're in the midst of the budgeting process. We'll see what the outcome of that is. Based on what I can see currently, I don't expect any type of major changes. You are addressing the moving pieces such as inflation, higher input costs, higher labor costs. They are offsetting costs such as, for example, the steel price. If you look at how steel prices have developed over the last 12 months, they've come down significantly. All of this will be taken into consideration when we do our budgeting process, and we'll see what the outcome of all of this will be.
My expectation is that we will not see major changes compared to what we have communicated so far for the time period 2021 through 2025. Your question on Germany sales by location of customer 47% growth significantly higher than what you see as sales by company. There's an explanation for that that's relatively easy, and that is the trading business that sits in other. We had significantly more trading business with customers in Germany than we had in the prior year quarter, and that's driving up the number as you can see it. This is raw material trading that we do, and that is reflected in the sales of others.
A big piece of that actually happening with customers in Germany.
We move on to Chetan Udeshi, J.P. Morgan. Please go ahead.
Yeah. Hi, thanks. I was just looking at the slide number 8 again, which shows the earnings split by different regions. I'm just curious, why is Germany so bad versus rest of Europe? Because the gas price dynamic is not something which is just German driven, you know, it's across all of Europe. Why is Germany particularly so bad at BASF? You know, I guess is there a reflection of maybe a lot of corporate costs at BASF actually sits in Germany, so you know, it's a bit of an unfair comparison. I'm just curious underlying like for like, why is Germany so poor versus rest of Europe for BASF right now? The second question was just on ag division.
You know, very strong top line growth, both because of high volumes but also very strong pricing. When I look at the incremental EBIT growth from that top line growth, you know, the drop-through is pretty low. It's like 15, 16% of incremental sales flowing through to the EBIT line. I'm just curious, why did we not see a much stronger drop-through? Because it seems that these prices are now strong enough to cover the inflation. Hopefully, that is the case. Sorry, if last small clarification is, again, going back to the previous question, EUR 600 million increase in gas costs in Europe in Q3 is actually lower than EUR 800 million-EUR 900 million that we saw in Q1 and Q2.
This despite the fact that the gas cost in Europe a megawatt hour was actually, in terms of year-on-year increase, double of what we saw in Q2. I'm just curious what like how much production curtailments have you guys taken in Europe as a whole, for that number to be closer to 600 and maybe not even double that number? Thank you.
Chetan, this is Hans. I'll start with your question on Germany. What's important to keep in mind is that Europe does not have one consistent natural gas price and one consistent price for power. Prices in Germany are significantly higher than what you are seeing, for example, in Belgium, in the Netherlands, in the southern part of Europe. As a result of that, Germany suffers more. Give you an example from the more recent days. Germany sits there and gas here is sold at TTF prices. Which yesterday closed at 100 for the forward months, so EUR 100 per megawatt hour.
At this very same point in time yesterday, you could buy spot gas in other countries at prices of EUR 20-EUR 25 per megawatt hour. Now, this is one day, probably not something that you can just extrapolate. We have had these significant differences depending on the regional trading prices within Europe over the last six months. As I said, they are, if you look at it on a daily basis, significant, and Germany suffers there in particular. Now, your next question was on, since we're on gas, I'll do the EUR 600 million cost. We have, in fact, in Q3, reduced gas consumption significantly.
We have reduced as a result of not running certain plants or running them at lower capacities, substituting by way of purchases from the market to the extent we could. We have also substituted natural gas on the utility side by using alternative sources, i.e., heating oil. We've done what we could, but overall, this is an expression of the fact that we've actually consumed significantly less gas. If your question is how much less, it is in the order of magnitude of almost 40% lower gas consumption in Q3 than in the prior year quarter. Last question was on AG and why don't you see stronger earnings on significantly stronger sales?
First of all, I think we have EUR 100 million improvement compared to prior year quarter. It is the weakest quarter of the year. That is the seasonality that we have in the business. It comes with significant cost in preparing for the season that has just started in the Southern Hemisphere, and then also preparing for the season in the Northern Hemisphere. There's also a mixed topic here. That explains why this is relatively low margin.
Let me say this, compared to where we were in the prior year, I think our teams in Agricultural Solutions have done a very good job, and EUR 100 million earnings improvement, I think, is also a good basis for, hopefully, a good quarter for our Agricultural Solutions business.
Thank you.
We will now have Laurent Favre, Exane BNP Paribas, and then we will go to Peter Clark, and Georgina Fraser after that. Now Laurent Favre, Exane BNP Paribas.
Thank you, Stefanie. Good morning, all. My first question is regarding the cash flow improvement and expectations for Q4. I think you are year to date below EUR 800 million, so I don't know, EUR 2.5 billion or so below the absolute amount of the dividend. I was wondering if you combine the expected working capital inflow of Q4 and the dividend of Wintershall Dea, if you think you can cover the dividend in free cash flow this year. That's a flat dividend with free cash flow this year. That's the number one question. Then the second question is on the Zhanjiang project. I think last year you told us that peak CapEx would start already in 2023.
I was wondering, given what's happening in China, if you could talk about the flexibility you have to slow down the build rate there and perhaps delay the startup of phase one. Thank you.
Laurent, this is Hans. Thanks for your question. I'll answer the question on the cash flow. To start with, based on what we see, and one of the important points you mentioned already, which is the dividend that we are expecting to receive from Wintershall Dea in the fourth quarter. We received that in the first or second quarter of last year. From a when you compare quarters, you just have to keep that in mind that there is a significant amount of free cash missing when you do the comparison. You alluded to working capital cash releases that we've already seen in the third quarter, and that will continue in Q4.
The short answer to your question is we fully expect to cover the dividend with the free cash flow. The expectation is also that from free cash flow perspective, Q4 will be a very strong quarter.
Laurent Favre, there is not so much flexibility when it comes to the spending in Zhanjiang for 100%. Actually, we also don't want, because we also want to have returns as soon as possible. Actually, if you look on the fundamental data from China, they have not changed. We have a sound assessment here. We don't expect old numbers of 6% and whatever was there. We are rather to the 4% as a solid projection going forward. It's very much domestically driven. I think we mentioned that we expect that most of the output of this plant is even absorbed in the province of Guangdong, not even going beyond.
For that reason, it's our highest interest also to get the returns out of these investments and the sales from that. If you order then the material and just remind you that at the peak of this construction, we will have about 35,000 workers working on that site. If you dismantle that, you would have actually a lot of additional cost and the project results then come in later. It's not even in our interest to do that.
Excellent. Thank you.
now it's Peter Clark , Société Générale.
Yes. Good morning, everyone. Thank you very much. I've got two questions. Martin, you mentioned obviously about it being a business case or not for investing in Europe. I mean, your investment on the five-year CapEx projections has come down significantly in Europe, having over 60%, 10 years ago to under 40% for the last 3, as you pivoted growth towards Asia, and particularly China. Obviously the risks with China arguably are growing as well. I'm just wondering in the context, if Europe continues to diminish, is North America an area that you would be revisiting thoughts again or not? Because obviously the spend there has come down dramatically in the last few years. Then the second question is around the cost cutting, the EUR 500 million program, but ultimately the right sizing.
You've quite a sizable target of 10% of that cost of the non-productive assets, in those units or non-productive unit cost. That implies some headcount reduction, and I thought with the focus on Ludwigshafen, the site agreement precluded forced redundancies for a while. I'm just wondering how you square the circle of what you can do to believe in that EUR 500 million then beyond that for the cost cutting. Thank you.
Yeah, Peter. I mean, we have no exact data yet, how many positions will be cut off, but if you take the non-production part and the units we mentioned, they are mainly personnel costs, so it goes down into a number of people working at the site, and this is also actually what we want to do. We have to detail it out because that's a sensitive issue for the labor unions, certainly. The site agreement is right. That's a framework which does not allow us to actually fire people until 2025. Peter, what is also the reality is that the population in BASF is increasingly getting older, so the number of retirements in the next years goes significantly up.
We have also positions that are not filled, as everywhere in the world you have problems to get experts, and well-trained people. We have some of them released from jobs we can then also put into, let's say, positions where we do not get the people on the market. I would expect that over these two years, the majority of these positions will be handled that way, and then let's see whether we need then also other means in paying, if some people have to leave. I'm not so worried that we cannot manage this in this time.
When it comes to business case and the CapEx spending, I mean, I said in Europe, if you go for capacities, new plants, this is, I think, a serious question whether this has a business case. The most of the spending we have actually here is maintaining our bases. The one or the other expansion EHS, but then also, very much, in the area of battery materials where there is something to come, which is a growth field for Europe. There you have a clear business case. The remaining business and the core, we have already mentioned that several times, we have really stripped down to what is needed because we have now higher CapEx in the other regions.
When it comes to China, I think we can talk long about that, I think, and elaborate a little bit on that. Yes, you have geopolitical risk. We look into this thoroughly in all these different dimensions you can imagine and try to do risk mitigation measures. What is also clear, you have also risks not to be in China. If you would now not do this investments, you could also imagine that China is questioning what is actually the commitment of BASF in China. It would also most probably affect all the other business we have over there. Overall, we think we still have a sound business case over there. The risk of not being in China and cutting ourselves off of 50% of the global market is also a serious question.
When it comes to North America, we don't talk much about it, but it is also a market we always look into. Just remind you that we spend EUR 200 million over there to actually expand our MDI plant, which is a very interesting market. We have really used the opportunity as the market is actually very balanced, that we are building capacity to absorb that in the years to come forward. We also not neglect North America, but if you look in the North American market the last 5, 6 years, it was also not much growing. Let's say from a local perspective, most of the capacity is going to export. That is also again, then the geopolitical question, whether you want to build capacities in the US rather than to export to China.
You know, we have different assumptions here. We look into this regional spread very much and considering all the different aspects for the regions, and there's always some opportunity. Now clearly, and I mentioned that in my speech, also looking into the tight situation in Europe and Germany, we are actually happy that we have all these strong positions and a balanced portfolio regionally, and we wanna balance that out even a little bit more by spending more now in the CapEx in Asia. I think this puts all in a little bit in a framework.
Thank you. Very clear.
Please limit your questions ideally to only one, but not more than two questions as we still have some analysts on the line who want to ask a question. We will now move on to Georgina Fraser, Goldman Sachs. We then have Andreas Heine and then Markus Mayer. Now Georgina Fraser, Goldman Sachs, please go ahead.
Hi, thanks, Steffi, and morning, everyone. I do have two questions, and they're both on the structural adjustments that you've been talking about this morning. Firstly, could you maybe give us an idea of how much of the drivers for the structural adjustments are attributed to higher energy prices versus the increased costs of regulation that you're seeing for the industry, Martin? The second question on the same topic is, I mean, what happens to the customer industries if there is more broad-based than BASF structural adjustments for chemicals production? Would you expect these customers to invest more outside of Europe? You just also said that you would be looking to do the same with your own production, maybe moving more towards China.
Yeah, just your thoughts on that would be very helpful. Thank you.
Georgina, the energy cost is the real driver. I mean, regulation is coming. I think I elaborated on the Industrial Emissions Directive, which is an additional burden, which would also then request additional CapEx to actually update the plants. That would also, I think, dramatically affect the industry. I'm really confident that we get this away or at least pushed forward because that's not a priority topic. You have to look into base chemicals here in Europe that are heavily depending on natural gas and energy prices, and you have to model actually the competitiveness relative to other regions. Then you have to ask yourself, producing a base chemical in future, let's say in Europe and selling it into the market, whether this take makes sense.
You have always to consider, however, that BASF is with the value chains, actually adding value and a lot of the base materials by 4, 5, 6, 7 steps in the chain. That means you dilute these costs very much to the final product. You know, in Ludwigshafen, for example, we have some 8,000 products roughly, or even a little bit more we sell to the markets. Many of them are actually evergreens. Whenever you do something in the industry, you need these, and we will produce them. Then in the future, with the PCF reduced or even zero. It is more about these considerations of some base chemicals. I think the most evident one is ammonia, which has a huge part of its cost just from natural gas.
It strongly depends, you make out of Ammonia, let's say a fertilizer, or you produce a specialty amine, which is a hardener in an epoxy system, which has certainly then a much higher margin on that equivalent of Ammonia. That is the way we look into this. On the other hand, this is something we have always done. We have always skinned ourselves, redefined ourselves, with all the raw material changes in the past, coal tar, then coal, then oil, then gas, now more in direct renewables. I think this is a normal exercise, but the real reason for that now is certainly the threat of the energy costs. You are directly also with the customers because some of your customers also take consequences and might stop production.
You lose the demand here. That is also why we have to very intensively discuss with our customers. You know that our strategy is actually we invest where the market is. We also look into our customer portfolio. Where are the strong guys for tomorrow? It's not necessary all the time you had served in the past, so if they don't have the potential, you go also to others. And then finally, because we talked about regulation, it's also about the CO2 price. That comes in if you have the energy price, but you have also the avoidance of CO2 if you don't produce the one or the other product here. It's a rather complicated picture, but at the very end, we have to come to grips then what are the right measures going forward.
It is always market-related. I hope that helps you.
Yes. Thank you very much.
Now Andreas Heine, Stifel.
Yeah. Also, two, but I keep it very short. If it comes to the Verbund site in China, you have quite a number of assets already in China, and they produce the cash flow. I would assume that the China Verbund site can be fully financed by your operations in China and by taking out debt locally. Is that a fair assumption, or can you elaborate a little bit how you finance this with your assets? The second is the volume in upstream was very much down in Q3, much more than in the other businesses. Could you explain a little bit in detail why that was? Is that there is a lot of de-stocking in the value chain, or is it due to the fact that you have closed your plants and lost in competitiveness?
What is the reason of this discrepancy? Thanks.
I'll take the first one, Andreas Heine. Andreas, your assumption is fully correct. That is indeed what we are planning, financing the investment in China with the proceeds of the Chinese business. I think that makes a lot of sense. Could you do me a favor? You broke up here and there. Could you repeat the second question, please?
Yes, of course. The volume decline in upstream was much more than in the other divisions. I would like to learn a little bit more whether this de-stocking across the value chain or was it deliberate that you had closed plants on site. Why was that so much different than upstream?
I'd say this is all of the above. As an example, you know, Ammonia is something that we partially shut down in Europe. These are, as Martin says, huge volumes.
We had to adjust to the cost, but we also saw an element there of lower demand in particular, in all regions. It hit the upstream businesses more than the downstream businesses. That may very well also mean we see an element here of adjusting inventories. We see an element of de-stocking in expectation of lower prices. Then we're approaching at the end of Q3, obviously also the end of the year, and everyone does the same for the end of the year, i.e., tries to manage the inventories as tightly as possible. All of the above is probably the best answer I can give.
Thanks a lot.
Now we have Markus Mayer, Baader Helvea, and he will be followed by Jaideep Pandya and then Sebastian. Now Markus Mayer please go ahead.
North America. Have you seen any significant imports from China into Europe for any particular product chains? Because Chinese product prices, except for polyurethanes, are pretty weak. You know, is there a big risk that we see a lot of product coming from China into Europe next year? And therefore, even if we see price deflation on the gas side in Europe, we actually don't see any improvement in returns in the upstream.
Markus, if I try to answer this. I mean, one of the reasons why the first half was actually working so well and we could pass on this energy cost basically completely to the market was the big orders level we had and the backlog of and the good demand. It was also one of the reasons that we did not have functioning supply chain. Actually, arbitrage business did almost not work, so not enough volumes and not fast enough to react. That has changed with the ease of supply chains, more materials flying in.
You can clearly see this in basically all the lines, and this is also one of the reasons of the deterioration of the margins in the upstream business, because you know that 2-3 big barges for a huge commodity product actually is changing the pricing power totally. That is also, I guess, not going away unless we have some unpredicted supply chain stuff coming up again. That's something I think we have to live with, and this can only be healed, let me say, if we have an increasing demand coming up. The material is flowing in certainly from all the regions.
I would say, yes, you see it, for example, in this, reverse picture now with the European chemical industry, where since March, Europe imports more than it actually exports. One of the major products here, you can see it's a mixture of many things, but it's, for example, Caprolactam that comes now in from China into Europe. In earlier times, it was actually an export product from Europe to China. You see many of these examples. A very cautious or let's say, answer on your first question. Let me say we are entrepreneurs, and that means we want to take the decisions what is right and wrong for the company. I don't want to have any strings that we get something in that we are limited in deciding what we think is the right thing.
The dividend policy is high-ranking for us, you know that, and that's also what we communicated. I have a hard time if anyone tells me or tells us what the right dividend policy is. I think this gives you some indication, that whatever is possible, we try to do on our own feet. I think also very clearly there is a responsibility for everyone, that's for a private person, but also for a company. It cannot work that everything is paid by public. If everyone just opens their hand and say, "Give me the delta and the difference for the next two, three years," and then I continue when energy prices come down, we will be over-indebted and it will be a disaster for the next generations to come.
That is also why I think there is a responsibility for restructuring, for adapting yourself for future competitiveness. If you get lazy now and you get paid from public, I'm quite sure in the next three years you have missed the boat when it comes to adapt your structures. I think in this, let's say, situation that you have support, if you really are going down the drain and you, it's a question of survival, then this is the right measure. If you are powerful and you are proud and entrepreneurial, and that's our understanding, then we try to avoid whatever is possible. I hope that gives you a bit the framework where we are.
Thanks a lot. Hans, I wish you at least a little bit less stressful few last months, although I'm personally very sad to see you leave. I understand that you have to retire at some point. Thanks a lot.
Thank you. Thank you for your kind words. You know what? You still have to deal with me for the next six months.
Thank you.
In January calls, we'll have Sebastian Bray, Berenberg, and we will then have Tony Jones. Sebastian Bray, please go ahead.
Hello, good morning, and thank you for taking my questions. They're mainly just nitty-gritty ones. The first, how much of the buyback is done to date? The second is on the other segment. Am I right in saying that there is roughly a gain of EUR 100 million realized on hedges here? I come to this figure by comparing the production in Q1, Q2, and the 40% decline in gas figure sequentially for Q3, but it was quite far ahead of market expectations, and I just want to see if that's the right order of magnitude. I appreciate the answer to this question might be no, but any update on when you think you can get money out of Wintershall Dea as well would be great. Thank you.
Sebastian, I take first one on the share buyback. We bought back order of magnitude EUR 1.35 billion till the end of last week. Project or program is progressing as we had defined it in the beginning of the year. On Wintershall Dea, getting the money out. What we'll see is a what I would call solid robust dividend payment in Q4 of this year. I had mentioned this already earlier. When Laurent asked his question, that's certainly one way. Everything else you understand the situation as well as I do with the kind of portfolio that Wintershall Dea has will require certain measures.
Mario and Paul spoke about that yesterday at the Wintershall Dea call. We're working on it, and I can assure you we're working very diligently on that.
Thank you. The other segment?
Other?
Question on the other segment, again was?
What actually was the benefit from hedging gain is EUR 100 million on energy and gas division EBITDA for Q-
Order of magnitude is okay. This is what we show another is actually combination of energy but also raw materials. Your estimate there is about right.
That's helpful. Thank you for taking my questions.
Okay. Now Tony Jones, Redburn, please.
Yeah. Good afternoon, everyone. Quick one to finish up with. On the battery materials projects in Europe, could you maybe update us on what level of ROCE you're targeting? On the one hand, the industry's getting scale, but then there's also an argument about competitive activity. Perhaps also let us know what internal level of cost of capital you're using for your growth projects. Thank you.
Now on the ROCE target for the battery materials business, it needs to meet the kind of criteria that we're applying to our entire business. With the developments that we've seen during the course of 2022, we are quite satisfied with the progress the business is making. Cost of capital, is that a question with respect to cost of capital for the BASF Group? Was that with respect to specific businesses?
Maybe for the group would be helpful. Thank you.
For the group, on a pre-tax basis, let's say roundabout 10%. Between 9%-10% pre-tax.
Thank you. That's great. Thank you, Hans.
We have one last investor in the queue, and if you keep it short, we're tired. I will probably not pronounce correctly the name. It's Sheharyar Malik from PIMCO. Please go ahead.
Hello. The questions are very short. First question is if you can, and apologies, you might have mentioned this at the start of the call, but I was late. What is your energy cost right now, annualized, based on your most recent numbers? That's question one. Question two is on energy. If you can just give us some sort of indication of how you're purchasing energy. Is it more on spot, or is it contract? And if it's a contract, what are the tenets of the contract? My last question is on the German government's announced fiscal help for industrial names that face spiking energy costs.
We're hearing some news of, you know, restrictions from the government on potential shareholder payments that those companies can make if they want to access that fiscal package. I'd like to hear your thoughts on that. You know, if you had to choose between shareholder returns and getting help from the government, which way you would lean. Thank you.
I don't know when you came in, but it was just elaborated on this very in detail, so I keep that very short. Operational freedom is highest ranking for us, so we would not like to take anyone the decision on the dividend. That is what we do from our financial strength and the outlook. I think this gives you enough indication where we are in this respect. The other two, Hans?
First on your question with respect to net gas purchases and the price basis in Europe, this is typically spot price based, and spot price based can mean anything between day ahead to month forward. As mentioned also earlier, we're buying natural gas from Western European suppliers in Europe.
Your first question, I think, was on energy cost for the BASF Group. Annualized, I give you monthly average order of magnitude, Q3, EUR 600 million-EUR 700 million per month.
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 for analysts and investors that we will offer on Thursday, November 17. The 1-hour webcast is scheduled to begin at 4:00 P.M. Central European time and will follow the research press conference. Melanie Maas-Brunner, Member of the Board of Executive Directors and CTO, will explain why white biotechnology is becoming increasingly important for the chemical industry, why BASF and LanzaTech are jointly working on producing chemicals from alternative carbon sources, and why basic research on biodegradability is making an important contribution to developing sustainable products. Should you have any further questions regarding our Q3 reporting, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and goodbye for now.