With this, I would like to hand things over to Kurt.
Yeah, thank you, Steffi, and also good morning from my side, ladies and gentlemen. Thanks for joining our earnings call for Q2. The positive demand development continued in the second quarter of 2017, and we saw solid volume growth. Overall, we considerably increased sales and earnings. Margins in our Chemicals segment remained on a high level. In contrast, Performance Products and Functional Materials & Solutions were negatively affected by higher raw material prices. Turning to the financial figures compared to Q2 of last year, sales in Q2 increased by 12% to EUR 16.3 billion. This was mainly due to higher prices and volumes. We raised sales prices by 7% on account of higher raw material prices, especially in Chemicals. Volumes increased by 3%. We achieved year-on-year volume growth in the 5th consecutive quarter.
The first half volumes were 5% above last year's level. Currency and portfolio effects were slightly positively impacted sales. EBITDA before special items increased by 23% to EUR 3.3 billion. EBITDA increased by 16% to EUR 3.2 billion. At EUR 2.3 billion, EBIT before special items came in 32% higher, mainly due to considerably higher earnings in our Chemicals and Oil and Gas segments. Lower earnings in Performance Products, Functional Materials & Solutions, and Agricultural Solutions partially offset this increase. The negative impact at the Ludwigshafen site due to the last year's North Harbor accident was offset by another insurance payment of EUR 100 million in Q2. This amount predominantly pertained to the Chemicals segment. At around EUR 2.2 billion, EBIT was 27% higher than in the same period of last year.
Special items amounted to EUR -70 million and were mainly related to expenses for restructuring measures and divestitures. Tax rate was 22% compared to almost 27% in the prior second quarter. This decrease was, among other things, due to deferred tax income arising from currency effects in Norway. At EUR 1.5 billion, net income rose by 37% compared with the prior year quarter. Earnings per share were EUR 1.63 in Q2 versus EUR 1.19 last year. Adjusted earnings per share amounted to EUR 1.78, EUR 0.48 or 37% above the prior year quarter. Cash provided by operating activities was EUR 3 billion in the second quarter of 2017 compared to EUR 2.3 billion last year.
Free cash flow rose from EUR 1.3 billion to EUR 2.1 billion, mainly due to higher net income and lower payments made for tangible and intangible assets. We continue to implement our We Create Chemistry strategy. Our commitment to research and development is core to this strategy. During our recent R&D roundtable in Ludwigshafen, we demonstrated how digitalization will further accelerate BASF's innovation power. Through digital technologies and data, we are increasing the efficiency and effectiveness of our processes and creating additional value for our customers. Let me mention a few milestones announced in the past weeks. At the beginning of June, we communicated plans to build our first regional automotive application center in Asia-Pacific, located in Shanghai.
This investment is a significant step in our strategy to strengthen our R&D footprint in Asia and improve our proximity to customers in the fastest-growing region for automotive businesses. In mid-July, Kaiima Bio-Agritech, an Israeli genetics and breeding technology company, and BASF announced their collaboration on the discovery of novel herbicide-resistant traits. Together, we aim to develop new weed control systems to improve farmer productivity. Our continued volume growth is largely enabled by the capital expenditures in recent years. We will continue to fill the new capacities. Additional projects will also support our organic growth. Nornickel and BASF signed a memorandum of understanding to cooperate on the supply of raw materials, especially cobalt, for cathode materials. In the first step, BASF intends to invest up to EUR 400 million in a European production plant for cathode materials to be used in lithium-ion batteries.
The envisioned cooperation will provide a solid basis to expand BASF's production of battery materials on a global scale. We announced the strengthening of our ibuprofen business with investment of approximately EUR 200 million. We will build a new plant in Ludwigshafen. It is scheduled to come on stream in 2021. We're also expanding the capacities at our production site in Bishop, Texas, to fill current supply gaps in the market. We'll now hand over to Hans, who will provide some more details on the development of our segments.
Thank you, Kurt. Good morning, ladies and gentlemen. Let me highlight the financial performance of each segment compared to the second quarter of 2016. I start with chemicals, where sales increased considerably. Significantly higher prices in all divisions were the main driver for this development. Volumes were almost at last year's level. Higher volumes, e.g., in amines and MDI could not fully compensate the lower volumes, primarily as a consequence of the still limited production of oxo alcohols and plasticizers in Ludwigshafen. In a continued favorable market environment, we were able to expand margins, especially in isocyanates, cracker products, and acrylic monomers. Improved margins and an increased contribution from our joint ventures in China resulted in an EBIT before special items of EUR 1.1 billion, which exceeded the result of Q2 2016 by EUR 662 million.
We continued to experience the negative impact of insufficient raw material supply at the Ludwigshafen site due to the North Harbor accident. However, this impact was offset by a second insurance payment related to business interruption losses. This week, we have started commissioning the rebuilt propylene pipeline at our Ludwigshafen site. Restoring the full propylene supply is a major milestone. We expect the logistics infrastructure to be fully operational again by the end of Q3 2017. Sales in Performance Products increased slightly due to higher prices and volumes. Positive currency effects were offset by negative portfolio effects. The price increases could not fully compensate the higher raw material prices, thus margins decreased, especially for oleochemical surfactants and fatty alcohols. In the animal nutrition business, vitamin prices decreased further. The ongoing intense competition in the hygiene business also impacted earnings.
Overall, this led to a considerable decline in EBIT before special items. Special items of minus EUR 42 million were mainly attributable to restructuring measures in Care Chemicals. In Functional Materials and Solutions, sales rose considerably. This was mainly driven by higher volumes and prices, as well as the acquired Chemetall business. Slight currency tailwinds also contributed to the increase in sales. Compared to the prior year quarter, sales volumes to the automotive and the construction industries grew slightly. Higher earnings in catalysts and the contribution of the acquired surface treatment business could not compensate overall lower margins as a result of higher raw material prices, especially for Performance Materials. Fixed costs grew primarily due to structural effects. EBIT before special items in Functional Materials and Solutions decreased considerably. On to Agricultural Solutions. Despite continued difficult market conditions, we were able to increase sales in Agricultural Solutions.
In Q2 2017, volumes increased by 5%, mainly driven by higher demand in North America and Eastern Europe. Slightly lower prices partially offset this increase. Currency effects had a positive effect on sales of 2%. Sales rose slightly in Europe, driven mainly by higher volumes. Considerable growth in the herbicides and fungicides businesses in Eastern Europe more than offset lower volumes in Western Europe in particular. Sales in North America increased considerably, driven primarily by higher volumes of herbicides in the US and fungicides in Canada. Higher prices and positive currency effects also boosted sales. Sales grew considerably in Asia. This was predominantly an effect of higher volumes, especially of herbicides in India and fungicides in Southeast Asia. Contrasting this development were declining prices in the fungicides business in China and lower volumes in Japan.
Lower volumes were responsible for considerable sales decline in South America, primarily in the fungicides business. In Brazil, the liquidity bottlenecks for farmers persisted in a challenging environment. Compared with the prior year quarter, EBIT before special items declined considerably. This was the result of higher fixed costs, partly related to the start-up of new plants, as well as lower average margins due to a different product mix. Sales in oil and gas increased significantly due to higher volumes and higher oil and gas prices. While production volumes matched the level of the previous second quarter, sales volumes, especially of natural gas, exceeded the level of Q2, 2016 by 22%. An offshore lifting in Libya contributed to the volume increase in Q2, 2017. Whereas in 2016, the offshore lifting took place in the fourth quarter.
The average price of Brent crude in Q2 2017 was $50 per barrel, compared with $46 in the prior quarter. In addition, gas prices on the European spot markets were significantly above the prior year quarter. The combined price and currency effect amounted to +10%. Overall, EBIT before special items increased from EUR 94 million to EUR 183 million, mainly due to higher prices and the offshore lifting in Libya. The return to the regular earnings scheme and our participation in the Yuzhno-Russkoye gas field and lower exploration expenses also contributed. Net income in oil and gas amounted to EUR 122 million compared to EUR 100 million in Q2 2016.
This disproportionate increase is due to currency effects from group internal financing that negatively impacted net income of Wintershall. EBIT before special items in Other improved to minus EUR 151 million from minus EUR 212 million in the prior year quarter. This was mainly driven by a release of provisions for our long-term incentive program, while earnings in Q2 2016 were negatively affected by an increase in provisions. Let's now turn to our cash flow. In the first half of 2017, cash provided by operating activities increased by EUR 463 million to EUR 3.8 billion. This was largely due to the higher net income. Changes in net working capital amounted to minus EUR 1.7 billion compared to minus EUR 1.0 billion in the first half of 2016.
This was driven by a higher increase in receivables following the strong volume growth and higher prices. At EUR 2.4 billion, cash used in investing activities was EUR 377 million higher than the first half of 2016. One factor here was a rise in financing related receivables. This was driven by the loan granted to Nord Stream 2 AG. Moreover, fewer payments were received from disposals. Payments made for tangible and intangible assets decreased by 17% and amounted to EUR 1.6 billion. Free cash flow rose from EUR 1.4 billion to EUR 2.2 billion in the first half of 2017. Financing activities led to a cash outflow of EUR 886 million compared to an outflow of EUR 1.8 billion in the first six months of 2016. We used the currently favorable market conditions to further reduce the financing cost of BASF Group. With that, back to Kurt for the outlook.
Okay, thank you, Hans. Now let's conclude our little presentation. You're aware that we have raised our forecast. Considering the better than expected macroeconomic development in the first half of this year, we have adjusted our underlying assumptions as follows. Growth in GDP 2.5% from 2.3%. Growth in industrial production, 2.5% from 2.3%. Chemical production unchanged at 3.4%. Average exchange rate of 1.10 for the US dollar from 1.05, and the oil price, down to an average of $50 per barrel Brent from $55. As announced and discussed with you in April, we reviewed our annual forecast based on the results of the first half.
In light of our sales increase of 15% and an increase in EBIT before special items of 30%, we continue to expect a considerable increase in sales for the full year by at least 6%. For EBIT before special items, we now expect a considerable increase of at least 11% for 2017. For the second half of this year, we expect a slight increase in EBIT before special items compared to last year. This forecast considers a very strong performance of the chemical segment in the first half of this year, which we expect to weaken a bit, as well as a weaker than originally expected oil price and US dollar. Now we are happy to take your questions.
Yeah, 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. If you wish to remove yourself from the queue, you may press star followed by two. To ensure the best sound quality, we kindly ask you to unmute your phone and use your headset. Please limit your questions to only two at a time so that everybody has a chance to ask his or her questions. Of course, you are welcome to rejoin the queue. The first question comes from Andrew Stott, UBS. Please go ahead, Andrew.
Yeah, thanks, Stephanie. Morning, everybody. The first question is around the downstream guidance. You said you expect chemicals to lose momentum in the second half. I guess that's no surprise. Given the extent of underperformance of the business in Q2 in Performance Products and Functional Materials & Solutions, I'm just wondering what your thoughts are as you go through the second half with regards to that raw material price dynamic. If I could just add to that sort of secondary question. If I look at Sika today in construction chems or I look at Clariant in consumer chems, and I guess we are marking to market and benchmarking as we go. It does look like you're significantly underperforming on margin management. What would you say to that maybe lazy observation? Thank you.
Hi, Andrew. Thanks for your questions. Yes, we are aware that the results in Performance Products and Functional Materials are not as they're supposed to be. We continue to work on margin management, i.e., price increases, and we continue to announce price increases. So far, they have not been sufficient to offset the raw material price increase. On top of that, we have a certain weakness in a couple of markets which are not completely unimportant, like vitamin pricing, which has come down considerably in Q2. We see continued heavy price pressure, for instance, in hygiene products, i.e., SAP. There are a couple of pockets where it's not just passing on of raw material costs, but actually special market developments which some other companies might have or might not have.
On construction chemicals, we have a very high, relatively high exposure in the Middle East, where we have seen acute payment issues and considerable decrease of business, which I think is reflecting the situation in the Middle East. Apparently this hits BASF's construction chemicals business quite a bit. Apart from that, business has developed quite nicely. We have continued to invest also in merger and acquisition, and we will continue to improve margins, trend-wise, certainly.
Okay, thank you.
Sorry, Andrew. The next question is from Stephanie Boswell, Bank of America, Merrill Lynch. Please go ahead.
Yes, thank you very much, and thank you for the presentation. Both of my questions are with regards to ag. First, on the Brazil market, we saw one of your peers take a write down and you flag in your commentary that liquidity bottlenecks persist. Can you perhaps share with us how you see the current inventory situation in crop protection chemicals for both BASF and the wider industry, and how you've seen trends develop over the course of the third quarter thus far?
My second question on ag is regards to dicamba. We've now seen a number of US states move to ban the use of dicamba products. Can you give us an insight into potential impact on sales on your Engenia products, particularly if we see changes to the labeling requirements? Whether or not we should expect this to impact on the ramp-up of your capacity expansion in Texas? Thanks.
Yeah, thank you, Stephanie, for your questions. Brazil, yes, the market has been relatively difficult for us. Oversupply, we noticed more in-field inventory in the first half than probably normal, and that has also affected our sales. We had a sales drop in South America, and America is an important market for BASF also margin-wise, which by and large also explains the shortfall in ag earnings compared to last year, apart from slightly higher fixed costs due to start-ups, one of which you mentioned, which is dicamba. The third quarter is difficult to judge for us.
We only have information obviously on what we have sold and we have exercised a very cautious approach over the course of the second quarter, because we do not want to burden Q3. By and large, this all depends finally on product on the ground, and that is difficult to foresee at this point in time. Dicamba is a topic which affects North America obviously, as dicamba is sold together with a resistant crop from Monsanto, essentially. We are a relatively big producer of dicamba. Actually, it's a BASF product originally. The core issue is here how you apply it, and that is really important. When you go, for instance, to our webpage and look at the crop protection piece, you'll find lots of information, specifically about dicamba.
This goes even to the exact nozzles which need to be used for spraying dicamba to make sure that there is no drift, and drift had been the issue in some states where the neighboring farmers have complained about the damage or perceived damage. This is an ongoing process, and from our point of view, it's awfully important that we continue to help the farmers to apply the product in the right way because that is, at the end of the day, the recipe for success. This is not unheard of. This has been the case also in the past for other products. There is always a little bit of a, let's say, a learning curve going into new applications. Overall, we had good sales in Q1 and Q2, so it's a promising start.
Now it needs to be seen how this drift issue develops, and we are cooperating here fully with all the institutions.
Okay, thank you.
The next question comes from Paul Walsh, Morgan Stanley. Please go ahead.
Yeah, thanks a lot. Morning, Stephanie. Morning, Kurt. Morning, Hans. Two questions, please. First question is around maybe some of the one-offs in the second quarter. Can you quantify the impact of the Libya offshore lifting in Q2, maybe the insurance payment, and whatever the ramp costs are for new production facilities? You talk about new ramps, I think, quite a lot in the press release.
Then my second question really is about you've given robust guidance for the second half, slight increase in EBIT. Can you just talk about how your business is playing out according to what you're seeing right now in the second half? Is that robust second half guidance, chemicals coming down a bit, which, as Andrew pointed out, you've insinuated, and the other business is recovering some of that margin? Just a little bit more insight as to the pathway in the second half and what you're seeing already in the third quarter. Thank you.
Okay, Paul, I take the second question, and Hans will take the first one on the special items. Chemicals, yes, I think we said it, by and large, we expect do not want it, but it might happen, chemicals come down, drift down a little bit, earnings-wise. At the same time, we continue to work very hard to improve the downstream products further on, and this is an ongoing task.
That is very much behind our guidance for the second half. Keeping in mind, I repeated, that the US dollar isn't necessarily helpful, and the oil price also for our oil and gas business is also not necessarily helpful. Overall, raw material prices have been more or less stagnant in Q2, which also means that the price discussions with customers become a little bit more intense, because we want to recover margins, and they will tell us, you know, "What's your problem? We haven't seen raw material prices coming up lately.
Okay.
Paul, Hans, I'm starting with your first question. This was with respect to the offshore lifting in Libya. You asked with respect to the impact there. In the past, we provided a range for these type of liftings. They are in the range of EUR 30 million-EUR 50 million, and expect that to be at the lower end of the range with current oil prices. Please also keep in mind, offshore there is one lifting per year, or there will be only one lifting. We had this last year in Q4, this year in Q2.
Your second question is on the insurance payment. The insurance payment was EUR 100 million as in Q1. This compensates more or less for the impact that we had as a result of the accident in Q2. Third point was on ramp-up costs in Q2. You may remember that we said that we'd see the peak of ramp-up costs in Q3, Q4 of last year. It has come down compared to that. Ramp-up costs in Q2 overall lower than what we had in Q3 and Q4 of last year.
Brilliant. You don't expect further insurance payments in Q3?
We are expecting a further insurance payment in Q3. It remains to be seen whether that will compensate fully for the damages or what's gonna happen, but we'll keep you posted there.
Thank you very much. Very clear.
The next question comes from Tony Jones, Redburn. Please go ahead.
Morning, everybody. Tony Jones in London. Can I ask you about demand first? Could you talk a little bit about the change in the inflection trend for volume, excluding oil and gas between Q1 and Q2? How much of this is due to Easter or restocking? Then secondly, on Performance Products, could you tell us a little bit about the other positives that you see in the past, like mix and cost savings, and whether the normal seasonality for margins to be lower in the second half applies this year? Thank you.
Okay. Thank you, Tony, for your questions. Volume growth first. We had a strong start, something like 8%, if I remember correctly, Q1. Now trending down a little bit. That is not unexpected because we actually said very explicitly, we can't imagine that the volume growth will continue at that pace. You asked about seasonal patterns. We had one influence, which I think is noticeable. We had in Q2 this year 2 working days essentially less than last year. If you average that out, it brings up the growth rate for volume in Q2 by something like 2 percentage points, which means then also Q1 2 percentage points lower, which still means that Q1 was slightly higher than Q2. We don't perceive this as any kind of dramatic downward trend.
It's more or less a normalization from our point of view, especially when you keep in mind that most likely in Q4 and early Q1, we had restocking in some markets, and that certainly has come to an end from our point of view. Seasonality in Performance Products, Functional Materials & Solutions, on average, as always at BASF, the first half is stronger than the second half. I think that still holds true. Our earnings improvement programs, the restructuring in Performance Products, for instance, continues. We wanna save EUR 500 million at the end of 2018, and we are well on track to achieve that number. From our point of view, the restructuring continues. We're taking cost out, but obviously this is overshadowed by the margin development. I think I talked already about the need to improve margins and prices further on.
Thank you very much.
The next question comes from Martin Roediger, Kepler Cheuvreux.
Yes, thanks. I have two questions. First, on politics, you have heard that the US obviously is in the process to increase sanctions against Russia. To which extent could that impact your oil and gas business with Gazprom, especially your activities for the Nord Stream pipeline? Secondly, on coatings, it seems to be that the same prices declined despite the fact that inflation seems to rise. Can you explain that? Is that because of rising competitive pressure, or is that related with your statement about intense price discussions with automotive customers? Thanks.
Hi, Martin. Let me start with the coatings business. We always have intense pricing discussions with our automotive customers. I'm still waiting for the day when they are really flexible on pricing. Seriously, it has played a role, yes, in Q2, on top of the slightly higher raw material costs, which we also have seen in coatings. Prices overall came down a bit, I think by 1%, something like this, which is not a big number, but it's an indication that there's continuous deflation in that business, which we have to overcome or compensate with higher productivity and cost efficiency. Politics, Nord Stream 2. Yes, it's an interesting development, certainly.
I mean, if this really becomes reality and the final wording hasn't been decided yet, and we don't know what the US president is going to do, it would be a new quality of a lack of cooperation between the United States and Europe with regard to the sanctions. Actually, it would mean that the US will promote their own industry at the cost of the European industry. That is not exactly what allies are supposed to do. In that respect, I think the wording and the justification for the current bill is quite revealing, buy, please buy American shale gas and don't buy Russian pipeline gas. I'm not gonna talk now about the technical and economic hurdles to supply Europe via US shale gas and not by pipelines anymore.
The only thing I can say is that I hope that at the end of the day, there will be a intelligent solution, and that the cooperation between Europe and the United States will not derail with regard to this topic. Impact on BASF, as Hans has said in his little speech, we are helping to finance the pipeline. We are not a shareholder anymore, but we continue to support the project because we think the project is a good one. It has good economic justification. Europe needs more gas, and there is need for a second pipeline, definitely. The supply from Russia always has been secure and competitive. We have no problems at all with shale gas imports to Europe. This will enhance competition, and that is always a positive aspect from our point of view. I don't think that you create a fair or level playing field by basically sanctioning one party off the market and then providing the necessary resources yourself. That is not exactly my definition of competition.
Thank you. Thank you.
The next question comes from Jeremy Redenius, Bernstein. Please go ahead.
Hi, good morning. It's Jeremy Redenius from Bernstein. Thanks for taking the questions. Just one question about volumes as well, but a little more looking forward. I'm curious to see what you're seeing so far this summer in Europe with regards to a summer lull. I think we saw basically no slowdown at all last summer in Europe, and I wanted to see what the trends look like this year. Secondly, just more broadly in on the auto industry overall, we had some very strong growth rates last year and early this year. Would like to hear your point of view on if you're seeing that growth continue into the summer more broadly speaking. Thank you very much.
Yes. Hi, Jeremy. Thanks for the question. Summer lull, I don't think we have used that word for many, many years. It used to be very prominent. We always try to divert you by talking about the summer lull and then coming back in September. What we have seen over the last couple of years is essentially a bit of a, I would say, typical seasonal slowdown, no surprise. At this point in time, there is no indication that we have a pronounced, more pronounced slowdown than what we have seen last year. Obviously the real summer in Europe starts on August first, and that is a couple of days ahead. Automotive, yes, we have seen very good growth 2016. Our automotive business has outgrown automotive production.
2016, we had a good first half. However, automotive growth already was slightly lower than last year. You're aware of the discussion about peak sales in North America. For the second half, I think we mirror what most people most likely will tell you that sales will most likely be at last year's level or maybe slightly above last year's level. We don't expect a pronounced demand pull from the automotive industry for the second half.
Sorry. Just to clarify, for the second half of this year is in line with the second half of last year or slightly above? Did I hear correctly?
That is, I cannot tell you whether it will be slightly above or at last year's level, but we don't expect a steep increase of demand above last year's level. It feels like it's, yeah, last year's level and maybe a little bit higher.
Great. Okay. Thank you very much.
The next question comes from Peter Spengler, DZ Bank.
Yeah, good morning, everybody. Thank you for taking my questions. I have two questions. First is on your H2 guidance again. So maybe you could elaborate a little bit on the situation in China. You had very good quarters the last three or four quarters in a row. Excellent. So what do you expect for the second half? Are there any important incentive programs in China running, which may be important for you or for your customer industries? The second question is, could you update us on the TDI plant in Ludwigshafen, the current status and the shipments you expect for the second half, and what's the status in the second quarter? Thank you.
Good morning, Peter. Hans will talk about China. I will try to answer the TDI question, Ludwigshafen. The plant is up and running, as it is supposed to be up and running, obviously. You're aware that we had to install a smaller reactor after the first one had a malfunction late last year. We cannot run at full capacity, which is in the current market environment not a problem because we can compensate by continuing to run our Schwarzheide plant for TDI.
The combination, I think, is actually quite competitive when you look at the results of our monomers or isocyanates business. We are quite pleased with the development. The next step will now be that the relatively small reactor has to be swapped against the newly built larger reactor, and that is supposed to happen late this year or maybe Q1 of next year. That needs to be seen. We continue to be very successful in the market, and we continue to supply from Ludwigshafen.
Okay. Thank you. Thank you.
Yeah, Peter, your question on China, maybe looking back to half one first and using that then as a segue to get to the second half of the year. Overall, what we've experienced in China is a slightly better macro environment than we had expected it going into the year. Overall 6.9% GDP growth, so slightly higher than what we thought we would see. Our business has developed in line with that, so we've seen good volume growth. You also see that reflected when you look at the regional figures, which you find on page 17, I think it is, of our half year report.
You see the significant increase there that we have in the first half of the year in our results in Asia, and that is driven by the good and strong development in China. You asked with respect to incentive programs. There is a small one still in place that has an immediate impact on our business, which is for cars with engines of up to 1.6 liters. There is still the reduced sales tax. It is at a level of 7.5%, where the standard sales tax is at 10%, so there's a bit of a benefit there. That certainly supports car sales also in the year 2017.
If I think about the order book and what I can infer from that for the second half, that looks okay. No issues there. We're all aware of the fact that in fall there will be the Party's Congress. Remains to be seen what kind of an impact that may have. Overall, the short answer is good performance so far and we have no indication for any type of decline.
Next question is from Andreas Heine, MainFirst. Please go ahead.
I have basically also two. One is on the guidance. If I look on what the consensus expects for the second half, if my math is right, then it's roughly an increase of 10%. Looking to the wording, you usually have meaning slight means up to 10%, then I would consider that you see the consensus forecast for this year as probably in line with the guidance, but demanding.
That's the first question, whether this is a fair interpretation. Secondly, on chemicals, this was very strong first half. Would it be possible to outline a little bit what you think it was an over earning in the first half? In general, you profited also from ramping up sizable plants you have invested in in recent years, which should anyhow have increased earnings from 2015, 2016 to 2017. The margins in this particular half are very strong and probably not sustainable. What would you say is a kind of sustainable profitability we could look at for this segment? Thank you.
Yeah. The second question definitely is more difficult to answer than the first one. I don't argue with your interpretation. I think what we have issued is pretty much in line with consensus, and it reflects obviously our current assessment of the demand path going forward. Yes, I would also subscribe to your interpretation. This is demanding. This is by no means lowballing with what we are doing here, especially given the fact that the oil price is relatively weak and that the dollar exchange rate has developed as a headwind and not as a tailwind factor for BASF. Chemicals, I mean, that segment is by definition supposed to be cyclical. That is actually what we have been seeing.
We have been seeing this over many, many years. We had a huge margin disruption in 2012. It took us years to recover some of those margins. In 2017, now we have seen a recovery of margins to a level which most people perceive as relatively high. It needs to be seen from our point of view, what is the definition of high going forward. There had been, in some cases, in some products, clearly, temporary shortages. There had been production outages, technical issues in the competitive environment. That might have helped, and we had an underlying good demand, which is always a prerequisite for healthy margin development.
Overall, we are now, and you mentioned it, we have invested heavily in some of these industries, and we are now harvesting some of the benefits of what we have planted a couple of years ago. I really shy away from any interpretation. Is this now completely out of range? Is this kind of average? Is this a new normal? We will find out. We are kind of cautious for the second half, and I think that is justified. You know BASF very well, and you know that we are always cautious.
Mm-hmm. Thank you.
Thank you. The next question or questions is from Peter Clark, Société Générale.
Yes. Good morning. Thank you. Hello, everyone. It's a quick one, I think, and I know you've tried to address this. It's the Functional Materials & Solutions margin hit and specifically the coatings, because if I... Try and adjust for M&A, and I know it's difficult. I would have thought that division looks like it's down 20% plus. Now, I know you're making clear that raw materials are a big issue here. I'm just wondering if there's anything else. Are there any uplift in structural fixed costs? Are there any charges with Chemetall in there? Because I would have thought something like the Brazil Deco would have been okay year-over-year. We're talking primarily the auto-related coatings in here. Well, there's nothing left of the industrial, I guess. It's the auto-related coating. Just what's happening within that coatings division. That would be great. Thank you.
Yeah. First of all, Peter, the major deviation in Functional Materials & Solutions is Performance Materials because they take the hit from the higher isocyanates and polyol costs, which they have to then translate into higher prices for their systems business. That is difficult, and it takes some time because prices are already relatively high in that respective business. In Coatings, we have had slightly higher costs, fixed costs, which are no special items. That is essentially the IT integration of Chemetall. We perceive this as, or we book this as an ongoing normal expense. Chemetall itself is delivering like clockwork. That is quite amazing to see. Also, they have extremely market-focused organization, and they deliver month-over-month.
They deliver exactly what they promise, and that is completely in line with what we had foreseen and put into our business plans when we made the acquisition. We are very happy with that acquisition. We are now in the midst of the integration effort, which we knew will also take out some cost ultimately. We also go for some growth synergies because we see a nice overlap with the Coatings business. I said early on in Coatings, you have always kind of a rub-off effect from sliding down sales prices, and we have seen this again now.
There is nothing special we would be concerned about. There is certainly the South American Decorative Paints business here involved, and that continues to be weak against the background of a very weak consumer business in general in South America. Last year, final factor maybe, we still have the industrial coatings business as part of that division, and that business has been sold late last year to AkzoNobel. Underlying, we are quite happy with the business development, and we don't see any trend here which would make us concerned.
Okay, thank you.
The next question is from Markus Mayer, Baader Helvea. Please go ahead.
Yeah, good morning. Two questions remaining. First one on Nutrition & Health on this pricing issue in animal nutrition. Maybe can you give us what you see in the market, how long this pricing pressure should last, and also the certain indication on the startup costs, how long they will last in this unit? Secondly, on Pigments, you said that sales was slightly below last year's level. Other competitors posted slightly higher sales. Is this just a regional issue or are there any kind of market share changes from your side? Thank you so much.
I'll start with Pigments, Markus, and then, Hans covers the nutrition and vitamin question. Pigments have developed as planned. We had a pre-sale last year, first half of last year, because that was the point in time when we had rearranged the business and formed a new global business group and also a legal entity for this. Some customers then did a bit of pre-buying because they probably expected that there could be some disruption, which actually was not the case. Yet we compare with a relatively low high base in 2017. Apart from that, the business developed quite nicely. I'm not aware of any market share changes, from negative from our point of view. We have a good portfolio. We continue to take out costs. This re-regrouping and rearranging has delivered the expected result. We are quite happy. Never satisfied, but it's moving in the right direction. Hans?
Okay.
Yeah. On the Markus, on your vitamin question, it happened what we expected to see in Q1 and also in Q2. We saw last year that capacities, in particular in China, were shut in, and this was before the G20 summit. As a result of that, we saw a quick increase. Just give you one example. In vitamin E prices end of Q4 2015 were in a range of EUR 450-EUR 460 per kilogram. Then, middle of last year, right at the time of the summit, they were as high as almost EUR 9 per kilogram. Where we are today is exactly back where we were in Q4 of 2015, price range EUR 450-EUR 460 per kilogram.
Competition is tough. There's even new capacity coming on stream. I guess we'll find ourselves for a while in this situation with low prices, and we're doing everything to stay competitive in this environment with the leading process from a cost perspective that we have. Yes, you're right. Q2 in Nutrition & Health is burdened with the startup cost of the aroma chemical complex in Kuantan, Malaysia.
The startup cost then will last for one year, is this a right assumption?
We'll grow into the capacity, and during that time while we're growing in there, we will see startup costs which hopefully quickly will be more than compensated by income that we generate.
Okay. Okay.
The next question is from Patrick Lambert, Raymond James. Please go ahead.
Hi. Good morning, everybody. Thanks for taking two questions. The first one on oil and gas, just to understand a bit more the 22% volume growth, and Libya was part of it, but I understand there was also some Statoil contract. If you can put some light on the impact in terms of volumes and also in terms of EBIT on that side. The second, a bit more geographical point of view, especially in the second half outlook for Latam, and clearly the margins and EBIT contribution for Latam is mostly in H2. If I look at H1 was pretty down year-over-year already. Your outlook for Latam, I know it's ag, it's coatings, it's SAP acrylic. If you could put your view on how margins can develop in Latam in the second part and what you're doing to protect them? Thanks.
Thank you, Patrick. We don't really provide guidance for regions specifically, but what I like to do is to explain what kind of business environment we are facing in South America. Obviously, Brazil is still difficult. We had expected more positive development for this year. This is delayed also due to political volatility, if you want to use a very polite word here. We have then also seen in the crop protection agriculture industry that markets were relatively difficult. As you know, the second half in South America is more important than the first half in terms of crop protection, the ag business. It needs to be seen how quickly these issues will be sorted out in that specific market, reserve.
On top, I mentioned this before, payment behavior, liquidity pressure in the markets. We hope this will ease off a bit in the second half, but actually too early to say because there are so many variables included here. We continue to be cautious for South America. What I have not touched upon is that obviously we also have an oil and gas business in Argentina, which is developing quite nicely, but that is a segue now for Hans to talk about volume growth.
Yeah. Patrick, your question on volume growth in oil and gas. Happy to provide some color there. Maybe best to start with production. Production in Q2 is 2% above production of Q2 in the prior year. We have the impact of the shipment from Libya that is roughly 600,000 barrels that you have there. Then the major impact is really coming from the gas that we buy from Statoil and then sell on. Picture that as a more or less type of a trading business that we have there, but one that certainly helps us also to provide the natural gas to our sites in northwestern Europe. I hope that helps you to look at the volume. In particular, I think it's important to keep in mind that there is 2% volume growth in production.
Yeah, just follow up. The Statoil contract, was it a Q2 one-off or ongoing developments there?
The Statoil is actually these are contractual deliveries that started in 2016. We've grown into the volumes, and in other words, this is not a one-off.
Okay. Okay.
We have four more analysts in the queue. It's now first Oliver Schwarz, Warburg Research, then Sebastian Bray, Alexander and Martin Evans. Now it's first Oliver Schwarz, Warburg Research. Please go ahead.
Thank you. I'll try to be brief. Looking at your guidance, which you have notched up a bit, you refer to more headwind from FX. You referred to a softer than anticipated oil price and growth in chemical production is basically still expected at 3.4%. What exactly drives the increase in the guidance? What exactly performs or is expected to perform better than anticipated at the Q1 2017 level when you last revisited your guidance? Secondly, back to Brazil, to the agchem business. How do you plan to counter that weak market conditions? Are you buying back inventory? Are you offering, let's say, more generous payment terms? What actually are you doing in Brazil to, let's say, soften the effects of the very difficult market? Thank you.
Yes, Oliver, with actually our guidance question, a very brief and clear answer. I mean, simply, second half has been better than what we had expected at the start of the year. The first half has been better, sorry. Hans just reminds me. That was the reason why we also said in April, we wait until July, after we have seen the results of the first half, and we have obviously outperformed quite a bit also against our own internal expectations. That leads us now to a more positive assessment for the full year 2017.
Brazil, AgChem, there are always buybacks at this point in time, during a season or off-season because you look at in-field inventories, and then you have to assess what is the adequate level of buyback. That is kind of your normal procedure for, I think, every crop protection company. We also had some buybacks. We continue, probably will have some in July as well. That is normal course of business from our point of view. You just provide inventory to the distributors and farmers because they have to be ready to spray, and then you see what really has been applied, and then you do the final booking and accounting, and you might have to take product back.
From our point of view, that was slightly higher than last year, but not completely out of whack with what we have seen in the past, talking about BASF. Payment terms, we try, and this is obviously also kind of competitive information, and I have to be a little bit careful here. We have a general approach that we try to be as cautious as possible, given the volatile business environment.
You are aware that there is something, what is called crop terms out there, so certain standards which have developed in certain markets, and you have to pick the right risk, obviously, and you have to have the right type of, let's say, yeah, cash management, which is called cobrança in Brazil, which means you also have to show up at your customer and remind him or her that they're supposed to pay, which we do. Yeah.
Very clear. Thank you.
The next question is from Sebastian Bray, Berenberg.
Good morning, and thank you for taking my questions. I would have two, please. Just to come back to the oil and gas business, what is a volume growth for the business as a whole that you would be comfortable with for the full year 2017? Also in your agricultural segment, your margins have come down in this area now for basically for a few years consecutive to each other. The 25% long-term EBITDA margin in this target, do you view that more as a point estimate, or do you think in the midterm there is potential upside to that? As in, do you think your margins are going to continue trending down from current levels in Ag in 2018, 2019, mix effects that are, or would you view them as stabilizing or changing in future? Thank you.
We certainly have no intention to trend down our margins in Ag. They have come down a bit, which reflects first of all the difficult situation in many of our markets, and secondly, a certain product mix change away from higher margin fungicides to slightly lower margin herbicide businesses. Going forward, there's a clear intention to improve again, and the 25% has been a good yardstick for our company in the past, and we are sticking to that one. Hans, oil and gas?
Yeah, on the oil and gas, when I look at the business and volume development, frankly, I do not care too much about what's happening with respect to gas sales and or gas that we buy from Statoil and then sell on. I tend to look at what's happening with production and the 2% volume growth that we have there is actually a good figure.
Thank you. Thank you.
Now it's Laurence Alexander from Jefferies. Please go ahead.
No, could you flesh out a little bit the trends you're seeing in human nutrition and in refinish coatings, particularly the decline in sales in refinish coatings, if that was just a raw material pass-through? And secondly, given the outages you had this year, should your pace of maintenance outages over the next six quarters be materially lower than over the last six or so? I mean, have you been able to tuck in other maintenance into this downtime?
Yeah. Thank you, Laurence. Outages, I'm not aware that we have higher outages this year than last year, actually, in terms of what we call planned and unplanned, kind of a nice word, unplanned turnarounds. The numbers are pretty much comparable to last year, and actually unplanned outages have come down quite a bit. So from that point of view, we are operationally in better shape than last year. Refinish, I'm not sure that we guide really at that level of detail, and actually I'm also not aware of any specific development in the Refinish business which is noticeable here. I would have to go back, but actually hasn't really come up. So this is pretty steady. I wouldn't say business as usual, but it's pretty steady business for BASF. It's a very regional business as well.
Markets are very different in Europe and in North America and Asia. Again, I'm not aware of anything specific. Hans, in Human Nutrition or Nutrition?
Boris, on Human Nutrition, what we have, I've already explained the what I would call interesting development in particular with respect to vitamin prices, and there's not only vitamin E, that's also vitamin A for the well-known reasons, the price spike that we've experienced last year. Now both E and A coming back to price levels that we saw prior to this price spike. As mentioned earlier, expectation is that this is the environment that we will operate in going forward.
Thank you.
Thank you.
Now we have the final question from Martin Evans, JP Morgan.
Yeah, thanks. Just one question. In the other line, this release of provisions for long-term incentives that you've put through, can you just explain why you've done that? Is it because you now are less optimistic about the outlook for the longer term and therefore have released these provisions now? Or is it simply some less sinister accounting process? Thanks.
Martin, this is Hans. What we have is, we have a long-term incentive program for management, and that is based primarily on BASF stock price performance. As you've seen during Q2, stock price came down, and as a result of that's been also reflected in the provision for the long-term incentive. If I may say so, unfortunately.
Okay, thanks.
Okay, thanks.
Ladies and gentlemen, this brings us to the end of our conference call. We will report on our third quarter results on October twenty-fourth. Should you have any questions, please do not hesitate to contact a member of the BASF IR team. Thank you for joining us today, and have a nice summer holiday.