Yeah. Thank you, Maggie, and good morning also from my side. I really appreciate that you made the effort to come to Ludwigshafen for two very intense days of investor relations at BASF. We will make sure that this will not just be intense, but also interesting and, in a certain way, delightful, hopefully. We'll also try to make sure that it will not be too long two days. As Maggie said, this is our anniversary year, 150 years. I can assure you, we will not talk about our history. We will briefly give you a review of how we have performed over the last couple of years. Essentially, we will turn to the future and talk about what we plan to do, including innovation.
Innovation will be a very, very important part of our two days here in Ludwigshafen. You probably noticed this is a relatively new building. You can still smell the paint. You might say, "Okay, now I understand where the capital goes." You can rest assured this is the first office building in Ludwigshafen after 28 years. We tore down a couple of buildings from the 19th century and we simply had to provide new places for our workforce here, and this is very, very modern building. From time to time, you need to do something like that. It's nothing we like to do, but sometimes it's unavoidable. Hans and I will guide you through this morning session. We have many slides.
What we try to do is to focus on those topics which are relatively new or really new to you. There are a couple of slides which those of you who follow BASF very closely might know, but this is part of the story, and we'd like to explain where we are coming from. Let me start by talking about what we said back in 2011. That was a year when we came forward with the, what we call We Create Chemistry strategy. We had a couple of, from our point of view, important messages. One was about the chemical environment, our markets, and we essentially said the chemical market grows at about 5%. Actually, back then we said it's 4%, but due to a rebasing effect of China, the number is now 5%.
You know all these factors which drive global growth and mega trends. I'm not going into that in more detail. We also said we want to continue to grow above market as we had done in the past. We want to do this as one company in a very integrated way. This is not just about the famous Verbund. We also want to deliver shareholder value by growing essentially EBITDA faster than sales. We gave specific targets for 2015 and 2020 against the background of 2011, 2010, very, very good year for the chemical industry. We also said we want to continue to pay a substantial dividend, something Maggie already alluded to when she said that already in our founding year, 1865, we paid a dividend.
What is interesting is what we did not say specifically back in 2011, and these are important points. We did talk briefly about shale gas, but frankly, back then, we did not foresee that shale gas would really become a game changer for our industry in North America. The investment spree which we have seen since then is far beyond what we had imagined five, four years ago. We also got a curveball from China in terms of coal versus natural gas. You know that just two years ago, the government decided to make natural gas much more expensive and really to incentivize coal as the most important feedstock for the chemical industry in China.
This is obviously a challenge for many chemical companies, and we also have to think very hard how we can improve our raw material base in China. We were also back in 2011, relatively quiet on Oil & Gas. Actually, we focused almost entirely with our strategy on chemicals. We create chemistry for a sustainable future, and we sidelined Oil & Gas . That was not because we didn't want to talk about it, but essentially because the strategy for Oil & Gas was well developed. If you try to encapsulate it essentially means keep it at about 25% of sales and earnings and CapEx, which we have done over the last couple of years. We were relatively quiet on an M&A. The strategy which we highlighted back then was very much about organic growth, CapEx-driven.
We said there might be some M&A going on, but we did not really foresee the full extent of restructuring, which has become necessary in some of our businesses over the last couple of years. What would we like to achieve here today with you in Ludwigshafen? First of all, we would like to provide you with a deep dive into our business portfolio and essentially to introduce you to our entire management team, not just the management board, but also the division heads, whom you will meet today and tomorrow. We will demonstrate how we drive value. We will specifically talk about innovation also as part of our anniversary year, where we have paid utmost attention to really drive innovation as a key value driver for BASF, and you will get a medium-term outlook.
Let me start with a short review of the chemical industry's landscape. What do we see today? Compared in this case to 2011. Obviously, the world economy has grown a little bit slower than what we had expected. We all know this. However, what is important, the chemical industry continues to grow faster than the global world economy, essentially because the emerging markets have grown faster and will continue to grow faster than the rest of the world. You can also see here that the share of growth coming from the emerging markets is slightly higher than what we had foreseen a couple of years ago. Essentially because the mature economies, above all Europe, have grown very, very slowly over the last four to five years.
What we are saying here is essentially that the growth which we had or the level which we had expected in terms of chemical production in 2015 will only be achieved in 2017. It's still growing nicely but slightly slower. What we have also seen over the last couple of years is obviously, especially during the last 12-24 months, increased volatility in many of our markets. Here you see just a couple of indicators. I know that you follow all of them very, very closely, but obviously this makes it much more difficult in our industry to predict the future. I think it is almost ludicrous to assume that there could be a straight line development going into the future. Some of these developments have taken us by real surprise.
I'm not sure if anybody in this room really had forecasted back in early 2014 that the oil price would drop to below $50, which has happened since then. This is just one factor which we have to take into account. Increased volatility, yet the long-term trends from our point of view are intact and they work for our industry. This is important. You might say, "Yes, we know this," but still it is important to keep this in mind. Looking around the globe in terms of demographic developments, standard of living, technology, there is a huge demand for more and better chemistry. Not just doing the same we have done in the past, but also providing new solutions for the demands of a growing world population.
We have tried to be a bit more precise here, and on this slide you see depicted the growth rates going forward, 2020 and 2025 by regions. Chemical production growth. You can clearly see the emerging markets will continue to grow slightly lower than what we had seen in the past. Also we do not foresee that the mature economies will really see a major pickup in growth. They will continue to grow at about 1%-2%, which is still growth, but it's certainly a different challenge to be competitive in such an environment than to compete in a high-growth chemical emerging market. What is also clear is that the share of emerging markets will continue to grow. Already today it's about 60%.
It will go up to something like 65% in 2020 and almost 70% in 2025. It's quite clear where the growth potential comes from. There are certainly a couple of doubt at this point in time, especially with regard to emerging markets. When you look at the current environment, I'm sure you will ask about this later on, but again, today we try to provide you with a long-term perspective, not just talking about annual volatility or even quarterly volatility. The long-term trend for emerging markets, I think, is a good and positive one. On this slide, you just see a couple of indicators about essentially standard of living, mature countries, developed countries, compared in this case to China and India.
It is obvious that most probably the developing countries, emerging countries, will not achieve the level of mature countries, but if they only improve a bit, this still translates into quite some growth going forward. As part of our anniversary exercise this year, we have, especially for emerging markets, tried to identify these growth opportunities also by having very new, very innovative ways of interacting with the science community, with the public sector, but also with NGOs to really identify what is the next growth engine, for instance, in India, and how can we cope with some of those challenges. Coping with those challenges at the end of the day means you have to provide better chemistry. Providing better chemistry is all about innovation at the end of the day.
Innovation is really at the core of our competitiveness and the competitiveness of the entire industry. When you look at this chart, you can see that the spending for R&D has gone up quite dramatically, and not surprisingly also in China, which is working very hard to get its seat at the table, so to say. You can also see this when you look at the number of patents being registered. China has become extremely aggressive in that sense. You can always talk about quality versus quantity, but what we clearly see, even in emerging markets today, innovation becomes key for the future of our industry.
This translates obviously also into our strategy, meaning we have to have a stronger foothold in this market with our R&D centers, and we have to make sure that we constantly improve our rate of innovation. You will learn more today and tomorrow about this, innovation culture within BASF. Here you can see on just one example, more details to follow, how the chemical industry is adapting to changing needs in society. This is about car manufacturing, obviously, how this develops from just a few kilograms per car into now about 25%, 20% of the material of a car being lightweight materials because we can now enter structural parts of the cars as well. This will continue. This is a huge challenge for the entire industry, but it's, from our point of view, it's a big, big opportunity. Innovation is important.
Will remain important, will become even more core of our activities. When talking about curveballs, it's certainly useful to talk about raw materials, because what we have seen in raw materials is a changing landscape over the last couple of years. I already talked about the shale gas development in North America. What we have done here in this slide is that we have tried to talk about the cost of raw materials by essentially talking about heating value in EUR per gigajoule. So we normalize, standardize the different raw materials or energy sources. What you can clearly see is that obviously in North America, shale gas today is very, very competitive. Please keep in mind these are average numbers, 2010-2014. Back then, the oil price had an average of $102 per barrel.
Today, when you look at the light blue NAFTA bar, you have to take half of that 50%, and then you have the real relation with current prices. In Europe, obviously, we have a slight disadvantage in terms of natural gas. We have known this for many, many years, although this environment is changing as well, and we will be talking about our Oil & Gas business today and tomorrow, but also about what it means for the natural gas markets in Europe. In China, I mentioned coal. Coal is extremely competitive in China cost-wise. It certainly has some challenges in terms of sustainability, CO₂ emissions and water consumptions.
Finally, just as an illustration, everybody talks about bio, also in our industry, which today across the entire chemical industry accounts for something like 7%-8% of raw material usage. Yet even in Brazil, biomass is not really competitive cost-wise. You have to keep that in mind as well. It is a niche application. It will remain a niche application. Some area where BASF is also doing quite some research and quite some investment, with good progress, but we have to be very much aware that our industry will remain a fossil-based industry for many decades to come. Having talked about innovation and raw materials, let's turn to production.
Here you see the situation in Asia and for different products. When you look at the percentage number, these are current utilization rates we are seeing in Asia for major products where BASF also has a position. Clearly these numbers are not where they're supposed to be. That is obvious. The one reason for that is obviously also that there has been much more investment in Asia than most people had expected. BASF has followed what I would describe as a very prudent strategy. We have invested in some of those businesses. For instance, in caprolactam, we have not invested for the last 40 years to make this very clear. Yet we are a competitor there.
We have invested it in technologies and businesses where we perceive a competitive advantage in terms of either cost or access to raw materials and technologies. There are two examples here. The industry's cost curves, which are important to really understand competitiveness in upstream commodity businesses, and we think that we have first-class technology available. Yet it will take a couple of years to absorb these additional capacities in Asia, and this is certainly weighing on our profitability in that part of the world. Globally, utilization rates for these businesses are at about 5%-10% higher.
The sweet spot, frankly, the sweet spot in terms of where you can really make money and profitability kicks in is probably at about 85%-90% for most of those products, which we have seen in the past, which we will again see in the future. We are, to make it very clear, a heavily regulated industry, and we have to comply with many rules and regulations around the globe, and these rules and regulations become stricter as we speak. This certainly is an opportunity in a certain way to provide better technology, but it's also a challenge because you have to make sure that you stay at top of the game wherever you operate.
On this slide, you see a couple of challenges we are seeing right now, and we will go into the consequences later on when we talk about the strategic development of the company. The G7 at their meeting in Germany recently called for the decarbonization of the world economy. I'm not really sure how you're gonna make this because it means you also have to stop breathing, you know, because we're all emitting CO₂.
I'm pretty sure the politicians have no clue how to do it and they're only talking about 2100, so a couple of years' time. Yet when you think about this is unrealistic. Yet it sets expectations in the political and regulatory environment we have to cope with. We are heading towards the COP 21 meeting in Paris in December. You already see now the countries lining up in terms of emission standards. President Xi on his visit to United States talked about introducing now a nationwide system in China as well, cap-and-trade, as of 2017. It's supposed to be operational in 2020. We don't know yet the details. We have to assume that the chemical industry will be affected as well.
That is, from our point of view, not necessarily bad because it would create or would help to create a level playing field around the globe. Right now in Europe, we have a system, which is not really helping our competitiveness. If other countries also step up to the plate and provide similar tools, it would be helpful from our point of view. We have to make sure that then the details of the system really work and effectively drive emission reductions. Chemical industry regulation, it's a hot topic in our industry. In Europe, we have REACH, you know about this. In the United States, we talk about the TSCA reform, which from our point of view is a very sensible and intelligent way to further develop a set of rules which was established more than 30 years ago.
Please keep that in mind. In a certain way, we need this new regulation in the United States. Emerging countries are now making big strides to perform at a higher level of regulation. From our point of view, again, an opportunity because we perceive BASF as being a leader in terms of sustainability and complying with rules and regulations. There's one upside, which is hard to read at this point in time, which is really trade. Everybody talks about, for instance, TTIP. In Germany, there's quite some opposition to that topic.
We sincerely hope that we will get TTIP because it's really good for the industry, not just in terms of reducing tariffs and certain economic opportunities, which at the end of the day, we have to pass on to our customers anyway, but more in terms of harmonizing regulation, avoiding double testing, et cetera. There are additional opportunities where we are working very hard as an industry also to get a better regulatory environment for our industry. With this, I would like to finish my little review of the overall development of our environment. I would now hand over to Hans, who will guide you through a performance review, and then we talk about the strategy going forward. Thank you.
Yeah. Thank you, Kurt. Good morning, ladies and gentlemen.
Also from my side, we heard about regulation and trade on the last slide that Kurt showed. I'll take you on a little journey to growth and earnings review. I start with the last five years and what we've seen in sales growth. You see our sales growing from roughly EUR 60 billion to EUR 74 billion. I've also shown on this slide the components. You see volume growth for the BASF Group in the order of magnitude of 3.5% per annum. You see price increases contributing to growth in the order of magnitude of 2% per annum. Foreign exchange, and that's obviously heavily driven by the developments that we saw towards the end of last year.
That's overall a negative with EUR 1.7 billion equating to round about 1% negative contribution. We have a relatively small contribution that's coming from M&A. In other words, structural changes that we have in the portfolio, that's only 1.1%. If you compare that to what we had in the prior five-year period of time, it is significantly lower, and I'll show that to you in a second. I've also given to you how the BASF Group has developed without our Oil & Gas segment. I've given you on the bottom of the slide the development for the Oil & Gas segment only. You see there in particular strong sales growth in our Oil & Gas segment.
That is primarily driven, the 15.7% that you see there, by our natural gas trading business that has generated significantly higher sales over the years. I already alluded to what happened on the M&A side over the last five years. This is shown on this slide. You see us acquiring sales in the order of magnitude of EUR 4.5 billion. At the same point in time, divesting roughly EUR 7 billion in sales. Now, those of you who remember the prior slide may immediately ask the question, how come that you have a positive structural effect of +1.1% when what you are showing us here is actually -EUR 2.5 billion coming from acquisitions and divestitures?
The answer to that is, in this, we also show in the divestitures, we also show the sales of, non-consolidated activities such as, for example, the divestiture of our 50% participation, in the Styrolution joint venture. If we take these out, the non-consolidated activities, we roughly divested, EUR 3.5 billion in sales, so round about 50% of what you're seeing, on this slide. You see that we didn't sit on our hands. We kept improving the portfolio. We divested activities with, what I would call, a lower strategic fit, activities that overall didn't show the differentiation potential that we would like to see in our businesses.
We kept investing in innovation-driven businesses close to the customer, preferably, in emerging activities such as, for example, Functional Crop Care, the omega-3 activities, enzyme, and also battery materials. You see that we also acquired selected activities in Oil & Gas , and that's predominantly the two transactions that we did with Statoil, one in 2013 and one in 2014.
The strong driver for our growth that we've experienced over the last five years is actually organic growth. Organic growth contributes roughly 60% to the growth that you've seen. That obviously comes with a requirement to feed that growth and support that growth. As you see depicted on this slide, which gives you our capital expenditures over this five-year time period, where in the beginning, 2010 and 2011, we kept spending at a level below depreciation. That then changes in 2012. As we had announced it, we started spending above depreciation, peaking this CapEx program that we announced back in 2011 in the year 2014 with roughly EUR 5.4 billion that we invested in 2014.
Many of the big projects that you are familiar with either starting up in 2014 or in 2015. The acrylics complex, as an example, in Nanjing that we started up last year. This year we'll have the start-up or had the start-up in August of the MDI complex in China. We have the TDI complex starting up here in Ludwigshafen. We have the acrylics complex in Brazil starting up. When you look at it from an overall perspective in what I would call our growth capital, I see three components there. Number one is CapEx, number two is acquisitions, number three is our money that we're spending on research and development.
Research and development over the years, roughly 3% of sales of the BASF Group without Oil & Gas . Why without Oil & Gas ? Because typically, there's not a lot of R&D funding required in the Oil & Gas business. It's roughly 3% on BASF Group sales without Oil & Gas that we're spending there. We look at the CapEx and the acquisition, the growth capital that we're allocating there. That's quite interesting to see. Yes, we stepped up CapEx significantly, but at the same point in time, we reduced our spending on acquisitions. To give you an idea, in the time period 2010 and 2014, we spent below 7% combined on acquisition and CapEx, exactly 6.7%.
When you look at the prior five-year time period, 2005 to 2009, we spent above 7%, in total, 7.1% of sales combined on acquisitions and on CapEx. I alluded to innovations already. As I said, 3% of group sales without Oil & Gas we spend per year, and we have clear expectations with respect to the outcome of that. We set ourself a target for 2015 to reach EUR 10 billion in sales from products and solutions introduced to the market from 2010 on. Over the last five years, you see how this is ramping up, and our forecast clearly shows that we will reach EUR 10 billion in sales in the year 2015.
Now let's look at our earnings growth and development there. I've given you the full picture over the last 15 years. You can see the CAGRs on top. When you look at the year 2001, we started out with EUR 700 million in EBIT. You look at the year 2014, we are at EUR 7.6 billion in EBIT that we generated last year. I've also provided to you the first half of 2015, sorry, where you see us with respect to EBIT being exactly at the level of prior year despite the significant hit that we get in particular in our Oil & Gas segment, resulting from low oil and natural gas prices.
In the first half of 2015, we generated an EBITDA, which is EUR 200 million higher than where we were in the first half of 2014. EBITDA development overall over the time period 2001 to 2014, from EUR 3.7 billion to EUR 11 billion. Now, when I look at this slide, I tend to segment it in three time horizons. The first one, 2001 to 2003, where you see us, let's say in a range of EUR 4 billion-EUR 5 billion in EBITDA. Then the time period 2004 through 2009, where we are in this range of EUR 7 billion-EUR 9 billion in EBITDA.
2010 through 2014, where we're generating EUR 10 billion-EUR 11 billion in EBITDA. A significant improvement in our earnings power over this period of time. What I may also want to mention here is that even in the year 2009, we would have earned our cost of capital were it not for roughly EUR 1 billion in integration costs that we had as a result of the Ciba acquisition. Now a closer look at the years 2010 through 2014. Again, last five years, I mentioned already EUR 10 billion-EUR 11 billion in EBITDA that we're generating. If you look at that period of time, it's quite interesting.
The years 2010 to 2011 clearly stand out. We all remember what happened. We came out of a recession. Demand picked up quickly in that period of time. Margins went up significantly. Why? Because in our industry, not all the capacity could be started up as quickly as it would have been needed to address the increase in demand that we've seen after the weak period in 2009. That was the reason there for generating very, very high margins. You see 2012 in this period of time being the year with the lowest earnings.
This was then also the time where we started to put restructuring and measures in place, in particular, in our Performance Products segment, but also with respect to our Construction Chemicals division. Now this slide I tend to call the business is actually simple slide because when you look at it shows you the following. It shows you that sales increased at 7% per annum over this period of time, fixed costs by only 3%. What this does is it generates nice improvements in your earnings. Rest assured that our push for operational excellence programs will continue going forward. In this period of time, there are a number of operational excellence programs.
The last two, which cover the time period 2008 through 2014, are the programs NEXT and STEP. You're well aware of the fact that STEP will deliver EUR 1.3 billion in EBIT improvement in the year 2015 compared to the starting point 2010, which was the baseline for the STEP program. A slide that you may still be familiar with from our We create chemistry strategy. It shows two things. It shows first our asset profitability measured here as EBITDA on total sales.
You see the nice development that we experienced there from 2001 to 2010, where we started in 2001 with an EBITDA on total assets of 12.7%, and a capital turnover rate of 0.9. In 2010, we were at 17.4%, and a capital turnover rate of 1.1. Now, what has happened over the last five years? BASF keeps its leading position in the chemical industry when it comes to asset profitability, but the asset profitability is slightly weaker in 2014 than what we've seen in 2010.
17.4% in 2010 compared to 2014 with 15.5%. What happened is, we have an increase in our asset base, and when I talk about assets, these are total assets, so entire balance sheet. We've seen an increase, from EUR 60 billion to EUR 71 billion in total assets. These are driven by three key factors. Number one, our CapEx program. I already mentioned, the plants that started up in 2014 and will start up in 2015. Plants not fully loaded, obviously, have a negative impact on your profitability ratios, but that will change going forward.
We also have an increase in our working capital that's related to generating EUR 10 billion more in sales compared to the year 2010. Last but not least, due to the strengthening of the dollar towards the end of 2014, also that pushes up the total assets. During the entire period of time, 2010 through 2014, we generated a significant premium on our cost of capital. The cost of capital line depicted here in yellow, and you see how EBIT during all these years clearly is above the cost of capital line. BASF is known as a strong cash flow generator. This is one of our clear targets.
You see the cash flow development, again over the five-year period of time, 2010 through 2014. Overall, we generated during that period of time an operating cash flow of EUR 35 billion and a total free cash flow of EUR 15 billion. I've also given you the development in the first half of 2015. Since 2014 was a year where we had, as I explained already, our CapEx peaking. We also had some not so favorable working capital influences on our cash flow. But you see that we actively address that in the year 2015. With respect to our financial standing, A+ rating and A1 rating with Standard & Poor's and Moody's.
A low leverage ratio as shown on this slide and operating with around 30%-40% equity ratio and a clear target to maintain a solid A rating. Maggie, in her introduction, already talked about our dividends, dividend policy, total shareholder return. Our dividend policy is actually very easy to remember. We want to increase or at least maintain our dividend. You see the development here again over the five-year period of time. If we think back even to a longer period of time, we delivered on the promise that we're making here each and every year from 2001 on with one exception, and that's the exception of the crisis year 2009 where we had to cut the dividend.
Out of the 15 billion in free cash flow that we generated 2010 through 2014, we paid in total 12 billion in dividends and had a dividend yield in each and every year above 3%. Now, my actually last slide that I wanted to show is the source and use of funds and the developments that we have seen there. First of all, the source of funds. When you look at this slide, you see how we've improved our earnings, as I alluded already in one of the earlier slides, too, significantly.
Contributing in 2003 to 2006 timeframe, 32% to our source of funds, and then in 2011 through 2014, in total, 51% to our source of funds. Let's also take a look at the use of funds. When you look at the use of funds, what you see is that we have CapEx development, first time period, 29% of total funds, and then increasing, and I explained already, you know, the rationale behind that, to 43% of total funds.
At the same point in time, and I mentioned that, also already, you see, and that's depicted in light green, how the growth money that we're allocating to acquisitions has decreased, from 30% to 8% in the 2011 to 2014 timeframe. Last but not least, sort of going back to the prior slide and the dividends that you've seen, we increased dividends from 14% of total funds to 25% of total funds. With that, I thank you for your attention and turn it back to you, Kurt.
Yeah. Thank you, Hans, for your review. What does it all mean? Where do we wanna take this company? Where we gonna take BASF? What I'd like to do is to give you a snapshot about our future strategic direction and to talk about strategic drivers. Many of you, I think most of you already know them. There will be some new information. There will be variations of a theme. There will also be some information which we have known for many years, because from our point of view, there was no need to change. But there are a couple of adaptations. Let's start with the forecast, how our markets from our point of view might develop. The industry will continue to grow. That is good news.
It will grow a little bit slower than what we had envisioned in the past, but this is really just a small variation. The share of emerging markets is coming down a bit. This is reflecting lower growth expectations in emerging markets, but also the expectation that some of the mature markets will finally catch up. There's a but to this development because this looks like a straight line development going into the future. We all know it's difficult to predict the future, and normally it's not going to happen what you expect to happen. You have to be ready for what might be different. Even if you get the trend right, I think we are up to a period of increased volatility and uncertainty. I have depicted here just a couple of points we are all aware of.
We see obviously lower growth dynamics in the emerging markets, and it feels right now, like for instance, the BRICs are running only on one cylinder and not on four cylinders anymore. Even that cylinder, China, is much less powerful than just a couple of years ago. We talked about overcapacities in Asia. We have to be aware that there is a huge investment spree going on in North America. A couple hundred billion being announced in new CapEx. We have to think very hard how this might affect our markets and whether this is an opportunity in terms of feedstock or whether that might be a threat for some of our products. We all know that the oil price has to go up.
This is not sustainable where it is right now because at this current price, the reserve ratio will come down quite dramatically just a few years from now. Yet, nobody knows how fast and when this increase will really start. For the time being, we have to assume that we will live in a world of relatively cheap energy by historic standards. All of this means that we have to make sure that our business models are highly flexible, that we can adapt our asset base as quickly as possible as we have been able to prove in the past, and that we also have to think very hard about the timing of some of our strategic measures in order to get the timing as perfect as possible. I tell you, timing is never perfect from our point of view.
If it's perfect, it's probably a coincidence. A couple of things are fundamental to our company, and this has not changed. This is about our strategic principles. You know them. We have just four, but they are really important, and they are instrumental to how we run our business as one company. We add value as one company. We really try to capture the sustainability trend, not just in being green, but in really providing technologies and solutions for a growing world population. This is about customer intimacy and innovation. More about this today, and it's certainly also about further developing our entire team. What are our priorities going forward? We wanna grow sales and earnings faster than chemical production. Continue to grow sales and earnings faster than chemical production.
We will continue to focus strongly on innovation again because this is the core of our competitiveness. I will briefly talk about acquisitions and capital expenditures, what we plan for the future, and certainly, as Hans already alluded to, operational excellence and the Verbund topic is always at the core of what we are doing. Portfolio pruning will remain very, very important. We want to maintain our industry-leading position in sustainability. Not just because it is a good selling point with the public, but because it really drives our business, and I will give you examples later on, and we will focus on cash generation and cash conversion. Let's start with the Verbund, and we have all known this for 150 years. This is the cornerstone of BASF profitability. It will remain one, I can assure you.
This is not just about product integration, process integration, which you will be able to witness tomorrow when you have a plant tour here in Ludwigshafen. It's also about innovation and technologies. There is one example, actually. This example we depicted before the recent discussion about NOx emissions erupted. We could not foresee that this was going to happen. This is a catalyst which we have invented based on a technology which we acquired from Engelhard in 2006, where Engelhard was not able to really bring this product to the market because there was a lack of expertise of catalyst know-how at the end of the day. Our team was very quickly able to bring everybody to the table. Within a few years, we made this a viable production. We reduced them.
Just to give you an idea, we reduced the number of production steps from initially 13 to six. This copper chabazite catalyst is able to absorb 99% of NOx emissions, and it's being sold very, very successfully around the globe. Verbund will remain important for BASF, and it's a broad and very comprehensive concept how we run our businesses. Let's talk about Oil & Gas , essentially. Why do we have it? First and foremost, it's a very good business. It makes tons of money and also very good free cash flow. There's also a strategic rationale behind it, and we know about it. You know about it. This is really about having what we call a hydrocarbon hedge.
We are pretty much hedged in terms of how many barrels of oil and gas we produce and consume for our chemical production. This is certainly not perfect. Actually, we produce slightly more than we need. Please keep in mind, we produce more natural gas than oil, and obviously in our production, we need more oil-based feedstocks than natural gas. We will continue to look at our portfolio. This is a little bit new slide compared to what you have seen in the past. Essentially, we differentiate here between two types of businesses or business models. One is called specialties and solutions. This is very much about customer intimacy, technology, innovation, where you can really make a difference in the marketplace. Then we have commodities. We now call them differentiated commodities.
I think this sounds much more sophisticated, yet they are still commodities. Essentially, what we're trying to say is we try to be in commodities where we can really have a competitive advantage, raw material-wise, integration, Verbund technology. That is where we want to differentiate ourselves from pure commodity players. Obviously, this portfolio is under development as we speak. There's a constant flow of new ideas, new products, new processes into our product portfolio, but there's also an ongoing commoditization, which is nothing new for our industry. This has happened for 150 years. The rate of commoditization sometimes is faster, sometimes slower. At the end of the day, we have to draw conclusions from that.
If we cannot overcome commoditization by better technology, more innovation, better business models, at the end of the day, this is also about divesting a business and finding a new home. Portfolio pruning is and will remain a very, very important cornerstone of our activities. We have been relatively cautious on acquisitions over the last couple of years. Since 2010, 2011, we have done a few acquisitions. You saw the numbers. Some people might even say we didn't do enough. Yet we had a clear focus on organic growth to bring new capacity around the globe into our business. In terms of acquisitions, the criteria haven't really changed.
These are still relatively high hurdles, especially when you keep in mind that since 2010, the multiples, valuation multiples in the chemical industry have gone up by 40%. The low-hanging fruit, something which is a good strategic fit and financially very, very attractive, the low-hanging fruit are gone. It is much more difficult today, at least from our point of view, to acquire companies which immediately add value, including our integration efforts. Let's talk about CapEx, and I know this is a little bit of concern for some of you because there's a little bit of feeling that maybe BASF has overspent over the last couple of years. What is our philosophy? What really drives our decision-making apart from doing good business models and decent economic studies?
The philosophy is really that we want to continue to grow in emerging markets. Emerging markets, essentially with commodity or differentiated commodity products because it's emerging markets in terms of life cycle are much earlier and they need these products and BASF has something to offer. We also will continue to invest into backward integration in North America to renew our raw material base there, taking essentially advantage of the shale gas situation, which also means whatever we do in North America is improving our profitability. It is not necessarily driving top line because it's really about replacing buy with make based on decent economics, which is an interesting discussion right now because with the oil price coming down to 50 and such, gas price being where it is right now, the economics are less attractive than one or two years ago. We constantly...
Third point, we constantly invest in upgrading our assets here in Europe. Europe is still our home base. We have to keep that in mind. About 50% of our production capacity globally is in Europe, and we have to make sure that that capacity, with everything we are doing here, including portfolio measures, is competitive. You will see examples tomorrow when you have the site tour, for instance, the new TDI plant, which is not just a new TDI plant, it's really the renovation of a core piece of our Ludwigshafen site to make sure that we stay profitable in the future as well. This is very much about differentiated commodity. Then we talk about specially designed solutions, which in terms of number of projects is much higher, in terms of size of projects, individual project, is much lower.
For instance, in construction chemicals, you can build a new mixing station for concrete additives for just a few million. That is not really that important from our point of view, but it is important for the construction chemicals business, and that's the way how they have grown their business over the last couple of years. This is very much about regional expansion and incremental growth for specific products, but we are not talking huge numbers here. In Oil & Gas , we have something at hand which the chemical business actually doesn't offer, which is very, very important in Oil & Gas . We can easily divest assets. It's a give and take almost. We can tailor our CapEx budget in Oil & Gas essentially by farming in and farming out.
Farming out of assets which are relatively old or have a cash flow profile which is not really that attractive. That means this is an area where we can optimize quite nicely, and Hans will talk about this later during our conference. Our goal for Oil & Gas is essentially to keep a reserve to production ratio of about 10 years. Right now, we are slightly above, but this number can fluctuate from time to time. We invested quite a bit. That is true. EUR 5 billion+ last year, EUR 4.5 billion approximately this year. When you look at this slide, you can see what were the projects or what are the projects which came on stream between 2010 and 2011 and 2014.
You can read it yourself, but it's quite a big number of projects around the globe, which we believe will drive future growth and profitability of BASF. There's already a history, you might say, because they are already in operation. Secondly, there are quite a few projects which will come into operation going forward between 2015 and 2017. I would highlight just a few of them. For instance, when you look at Asia, at China, the investments we are doing there very much focus on the automotive industry, catalysts, coatings, lightweight materials. You can rest assured we have many, many customers in China, not just German customers, to make this very clear. We are taking part in the growth of the automotive industry in Asia and in China.
These projects are supposed to generate growth and profits for the next couple of years. That was the underlying idea when we started this investment spree four or five years ago. Yet it looks at this point in time like global economic growth might slow down a little bit. We see increased volatility, but we have to make sure that these capacities are in place. Probably the most prominent example is actually Brazil. In Brazil, five years ago, we made the decision to invest in acrylic acid and superabsorbers. That is the only acrylic acid plant in South America and the only superabsorber plant in South America. There is a market because there's a growing middle class. What we did not foresee four, five years ago is that Brazil would tank, and they are in a big recession right now.
It's very difficult to foresee how long it will take them to really turn around and grow again. Yet for our product, there will be a market and demand, and we are quite confident about the project and its future. It's certainly a little bit more difficult today to achieve our targets than three or four years ago when Brazil was a booming country. You might ask the question, if you had known this four years ago, would we have still invested? The answer is yes, because it was the one and only opportunity to build this market presence in Brazil. There will not be a second acrylic acid plant and superabsorbent plants for many, many years to come, and it will generate growth and earnings for BASF. That is CapEx. We will talk quite a bit about innovation.
I don't want to go into too much detail today because we need some time for discussion as well. As Hans said, roughly 3% of sales, that is just input. What is important is really output efficiency and effectiveness of R&D. We have quite a few tools in place to ensure this, and you will learn more about this tomorrow. Specifically, when Martin Brudermüller will talk about innovation. You will also learn about one example, which is a complete left-field surprise for you. You can be sure about that one, technology which we had not foreseen a couple of years ago to become viable. You will probably also be a little bit surprised when you learn how we drive innovation and talk specifically about what it really means at BASF.
There's one area of innovation which is not really about products and processes, which is very much about business models, which is also important. Everybody talks about Industry 4.0. Industry 4.0 is a little bit of a buzzword. People ask, what does it really mean? We try to capture it here in this slide, which has essentially three components. One is really the development of computer performance, blue line, and the development of telecommunication transmission speed. Essentially, these lines are exponential when you depict them correctly, which means we have today a technology available which just a few years ago was not available. Which also means for a process-driven industry like chemicals, only today we have the technology which we really need to digitalize our industry. We are not an insurance company.
We are not a travel agency. We are not a discrete manufacturer of things sitting somewhere in China or Vietnam. We are a process-driven industry. We need different technologies becoming available. This is the case now, and the big question is now for BASF, what are you doing with this kind of opportunity? There are many opportunities. Some of them are with customers and suppliers, also about new business models. There are also opportunities which are relatively close to what we are doing anyway, technology maintenance, how we run our operations. Just to give you a little bit of a glimpse what it could mean and will mean at BASF, I would like you to watch a short movie about maintenance, not just of the future, but probably already of tomorrow. I hope you got the message.
This is not just predictive maintenance, this is really about speeding up the way how we operate and to be much more precise, to really link information around the globe, to have very deep communities which are digitalized and can share information. This will require, by the way, also quite some changes to how we manage and how we run our operations. This is just one example. We have many, many projects going on as we speak. The results are quite interesting, to put it mildly. We are quite optimistic about that this is a technology, a concept which can really drive not just efficiency, but also make us more competitive in the marketplace. This needs a little bit of imagination.
This is certainly at our 150th birthday, a little bit of a challenge sometimes to imagine that something is completely different in the future. We have teams in place who think exactly along those lines and who challenge existing business models and ask the question, "Can we do this completely differently?" Or, "What would be the worst case?" Or, "What would be the biggest hit to our business, and what would it mean, and what can we do to prevent this to happen and really to turn this around into an advantage for BASF?" This holds true for operations and manufacturing, but it also holds true for interactions with customers and suppliers.
Everything we have seen so far tells me this is probably gaining speed and importance much faster than what we had imagined just a few years ago. Again, based on now finally available technology, which is really mature, fast, and powerful enough to drive these changes. I talked about innovation. Innovation is also driven by our desire to produce more and better products in terms of sustainability. Let's talk about sustainability for a minute. Just to give you the short version of that presentation. We think that BASF is a leader in that field. We pay utmost attention to our sustainability record, what we do, how we do it, how we talk about it. Transparency is key to gain and maintain the trust of the public or stakeholders.
You can see here that we have very challenging targets set for ourselves, and this is also recognized by various organizations around the globe. I know that this is also important for many of you now as investors. I can only tell you that the chemical industry from my point of view is one of the key drivers for providing solutions for many, many issues which we are facing in terms of sustainability. We might have some problems with some parts of our business around the globe in our industry, yet we see enormous progress in that respect also in emerging markets, where more and more companies get very, very serious about their track record in terms of sustainability. Sustainability is not just environmental issues, it's also social issues and also economic performance at the end of the day.
We will set ourselves a couple of new targets, which you can find on this slide. I'm not going into too much detail here. They will be presented again tomorrow. There's one example I like to talk about because this is really new, and this is something new also conceptually, not just a new target, but really the way how we run the business, and this is what we are doing with our customers. The question was always, okay, you can talk about your production environment and your waste streams, et cetera, and CO₂, but what about your products? How sustainable are your products, and what is really good yardstick to make that decision? Our first response would be, everything is obviously legal, highly regulated, so what is the problem?
After thinking about it for a bit, we came to the conclusion, maybe we take a different look at our portfolio and really try to understand to what extent our products really provide an advantage in terms of sustainability. For that reason, we introduced Sustainable Solution Steering, introducing essentially different categories of products. Some of them are supposed, or actually one of them is supposed to be replaced as soon as possible, substituted with better solutions. Some of them really drive a competitive advantage. Those who drive a competitive advantage we call Accelerators. They have a superior sustainability profile. This is measured in very detail. Actually, today they make about 23% of our products. These products have on average higher growth, higher profits, a better sustainability profile.
We have very few products, essentially 0.3% of our portfolio, where you could say, "Yep, maybe that's not really what we want, and is there better substitution available?" We are working very hard then in research to find that substitute. Although it's very important, although obviously that product is approved and can be sold. According to our standards, we think there must be something better to provide to our customers. We want to increase the share of Accelerators from 22% currently to 28%. This covered, by the way, 60,000 products which we analyzed in detail. This tells you also quite a bit about the diligence which we apply here and about our approach to sustainability. We are a science-based, fact-based company.
When we talk about it, we try to make sure that we got the facts right and that this is really something which can be effectively communicated. That is sustainability. Operational excellence. This doesn't sound very strategic, but yet it is important to keep us going and to improve our profitability. We have had several programs over the last couple of years. The last one, STEP, will come in at much higher number than we had expected. We had planned EUR 1 billion. The actual savings improvements will be EUR 1.3 billion until end of this year, so it's time now to come up with the next program. That is now called DRIVE. That is another EUR 1 billion earnings contribution from 2016 to 2018. We are very confident that we will be able to implement this thoroughly and quickly.
We have many projects. This is really supported by not just project ideas, but by real projects which are ongoing as we speak. It will require a certain investment and one-time cost, but obviously these are very, very economic measure. They have very short payback times. With that, I would come to a conclusion with regard to the strategic drivers I was going to talk about. I will now give you a very quick overview of what you have to expect from the different businesses you will have deeper sessions with later today. We'll start with the Chemicals business. Chemicals is, from our point of view, the chemical segment, then Performance Products and solutions and materials. Functional solutions and materials. This is a pretty broad range of products, obviously, but we will continue to drive for Verbund integration.
I think this is important not just in commodities, but also in what some people might call specialties. I have talked about flexible business models, especially in light of the uncertainty and volatility we are facing. We will continue to focus very much on operational excellence, especially in commodities and obviously in specialties and solutions. This is very much about innovation. More about that today. In commodities, it's about integration technology, process technology and raw material, and also some CapEx which we need to support growth, especially in emerging markets. Agricultural Solutions is an interesting business because it is an interesting phase right now. We have had a couple of excellent years for BASF, tremendous growth, very good profitability. You know about our target 25% EBITDA margin on sales, which we have achieved very consistently. We have an excellent pipeline.
We are very proud of what we are doing here. The pipeline will not in every single year produce equally successful products. Sometimes you have one or two years when you have to wait for the next blockbuster. You can rest assured we have quite some projects underway, actives underway, which will materialize and will drive future growth. For that reason, we are optimistic then that we can continue to grow that business. Even having in mind that 2015 in terms of soft commodity prices, agricultural markets, is a little bit more difficult year, and we want to achieve the 25% EBITDA margin, which doesn't mean necessarily in every single year. It's what we prefer to achieve. I can't promise you that we'll do it in every single year. That is Ag.
I'm sure you will have a couple of questions with regard to Ag, given the market events which we have all followed over the last couple of months. Then, Oil & Gas . We want to continue to generate industry-leading profit margins. This is a very attractive business for BASF and actually on average, it produces higher returns than the chemical business. We want to maintain this hydrocarbon hedge which has served us well. In the future, you might say, okay, we now see in 2015 the negative impact because we got a hit in Oil & Gas . Yet that is the reason why you have a hedge in good years and in less attractive years from the Oil & Gas point of view. We will strengthen our E&P activities in core region.
You have followed our recent announcement with Gazprom, where we will invest in, from our point of view, very attractive essentially natural gas fields in Western Siberia, which means we will focus on a couple of key partnerships and we will. When I talked about CapEx, I mentioned this. We will continue to have active portfolio management also to tailor our CapEx to our needs and expectations. We want to grow our production to about 190 million in 2018. At the end of the day, this business is supposed to generate a strong free cash flow.
If I try to summarize this now, coming to an end of the presentation, having talked about the individual parts of our business, now talking about BASF in its entirety, we want to grow, continue to grow faster than the chemical market. That is a challenging target, especially when you have in mind that about 50% of our asset base is still in Europe, and obviously the emerging markets are growing faster than Europe. We have to outperform in some of the emerging markets. I have not said that this is organic growth only, by the way. We've never had this. We always said this is the entire growth of BASF. This also obviously includes in portfolio management M&A. We wanna grow our earnings above sales.
That doesn't sound very exciting at first glance, but when you think about it for a second, it is a challenging target, given the environment we are facing and the volatility we are facing. At the end of the day, we want to improve our return on asset. Hans showed you these three pictures, 2000, 2010, and then 2014, where we are also in terms of capital productivity. We know we can improve, and we will improve going forward. We will continue to be a strong cash provider. Free cash flow is also a very, very important KPI for BASF, and obviously we will not change, in case you expected this to happen, we will not change our dividend policy. We think our dividend policy is a good one to continuously increase dividend.
If there's really a big problem, then to maintain it at its current level. These are challenging targets, growth and earnings-wise, and we are deadly serious about achieving them. Let me summarize. We want to continue to grow. We want to continue to improve our profitability. We have to be very conscious about CapEx. M&A will continuously play a role within BASF, but I explained to you, the market is a little bit more challenging than six or eight years ago. OpEx is always a cornerstone of our success, and we just announced a new program called DrivE. We wanna maintain our industry leading position in terms of sustainability, and we will continuously focus on cash generation and conversion. To sum this up now, during all your presentations, we'll get one final slide, and this slide always has five numbers to take home.
In this case, I took the liberty to add a sixth one, which I will mention. We are a strong cash flow provider. We invest a lot for creating our future. We are very conscious to pay dividends our shareholders expect to see. We will continue to invest heavily in R&D because it's really the cornerstone of our future growth and profitability. We will do so, and that is the sixth number. As one company, this integrated way of running things, always pruning and trying to improve, is really the overall philosophy and approach how we run this company. With this, I'd like to thank you for your attention, and we are now ready to take your questions.
Yes, ladies and gentlemen, thank you, Kurt, and thank you, Hans, for your detailed explanations and comments. Now, ladies and gentlemen, we are moving into the question and answer session. You have made it a little bit tricky for me because many of you selected seats far, far in the back. In case there are still any volunteers to take some seats up front would be super. If not, then I ask for your help in terms of if I don't see you immediately that you please raise your hand again. I would do the following procedure. I would like to start on the left here with maybe two, three questions, then move to the middle and then come to the right. It makes it a little bit easier for me, if you allow.
Please, use the microphone and just as soon as you're called, push the speak button. I would suggest that you please say your name, and then you can ask your question. Once you're finished, please push the speak button again because this turns off your mic. Okay. Are there any volunteers here? I see Andreas Heine on table 21, and I see Markus Mayer, and then I see in the back. Sorry. It's, but you can, you're third one. Fine. Okay. We start with Andreas.
Yeah, two questions, if I may, interlinked to each other. One is on shareholder return and the dividend policy. You outlined that the CapEx will go down, and so far it was said that acquisitions play a role, but only the mid-size ones, not the larger ones. The balance sheet is very strong, and with lower CapEx and your profit targets, you most likely will also increase the free cash flow quite a bit. What does it mean for the payout ratio in the future? Will dividend rise faster than earnings? Are share buybacks on the agenda in the future or not? You stressed several times that M&A is important for BASF and that the growth targets are a combination of organic and acquisition growth, but that acquisitions become more difficult to get to.
Has anything changed in the last year how you look at acquisitions going forward? Do you like to spend more than you have spent in the last four years or in different areas? Thank you.
Yeah. Thank you, Andreas, for your question. Share buybacks, we have the tool available. We got shareholders approval at the last shareholders meeting. It's not a priority at this point in time. We have to find a balance between our rating, which is the debt expectations so far and the equity expectations so far. I think that balance was okay. We will continue to grow our dividend. I think it's a little bit too early to speculate about whether that dividend could go up faster or at a speed which we have seen in the past. We also have to keep in mind the volatile environment we are facing right now.
M&A, the environment is an interesting one because you see quite a few transactions going on at multiples which are quite high from our point of view. I think we will continue to stay very, very disciplined here. We are constantly, as you can imagine, scanning the market for opportunities. We will always have small millions things going on, but that's all I can say at this point in time.
We're moving on to Markus Mayer.
Two questions as well. Firstly, again, coming back to M&A. Previously, before now discovering market theory, you said you'll play an active part of the sector consolidation. Now looks like that this has less become a focus. Might this then become a focus back when the over capacities have fully hit or coming capacities hit and the market absorbs this? Or is this completely out of your cards for the next years? Secondly, yeah, you already elaborated on Asia and Latin America. Maybe you can update us with the current business environment there and what you see and what you expect for the next month.
Markus, thanks for that question. M&A is not out of the cards, so to say. I mean, it will remain a very, very important cornerstone of our strategy going forward. We always have been very, very active, but we also have a certain way of doing it. For instance, we don't talk about it, frankly. You only talk about it when you really think that there is something tangible to communicate. So the scanning goes on, but it's absolutely premature at this point in time to speculate about anything concrete. I mean, this is ongoing M&A activity which we have been seeing. That's the way we do it. Hans will talk about Asia and South America. I think South America, I talked about a little bit.
I mean, this is, I think this is called a recession. Yeah, you can call it a recession.
Yeah. Let me start with South America to confirm it. Very difficult business environment. We haven't seen a change there since you asked about current trading environment in Q3 compared to the situation that we experienced in Q2. Certainly not a change to the better. Asia also, in Q3, I would describe it as more headwind than tailwind. I mean, we all followed the recent developments in China, where growth, based on what we see in our figures, is certainly not at 7% GDP growth. India, on the other hand, has a very positive GDP growth. Seems to be at a level of 7%. You know that we have invested in India quite a bit.
We've started up our activities in Dahej, all still relatively early stages. We certainly hope that will then also contribute on the way going forward. Also, and that in summary, with respect to Asia in Q3, certainly not an easy environment to operate in.
I think the third question was from Daniel Balthasar in the back. Is that correct? Yeah.
It's Laurent from Bank of America and Merrill Lynch.
Okay. Sorry.
The question is actually to try and help me to reconnect slide 10 and slide 18. Slide 10 is the one where you showed production, chemical production growth of 3.9%. Slide 18 is the one where you showed that excluding Oil & Gas , you've had volume growth of 1.5. I'm just wondering if we can try to bridge the 1.5 to the 3.9. Is it the case that the geographical split of BASF is just not favorable, i.e., you've had better growth in Asia-Pacific and you're not there? Let's say that your percentage of sales there is too small. Is it that you've been focusing on value chains that have just had lower growth?
Is it a case that you've not been chasing volume growth that has been at low profitability? In other words, what is going to change from here, so that you can reconnect to the growth of chemical production?
Yeah, let me try to answer that question. Yes, it's certainly right when you look at the figures part of the explanation you gave already. It is our geographical footprint, which we are actively addressing with CapEx that's allocated to emerging markets and there, in particular, to China. China overall in the BASF portfolio stands for roughly EUR 6 billion in sales, which is, if you compare it to the size of the Chinese chemical market, still relatively slow or small, even though we've nicely increased our sales over time in China. Then you have to keep in mind that in certain areas we clearly made decisions that we don't wanna play in, such as, for example, the polyolefins.
If I look at it from the perspective of our strategically relevant market, we look certainly much better than when you compare it to the overall chemical market. I think these are the key explanations. Again, our geographical portfolio we are addressing, that is one of the key reasons
Why we allocated much more to CapEx because that allows us a more focused approach with respect to the emerging markets where it is extremely difficult to do acquisitions because they tend to come with what I occasionally call excess baggage that you don't want to have in your portfolio.
We have the first three questions, and we move to the middle block here. I had Tim Jones with a question. Back there, yeah. Okay. Tim.
Yeah. Thanks. Tim Jones, Deutsche Bank. Maggie, is it we can ask as many questions as we like, I take it?
Only two.
12 questions, please.
Only two, Tim.
Sorry. Only kidding. Just two questions. The first, Dr. Bock, is the same question I asked you actually at the full year results, and you said, "Ask me in September." So just in case you forgot the question, it is your guidance is that margins go up, CapEx comes down. You're at one times net debt to EBITDA. You haven't given any special cash return or anything like that. You've done no big M&A. Should we just assume you gently increase the cash sitting on the balance sheet and try and be more nimble than in the past when it comes to opportunistic M&A? That's the first question.
The second question is more a general question about how do you actually plan for long-term investment now, given the huge volatility, not just in demand in some of your growth markets but also in energy prices? Do you assume a shale gas advantage long term? Where do you see the oil price going now? Do you think China will change its gas price? I'm just sort of thinking in the next five, 10 years, how can you actually plan when your biggest inputs are going up and down 50% quarter to quarter? Thank you.
Yeah. Thank you, Tim. Let's start with CapEx. I mean, that's a real issue. How do you plan for a future where you have such a high degree of volatility? We're seeing it now in the U.S. shale gas environment, where we have some investment plans, obviously, which also, in a certain way, are a bet on the difference between natural gas and oil-based products, to make it very clear. We do these studies very, very carefully. We try to be as diligent as possible. We don't want to get carried away, so we always go back to the drawing board and try to understand, is this still relevant, what we are supposed to believe is going to happen? We are extremely self-critical in that respect.
One way of testing our business case is essentially you work with scenarios, which you can do, but still at the end of the day, then you have to make a decision which scenario you like most. The ideal situation would be that an investment is robust under all scenarios. That would be perfect, but that is most cases not reality. You have to make choices. In one of my slides, I said, we have to be flexible with regard to how we implement the strategic measures, and this was essentially alluding to this high volatility environment. It could mean, for instance, that we postpone an investment and say, "Okay, it's essentially the right thing to do," but what everything we see right now for the next five years is telling us it's not the right point in time.
It might still be a good point in time a little bit later. This is an ongoing analysis. There is not a perfect solution to that. Clearly, with this changing raw material world, it has become much less predictable than at least we believed it to be predictable a couple of years ago. M&A, we always try to be nimble and fast and speedy. Our M&A decisions are not driven by our balance sheet, to make it very clear, and you know this.
I mean, the fact that we have a little bit more cash on our balance sheet or a less debt level wouldn't lead to a board discussion, "Okay, what we are doing now is really a great company to buy, you know, which we have overseen and not seen before." That is not the way how we do a strategic analysis. We have a list of companies we follow very, very closely, as our competitors do as well. We try to find out what are the pros and cons in terms of integration synergies. Are we really the better owner at the end of the day? That is where you see the underlying question. Are we really the better owner of that business? What does BASF bring to the table when we acquire a company?
What would we do differently than the previous owner, which would really then drive value? And then we look at the balance sheet and ask ourselves, "Okay, is the money available?" That is the way we do it. If we really know, this is an assumption. If we really know we would have a period of increased cash generation, as you alluded to, we will find a solution for that. We will not make any foolish decisions in terms of M&A.
Next question comes from the gentleman on table 65. Yeah.
Hi. It's Jeremy Redenius from Bernstein. Couple of questions related to CapEx. The first one, have you done a look back at the capital projects that you've executed over the last, let's say, three to five years, just to understand how well those decisions were made, and have you made any changes to your capital approval process as a result of that look back? Second, just specifically on the methane-to-propylene project in the U.S., what are your latest thoughts about that? Thanks.
Yeah, Jeremy. MTP, we are in the engineering phase. We're doing the detailed engineering, which is quite a lot of effort because it's potentially a big project. As we said before, in 2016, we will look then at the entire situation, which is essentially a set of predictions we have to make about the different product and raw material prices. Then we know in detail the engineering and construction costs, and then we can make up our mind whether we like it or not. At this point in time, it's pure speculation. What I can tell you is, if this current situation continues in terms of relative advantage of oil versus natural gas, it would be a little bit of an uphill battle. Yeah. Then again, you have to make a prediction about the long-term price development of oil.
I hope we will be smarter in that respect, six or 12 months from now. That is the idea. CapEx, we have a very thorough procedure in place where we backtest, so to say, all our projects which have been approved and have been implemented. There are a couple of internal audits, economic audits, where we try to understand whether we hit our economic targets, and if not, what are the reasons for over performance or under performance. This is a very, very thorough process. We try to learn from that. When we fail, and I'm not saying we're doing everything perfect. When we fail, it is probably 90% about misreading the market in terms of timing. Technology, we normally get perfect. Construction, there might be some surprise from time to time.
For instance, we had a situation in Chongqing. You are aware of that, where all of a sudden we had to change our raw material base, but yet the team did an excellent great job in bringing the project on time and on budget, but a little bit delayed because there was this change in the natural gas situation. The most difficult thing to predict, obviously, is the market. I talked about Brazil. Overall, we have not changed our set of KPIs because they work. It's really more about less methodology, about the assumptions you put into the models, and that's something we constantly ask ourselves again and again. Is this still the best case?
I already talked about the scenario planning, which we are doing here as well to test projects against very unfortunate conditions, put it that way, and whether they are still viable under those unfortunate conditions.
There's the next question, I think from Andrew Benson, table 20, and then we have one from table 30.
Yeah. Thanks very much. You talked, I think it was 2012, was it, the HAC about the shift to a higher proportion of your business in solutions, move away from commodities. You talked here about perhaps a faster pace of commoditization. You talked about specific discrete CapEx projects and increasing the proportion of your assets in Asia, rather than shifting, if you like, downstream or towards more solution providers. I wonder if you can just perhaps give an update on that, I suppose. Industrial philosophy is my term certainly.
Secondly, have you looked at whether it would be advantageous for shareholders to spin out Wintershall in total and whether, given the lower price environment and perhaps the need for Oil & Gas consolidation, it might make more sense for those two assets?
Mm-hmm.
to be separated and to deliver value and aggregate to shareholders.
Yes. Let's start with Oil & Gas . I mean, this discussion or this question is not a brand new one. Actually, it has come up for many, many years. There's probably not a single year where not an investment banker comes with a blue book and says, "Okay, how about Oil & Gas ? Can we talk about it?" I know that some of you are a little bit critical with regard to having this relatively broad portfolio, Oil & Gas and chemicals within one company, and you're basically saying, "Okay, I can do this kind of diversification myself if I want to." Yet, I think I have talked about the hydrocarbon hedge, which is important, which works.
I also talked about the way how we run Oil & Gas , which is really ensuring a high rate of return, ensuring strong free cash flow, and we have the ability to do that essentially by tailoring the investment portfolio, the CapEx portfolio, in an ongoing fashion. That has worked very nicely. I think also we have been able to develop that business over the last couple of years quite successfully. You will have a special session on Oil & Gas with much more detail, where we will also talk about the separation now of E&P, exploration and production from gas trading. As you know, we have achieved an agreement with our partner, Gazprom, in that respect. I think we are developing the business in the right direction.
It will be in terms of sales, by the way, then much, much smaller. Today, we have about EUR 12 billion in terms of natural gas assets. Today, it is a, I wouldn't say inflated because it's a trading business, but it's the nature of the business, but it looks bigger actually than it is. It's something we can manage. I think, Wintershall has benefited tremendously of being part of BASF because we provide, financial clout and, political support in getting things done, and this has worked quite nicely. At this point in time, we don't really feel that this business doesn't fit, into BASF. And then you can always ask a question, even if you hypothetically now would say, it could be a good idea, then you have to have a very strong opinion about the oil price.
Right now we are at about $50. As I said before, it's supposed to go up, but if you tell me when it's going up and how fast and how steeply, I would be extremely grateful. Your third question is a complex one. We have a clear strategy to strengthen our downstream businesses, Functional Materials, Solutions, Performance Products. I think we have done so, quite nicely. When you look at Functional Materials and Solutions, I talked about the investment projects, but you will learn much more today and tomorrow about the specifics of that business. It's really all about R&D, customer-driven projects, bring something completely new very often to the customer, and these businesses grow very nicely and really plays to our strengths in R&D. Performance Products, we have a huge diversity of products actually.
It's a big operation. Michael Heinz is here, and he will talk about that business as well. We have acquired a couple of businesses over the course of the last 10 years in that specific field. Some of those businesses have developed very, very nicely. We have achieved tremendous progress. Other businesses need a little bit attention, and you have seen quite some restructuring in that segment of BASF, which is ongoing, which is in a certain way the nature of running a chemical operation because, again, as we speak, products commoditize, there are better owners available and we make a decision to sell. To give you one example, we have a relatively successful pharmaceutical business, custom synthesis essentially, which has developed quite nicely over the last couple of years.
Yet in terms of size, critical size from a group point of view and investor ownership, we came to the conclusion there are better places to put it, and we sell it now to a company, a Swiss company called Siegfried, and we want to close this very soon from now. This has been a good deal for BASF, most probably also for Siegfried and also for the employees of that business. This kind of pruning and adaptation will continuously go on. I think the underlying question in your case is, will it shift really the ratio of differentiated commodities to performance products and functional materials and solutions? This is our goal. You see a certain shift. Yet with a relatively large investment in some of the commodity businesses, these businesses also grow.
They are supposed to grow in emerging markets because they very often are the first phase of going into the market and then building on those more commoditized products. You go down the value chain and establish differentiated products as well, which we do as we speak in Asia, for instance, in terms of catalyst coatings, but also lightweight materials. This is a kind of a life cycle in terms of investment going on.
Mr. Kalliwoda, please.
Yeah. Norbert Kalliwoda. Mr. Bock and Mr. Engel, you told about your operations in Siberia, the gas operations. In Alaska, in North America, there are some new operations or explorations. Are those markets for you interesting for the future, maybe? Thank you.
In Oil & Gas , we have a clear focus from a regional perspective. We are in four core regions plus one core, so-called development region. I'm very happy to explain that in a little bit more detail in our afternoon session. There are no plans to venture into America, i.e., North America, or into Alaska. We also know our limitations. Yeah, we know our strengths, but also our limitations.
Now we're moving to the right block. There is Faitz, Schulte, and then a gentleman in the back who I can see for these three, please. We start with, maybe the gentleman in the back.
Thanks, Maggie. It's Paul Walsh from Morgan Stanley.
Oh, Paul, sorry.
That's all right. No problem. Long way back over here. I had two questions if I can. How should we think about the ramp of the CapEx projects? There's an awful lot coming through the system, 2015, 2016, and probably 2017. I just wondered how we should think about the impact that's gonna have on the business. We talked about a lot about what you're spending your money on, but in terms of the impact that's gonna have on the business, there's some big projects going live now. Do we see an acceleration coming through in some of that investment-driven growth? I guess the two questions are interlinked. To what extent do you feel comfortable or confident that in 2016 you can get back to the sort of overarching targets of growing above chemical production, i.e., above 4% volumetrically with higher margins?
Are those two sort of intrinsically linked? Also noticed there's no real comments around the sort of current 2015 targets, but I assume that means that there's no change to them. Just want to check on that as well. Thank you.
Thanks, Paul. Talking about 2015, at this point in time, we have nothing to say with regard to our expectation for 2015. The market environment is not an easy one, to make it very clear. At this point in time, what we see, nothing new to report. The organic growth, yes, the investments have the purpose to create growth and profitability going forward. I have not said, I did not say that we will achieve this growth rate, growing slightly above market with organic growth only. I mean, this always has been a combination of CapEx plus the net effect of acquisitions and divestitures, and that will be the case for the future as well.
Maybe just you gave some guidance on the costs relating to the ramp-up of projects this year. Is there anything worth flagging for next year as well? Thank you.
This year, as we discussed earlier, this year. Next year, I think it's a little bit too early. I think the easy answer would be we haven't yet started the budgeting process for 2016. We are still focusing on getting things done in 2015, which keeps us busy, frankly. Yeah.
We move to Mr. Schulte, Christian Schulte .
I haven't asked a question, but when you call me up, I can.
Sorry.
I can submit one. Which is, for instance, what cost of carbon do you bake into your investment decisions for the next three to five years?
Thank you for the question. I knew you would have one. I don't think we say that number, actually. It is much higher than what you can read in the papers currently in the European Union Emissions Trading System. The real question with regard to ETS is how the system now will be changed after 2021. That is an ongoing discussion in Europe, which is a real concern to us, because everything we have seen and heard so far means that the technological hurdles will be very difficult to overcome. To be more precise, currently, we have a rate of improvement in terms of energy efficiency of something of 1.7% based on the current goals.
If the new goals, 40%, come into play, this rate of energy efficiency improvement will go up to 2.2%. It doesn't sound a lot, 0.5%, but it's a lot. Industry normally can achieve something like 1%. This is above the rate of technological development, and therefore it could become a real burden for the entire industry. There are lots of questions about carbon leakage, you know, and who is included and not. This is an ongoing discussion with the European Commission. It's a very serious topic for the entire industry.
As I said, when I talked about China, the good news is if really other parts of the world also introduce cap-and-trade, it could create a more level playing field. Although the newest proposal from the European Commission foresees that we would not be able to use the credits which we have, for instance, in other parts of the world for Europe. Although that would make a lot of sense globally, because emissions trading is a global issue and not a regional one.
Thanks for helping me out, Christian. I found out, I think it was Laurence Alexander from Jefferies who wanted to ask a question and then Christian Faitz. Is that correct?
Sure.
Okay.
Can you flesh out a little bit where you see niches or areas of pent-up demand that would drive the re-acceleration later in the decade from the current choppy environment? And also around your comments about absorbing the excess capacity in the next few years, does that imply that by 2017, 2018, you should be making decisions on the next wave of CapEx upcycle? And should we be thinking about that for, like, 2019, 2020?
Second question first. I'm not sure that's the way how we operate. I mean, we look at markets and businesses and try to understand how we are positioned, what is the future outlook, and then we try to understand whether it makes sense to eventually to invest. Very often, investment is not the first choice. It's a debottlenecking, for instance, or just a change in specifications. Investment is not the first and foremost purpose of this company, to make it very clear. This is a tool to achieve growth and profitability. We come to that decision point which you described then maybe in 2016, 2017, but really it's an ongoing discussion and analysis of where are we and what would it mean for our investment budget.
What I can tell you, we have many more proposals on our desk for future investments and CapEx than we as a board would like to see implemented, and also much more than what we think is financially viable. There are many ideas constantly generated within BASF, and part of our job is essentially to say no. Saying no is a very important skill, sometimes. Areas of growth. I think it is helpful when you look at that one slide where we have shown the startups last couple of years and next couple of years, and it clearly highlights where we would like to see growth. This should help us to grow, not just in Asia.
I cannot give you no specifics in terms of which product and in which country, but I'm pretty sure today and tomorrow you will learn more about that when you really do the deep dives into specific businesses and you get a much better feeling what's really behind this kind of summary presentation which we have been given here today. I think this is more helpful than.
Christian Faitz.
Yes, thanks for taking my question. Dr. Bock, you mentioned before Asia is currently running on three cylinders. I believe one of your key customers was running very well on four cylinders in two-liter TDI engines up until last week. Can you comment on, as a first assessment from a top level, how you see if Volkswagen was to lose market share, how that would affect your sales? Would you maybe potentially even benefit in the longer run via I don't know SCR catalysts, et cetera? How exposed are you to Volkswagen? Can we get any feeling to that? Thank you.
You won't be surprised if I tell you that Volkswagen is a big customer of BASF. We are very proud to be their supplier, actually, a strong supplier of them. Whatever we know about the situation, we know from the press, so we don't know more than all of you. We analyze what is going on. What I can tell you here is that the technologies are available to cope also with the U.S. emission standards. That is already existing today, and we have a very good business in catalyst providing these tools. Coincidentally, today I talked about the copper chabazite catalyst which is exactly aiming at NOx reduction, which is a big topic for diesel, as we know. The tools are available.
This is a competitive industry, catalysts. It's a window industry based on innovation. You will also learn more about it today and tomorrow. We have to see whether this translates into a net increased demand for these technologies which we provide. I cannot rule it out, put it that way. Everything else, I think at this point in time is really pure speculation.
I think we can only take maximum of three more questions, so we do one per block. Here I had, I think, Jaideep. Jaideep, then one from the middle section and one from left. We start with Jaideep.
Yeah, thank you. I have two questions. First one is, if I look at the 2010 to 2014 period, your EBITDA growth has been around 2.5%, so below your sales growth, what you have shown. This is a period where oil prices were around $96 as an average, and you've also done very well on the cost savings. Could you give us some color why you're confident that the next five years you will be able to increase EBITDA stronger than sales? That's the first question. Then the second question is really going back to your production targets in Oil & Gas . If you do achieve 190 billion barrels of production in Oil & Gas , could you shed some light on the hydrocarbon hedge?
Does this mean that you'll become a net long oil company?
Maybe I take this second one about the hydrocarbon hedge. I made one observation, which is really about the proportion of natural gas versus oil production. We produce more natural gas than oil. Oil & Gas have different price dynamics. While in our production we are more oil-based than natural gas-based. In that respect, the pure comparison of barrels, million barrels is not perfect. You also have to look at the composition. But your observation is probably right. If you get to the 190 million, we might be slightly long in oil. One way of coping with this is to grow the chemical business as well, faster. Yeah.
Quickly on your question with respect to EBITDA growth in the timeframe 2010 to 2014. As I tried to explain already during my presentation, we've seen these exceptional years, 2010 and 2011, coming out of the recession with very strong earnings growth during that period of time. We've seen following that, beginning in 2012, from a margin perspective, on the chemical side, a let's say, overall weaker environment. We've seen a small downturn there. You have to keep in mind that as a result of the CapEx program, we have slightly higher fixed costs that come with new plants which are not yet fully utilized.
You should see that working itself through the system over the next years.
Any last-minute questions from the web. We have yours.
Yeah.
Yeah.
Quick, specific question on coal-based projects in China. Can you comment big picture why coal-based projects can be a sustainable solution? Why can this concept be applied outside China? Thank you.
That's a great question, actually. It has a sustainability challenge, coal. There's no doubt about it, in terms of CO₂ emissions and water consumption. Yet it's a very economic raw material base, and I think the net for the Chinese government is they push coal. For us, this poses a real dilemma, because we have clear sustainability targets. On the other hand, we also have to make sure that our raw material base in China is competitive. There is technology available which is state-of-the-art, which is better than what we have seen in the past. For instance, Syngas plants based on coal can be quite efficient actually. Syngas you need for large chemical sites in huge quantities.
There might be opportunities to selectively improve our cost base. What I don't foresee is that, to make it very clear actually, that BASF would enter into a completely new coal-based site somewhere in Asia, to have a kind of a Verbund-driven production there. I don't see this happening because the challenges are huge to make this sustainable. On top of that now comes a new from President Xi announced emission trading system where we don't yet have the details, but we have to assume. If they're serious about it, and they create the impression they are serious, that this will also affect the relative advantage of coal versus other raw material sources.
I'm looking to the right-hand side. Okay. It's great.
Just two remarks from my side. Compared to the last strategic update meeting we had, your targets seem to be a tad less quantitative than they were the last time. I guess that's mostly due to the volatility we saw on the underlying and changes in the market. Judging from your target sales growth slightly faster than the global chemical production, given the idle capacity you have on your hands, the CapEx projects coming on stream over the next two years, and your assumption that raw material prices, e.g., the crude oil prices will go up again, it's just a question of time. What is it that holds your sales growth back in comparison to the global chemical production?
Is that only due to the large expansion in the U.S., but are there also other components that I might be missing? Secondly, just quickly on the hydrocarbon hedge, it seems to me, judging from past numbers, that margins in the chemical business and in the Oil & Gas business used to swing in tune. There's not too much on a hedge basis when talking financials. It must be all about the availability of hydrocarbons to your chemicals when talking about hedge. Has there been any case of you're not able to source from third-party sources or suppliers over the last 10 years, so you had to really rely on your own production, so you didn't run into a bottleneck? Thank you.
I think we never said that we need Oil & Gas to really have physical, so physical supply for our chemical production. I think that would be ludicrous. These are very liquid markets, and you can buy the stuff if you need it and wherever you need it. Yet the hydrocarbon hedge has an economic effect, and it is correct in a certain way, it swings in parallel, depending a bit on the underlying reasons for the price developments. If the underlying reason for weak oil price is lack of global demand, essentially meaning lack of global growth, then you see a very parallel development. If the reason for Oil & Gas price decline is simply oversupply, then you see somehow different environment. This year, it's hard to actually say what is the real situation.
It feels like there's oversupply, yet it also feels like there is a little bit of slowdown in overall growth, especially when you talk about emerging markets. Availability of physical has never been an issue, will not be an issue. It's a good business for BASF to run, and Hans will talk about it in more detail later today. The targets, to sum it up here for today, for this session, we think that these targets are very, very challenging to achieve. The growth target is especially challenging because clearly we have a different regional footprint than the global chemical market.
We have more business in a low-growth area, namely Europe, than when you look at the global chemical footprint, market footprint, and that is certainly a challenge, so we need a little bit of improvement in Europe and the United States as well. Asia will grow a little bit slower than in the past. This might help relatively, so to speak. In terms of earnings, we equally think that our target here is maybe not a Punktprognose in good German, but it is directional, and it gives you clearly an understanding what we try to achieve and what is our aspiration level.