Yeah, good morning, ladies and gentlemen, and a big welcome from all of us to the BASF Chemicals Investor Day. We're very pleased that so many of you have found the time today to join us here in London for the event. I'm really proud to say that this is the first Investor Day where we have in excess of 100 attendees. We hope we will provide you with a very interesting and informative day. As the chemical company, as you saw in the film, chemicals are close to our heart. In fact, the chemical segment is the core of our unique Verbund concept and the starting point of many of our integrated value chains. As you also saw in the film, the segment represents nearly a quarter of the group's revenue and about 30% of EBITDA.
BASF produces a broad range of basic chemicals and intermediates for internal as well as for external customers. BASF has a total of six integrated production sites around the world, two in Europe, two in North America, and two in Asia. You will also hear today that we will continue to invest in our production base in the coming years in order to drive our profitable growth. You will hear more about these topics, right after from Kurt and from Wayne, and this afternoon in our breakout sessions with the divisional presidents. This brings me already to our sessions, to our introductions. I'm delighted to introduce to you our speakers this morning.
I would like to start with Kurt Bock, he is BASF's Chairman and Chief Executive Officer, and Wayne Smith, member of the BASF board, and he's responsible for the Chemicals segment. In their keynote presentation, the gentlemen will basically touch upon the trends in the chemical industry, then we will talk about BASF's positioning in the industry, the strategic direction that BASF will be taking with its Chemicals segment, as well as the Capex program for future organic growth. Then Wayne will conclude with the future expectations for sales and EBITDA development of the Chemicals segment. Now, after their presentation, which will be about 45-50 minutes, we will then move into the question and answer session. You can believe me, you will have plenty of time to then ask all your important questions.
We come to our organization after lunch. You see between 11:30 A.M. and 12:30 P.M., there will be lunch break, and then after this we are moving into the breakout sessions, and these are hosted by our presidents of the three divisions of the Chemicals segment. I would also like to introduce them to you already this morning, and they will then introduce themselves to you later this afternoon. I would like to start off with the President of Petrochemicals, Rainer Diercks. Rainer has studied chemistry. He is an honorary professor at the University of Mainz and has been with BASF for already almost 30 years. In 2010, Rainer took over as president of the Chemicals division. Now, ladies and gentlemen, let me turn to Stefano Pigozzi, our President of Monomers. Stefano studied business administration, and he joined BASF in 1987.
Stefano held various positions in operating businesses, and then he became president of the Inorganics division in the year 2009. In 2013, after we made the segment change, Stefano took over the newly formed Monomers division as president. Finally, I would like to introduce to you Sanjeev Gandhi. He is President of our Intermediates division. Sanjeev studied Chemical Engineering at the University of Pune in India, and subsequently also earned a master's degree in Business Administration. Sanjeev started his career at BASF in Intermediates in the year 1993. He has gathered extensive experience in various operations of BASF throughout Asia, and he heads the Intermediates division since the year 2010.
Now, ladies and gentlemen, if you add up all the chemical experience that our three divisional presidents bring to the table, then you come to a total of 76 years, so I think this is quite impressive. In each breakout session you will get an in-depth view of the operations, the strategy, and the prospects of the respective division. The gentleman will highlight the important role this division has within the Verbund. After each 20-minute presentation, you will have the opportunity to ask questions, and the color of your name tag also basically indicates where the session, which you start with and then where you rotate through. Finally, I would like to inform you that we are video and audio recording the presentations and the Q&A sessions.
I would also like to ask you to please turn off your mobile phones because they could interfere with our microphone systems. Before we start, I would like you to take a quick look at our disclosure language, which is now shown on the screen behind me. With this, I wish you, ladies and gentlemen, all a very exciting and interesting day with BASF and turn the presentation over to Kurt.
Yeah. Thank you, Maggie, and welcome also on my side. Pleasure to have you back here at our venue. It almost feels like home now after I think we have had two investor days already here. 2011, we talked about our strategic path forward, We Create Chemistry. Two years ago, we talked about our automotive strategy, very much downstream topic. Last year then we went to Asia, obviously, to talk about our Asian operations. Today, it's about chemicals and chemical segment. You might say, "Okay, this big segment is in BASF upstream, kind of boring. We know you are good at your Verbund. We know what you're doing.
Why should we spend one day talking about the chemical segment?" I think it is important for a couple of reasons I will talk about in a second, but most importantly, the chemical segment is a precondition for the success of BASF. That is very, very important to keep in mind. Everything we do in this chemical segment nurtures the growth of BASF Group also in our downstream operations. What we try to achieve today is to give you a better and broader understanding what that business is all about and how it also contributes to the entire performance of BASF.
What I'm going to do now is to talk very briefly about why we have this chemicals day, and then I try to set the stage talking about the large trends we see within our industry which really drive the further future development of this business within BASF. Let's start with why we talk about chemicals. This you already saw in our little movie. Chemicals is about 23% of our total business in terms of sales. It's, however, 28% of EBITDA, which looks like it has a pretty high profitability. Actually, it has a very good profitability. Please keep in mind, the EUR 17 billion of sales which represent the 23%, that is only the sales to third parties. On top of that comes about EUR 6 billion, EUR 6.5 billion euros of sales, which we transfer, sell to our downstream operations.
If you keep that in mind and then do the math, the chemical segment also would represent about 28% of BASF. It has its fair share of sales, but also a fair share of profitability. It again shows you that we have a very well-balanced overall portfolio. It's important part of BASF in terms of profitability. You know a few of those numbers already. It's a relatively large business, but it's also a relatively complex business when you really drill down further on, because people always focus on very large products. It's always on your mind, and we'll talk about it today as well. Again, we have about 1,500 products. We have about 6,000 customers. We have the 6.5, 6.4 billion of transfer sales to our downstream operations.
We spend about EUR 200 million in R&D, not the biggest share of R&D within BASF, but it's material because it's very much about process development. Again, we have a very strong profitability. We also have a strong underlying cash generation, and the free cash flow of that segment is about EUR 1 billion a year. It is a cyclical business. It's partially driven by supply and demand. We will talk about it, this today as well. What you can see here also is that even after cost of capital, that segment always has contributed to BASF's performance. Even in the downturn of 2009, which was very, very severe, as we all know, we still had a positive EBIT after cost of capital. You also see a slight increase over the years.
The compounded growth rate is something like 7% when you start from 2004 going all the way to 2013. It also has gone through quite a few changes over the last couple of years, and that's the reason why we talk about it today. We had a Chemicals day back in 2008. This was pre-crisis, pre-recession, obviously, when the world was very different from what we see today. Even after that, we had a couple of changes. We moved, for instance, the acrylic acid value chain into the Chemicals segment. We had a big expansion in Nanjing, in our Chinese facility. We had to cope with the changes in the U.S. shale gas market, predominantly changing the feedstock composition of our cracker in Port Arthur.
We changed the segment structure, very important, something you will learn about today a little bit more. We put more money into that business to keep it growing and to make sure that it stays competitive within the overall structure of BASF. Just recently, we had a couple of announcements with regard to shale gas in North America as well. Lots of changes, important, and for that reason, we are here today. I talked about investments briefly. Here you see a few examples. When you look at these pictures, and I'm sure you're aware of all these major investments BASF is doing right now, the question immediately pops up, how about supply and demand? I know this is on the mind of many of you, and we will talk about this today in very detail.
I think this is important because we should avoid general statements about supply-demand in our industry. There is not the one chemical cycle. There are many different cycles and many different situations with regard to supply-demand. For that reason, you also have this afternoon's opportunity to really drill down in the divisional presentations, and I'm sure you will use that opportunity. Nevertheless, this is one of the biggest investment programs we have ever had in the chemical segment, and it is kind of unique because for the there are a couple of first times here. There's a first-time real big chemical investment in South America. We have tried to do this for decades, essentially.
Never could find an entrance, never could find a real good commercial reason to be there until finally we could first secure a raw material supply, propylene, and then started acrylic acid and superabsorbents. Those plants are under construction as we speak. There's another first, which is an isocyanate plant in Ludwigshafen. Isocyanate in Europe, we're pretty much focused on Antwerp, which is a very strong, powerful, profitable site. Nevertheless, we now do TDI in Ludwigshafen. It's a major undertaking because it's not just this TDI plant itself, it's also about the adjacent supporting plants. That is very important because this is all about the competitiveness of Ludwigshafen, which is in the heart of Europe.
I know, again, on the minds of many of you is the question, what is the competitiveness, what is the future of the petrochemical industry in Europe? That is something we can discuss here today as well. You can ask the question, why are you putting so much money into your site in Ludwigshafen? What is the rationale behind that? Lots of investments, important investments for BASF, which will lead to discussions today, I'm quite sure. Those are the reasons why we are here today talking about chemicals. Let me now cover a couple of trends we see in our industry, and I try to focus here on trends which are really important for the upstream chemicals business, chemicals segment.
We will cover this in four categories, global growth, why this is also from a growth point of view an interesting business, then sustainability, what is the contribution, what are the challenges for chemicals, raw material change, very important topic, there's lots of change going on, again, as we speak, and the competitive environment, what is the future of an integrated company like BASF in that chemical space? Let me start by going back where we were three years ago here in this venue again, where we talked about our strategic path forward, We Create Chemistry. We made a couple of statements. We said the chemical industry is going to grow above GDP, and most probably the emerging markets will have a share of about 60% of global industry by 2020. Those two assumptions still hold true from today's point of view.
Actually, when you now look at the 2013 numbers, you see that this is moving pretty much into that direction. A slight deviations, we have seen lower growth in Europe, for instance. We have also slightly lower growth in some emerging countries, but the general picture still holds true. What is important here, we are looking here at the chemical production globally, excluding pharma. What is important is really the blue bar at the bottom because that is really within this chemical universe, the strategically relevant market, which is important for our chemicals segment. You can clearly see this is just about $550 billion out of roughly $3.5 billion in 2013. This really tells you that our chemicals segment is quite a focused operation. We are not everywhere.
We are not doing everything in our chemicals business, but we have a very focused strategy which has been developed over many, many decades and has been implemented, I think, with great discipline, and we are following that path into the future. When people talk about BASF, they always assume we are doing everything. That is not the case. Chemicals is a very focused operation. Growth. You might be surprised that we talk about growth in chemicals segment as well, but actually it's an important driver for our downstream businesses. You see here a couple of applications downstream where the chemical segment plays an important role, driving future growth. This is about substitution of established materials. It's about new chemistry-based solutions. You will learn much more about this later today. Let me continue with sustainability.
It's a buzzword. Everybody has a different perception of what sustainability is all about. From our point of view, it has three dimensions: ecology, society, and making money. You have to balance those three criteria, so those three objectives. There are a couple of challenges with regard to sustainability, which you see depicted here on the slide, energy consumption, very, very important. Climate change has a direct consequence of what we're doing in this segment. European climate discussion going on. Also, the topic of renewable resources comes up very, very often under this headline of green, so-called green chemistry. There's some people out there who basically believe that this industry will move out of fossil-based chemistry very soon. Something we do not subscribe to, as you probably imagine, and we talk about this as well.
Here you see a couple of examples how we contribute as BASF to provide a more sustainable future. I don't wanna go through all of this. Just one interesting example, which is sodium nitrate, which is as a storage capacity for energy, which we're using for the battery business. Sodium nitrate is kind of a commodity type of chemical, but obviously it has applications which are kind of interesting in that there are not too many companies who produce it, very, very effectively. You are aware of lightweight materials in cars. That's a topic we talked about two years ago here when we had our Automotive Day. Polyamide, again, tightly integrated into our chemical segments. The products are now sold within a division which is called Performance Materials, following a reorganization, about roughly two years ago.
Feedstock, an important topic, which is really on our mind right now because there are strategic considerations we have to make, and it's a very interesting time as we got to feedstock. Actually, I don't think it's so interesting because there's a renewable feedstock. Renewables today in our BASF universe account for about 4%-5% of total raw material. The share went up a little bit when we acquired Cognis a couple of years ago because they have palm oil to a certain degree as a feedstock. Industry in general has a slightly higher share, 7%-8%. That share will continue to grow, but from my point of view, it's completely unrealistic to believe that this renewable piece will really change our industry in any dramatic fashion very soon. There are technical reasons, and there are commercial reasons.
We will talk about this today as well. Yet, there are applications where renewables provide very interesting opportunities, and that is something we also pursue, and you will learn about it today as well. I don't want to bother you with the entire value tree of BASF because it's quite complex, but I will show you two conceptual slides basically trying to depict how we see the world and how the raw materials go into the different value chains of BASF. Obviously, in the past, it has been very much oil and natural gas. Those are the two, as we all know, big cornerstones of our industry. That is going to change a little bit because the world is changing, and that is really what is on our mind when we talk about raw material change. It's not renewables, it's really this very picture here.
Because this picture looked different just a few years ago. We are all aware of the shale gas situation in North America. There are always rumors that this is a short-term experience. We don't buy it. We think this is long term, this is going to last, and this is a good opportunity for BASF as well. We also see a situation now in China, which is kind of interesting because China increasingly turns to coal at the base of the chemical industry. That is an interesting challenge because, yes, it is commercially, economically very, very attractive. Economics of coal-based chemistry are very comparable to U.S. Gulf Coast shale gas applications. There are obviously sustainability issues when you think about water consumption and CO2, just to name two. Then there's the Middle East.
Everybody has been talking about the Middle East for the last decades, and it always has been an attractive location to do base chemicals. You're all aware there's one relatively big chemical company which has virtually no presence in the Middle East, and that is BASF. Some people always ask us, "Did you miss a boat? Didn't you see this coming? Why are you not really in the Middle East? Why are you still investing, for instance, in Europe?" That is also something we will discuss today. What is the relative competitive advantage, Middle East versus Europe, and why do we still feel comfortable doing petrochemicals, base chemicals in Western Europe? Finally, South America is very much about renewables. Still, South America imports a large chunk of chemicals from the U.S. The new world looks a little bit different.
There will be coal. There is already coal, for instance, in ammonia in China, very, very important. There will also be renewables. Certain applications will always remain kind of a niche opportunity application, but it will have its share, growing share within our industry. Here you see again the major trends and challenges we are seeing in this world of changing raw material opportunities. Let me conclude by talking quickly about our competitive environment. I think you have seen this slide before. You are very much aware of the situation back in 1980, lots of integrated chemical companies, ranging from oil and gas all the way up to or down to, however you wanna see it, to pharmaceuticals. This has changed obviously. The world looks very, very differently, very different today.
Lots of new players in this current world of 2014 as we speak. It feels like when you look at this now and look at the blue line of BASF, like nothing really has changed. Yet these guys got rid of their pharmaceutical business more than 10 years ago, but they still run oil and gas, which is always something we can discuss. It looks like a monolithic development of BASF. I think this is a complete misperception because behind this kind of static-looking blue line has been a tremendous change within our industry. We stepped out of many, many businesses over the last 10, 15 years. Businesses, some of them where we had a dominant role in the past, where we really were the innovative force, and the best example probably is fertilizers.
The Haber-Bosch process BASF invented, and we had our hundredth anniversary just recently of that technology, which was introduced in Ludwigshafen, and we stepped out of the business, selling it to a Russian company, EuroChem, recently. What I'm trying to say here, the green lines on the right-hand side of that slide, some of those companies now run businesses which were owned by BASF just a few years ago. LyondellBasell, all of our polyolefins are now part of that operation. INEOS, we have a joint venture called Styrolution, where we put our styrene business into a 50-50 joint venture recently. We can talk about this today as well, if you like. The world has changed. I think BASF has adapted.
What we try to do today is to explain to you what is the path forward, what are the strengths and weaknesses of our business, what are the opportunities, and why are we optimistic about the future of our chemical segment and feel good about what we are doing here, and why do we believe that this business is a cornerstone of BASF. It is fundamental for the overall competitiveness of our company. Which leads to one final point, which is also about competitiveness. The question, can you guys really run different business models within one company? Can you really focus entirely on being mean and lean and reliable and low cost and large scale and low feedstock cost in upstream, and at the same time be customer-oriented, customer-focused, innovation-driven, market-oriented, in downstream? Is this really something you can combine within one company?
Clearly, there are different needs in those different businesses, upstream versus downstream. You see here the upstream model, which is very easy to explain. Again, we go into much more detail today. There are obviously different, sometimes overlapping, but largely different needs in our downstream business. We do think that we can combine the business in one company, and we have done this for more than 100 years. Actually, when you look at where BASF started, we started pigments, et cetera, in what we call today downstream operations. These are not new business to BASF. This has always been part of our integrated philosophy based on a very, very strong chemicals segment. That is again, something we can discuss today. What I'll try to do this morning is briefly tell you why chemicals. Secondly, what are the big trends?
I think these trends offer big opportunities, but they also pose some challenges, raw material change to BASF. What we like to do now is to go into our chemical segment in more detail to explain what is it all about, how do we run the business, what is really on our mind going forward. Then in the afternoon, you will have the opportunity to really have deep dives with our divisional presidents, to answer probably not all of your questions, but probably most of your questions, you might have. I sincerely hope that at the end of the day, you will go home with a much better understanding what we are doing, which then should filter into your analysis and recommendations. With that, thanks for your attention. I would turn over to Wayne now, who will really bring the business closer to you.
Thanks a lot.
Okay. Thank you, Kurt, and good morning, everyone. Let me start with a very brief summary of the chemical segment at BASF. It's a set of interconnected businesses which have grown very nicely over time. They've been very profitable, and they form the backbone of these highly integrated value chains that work their way all the way down into the specialty divisions of BASF. What we talk about here today are commodities. These are commodity chemicals, so this means we run our businesses hard, we focus on margin, we focus on cost, and we focus on integration. Very, very simple. At the end of the day, this segment has spun off a tremendous amount of free cash flow for BASF.
Now, what I'd like to do here is start with a few messages, some simple messages that I would like you to take home with you today. These are the core messages I would like you to think about when we talk about BASF Chemicals segment. First and foremost is what I just said. It is a strong earnings and a strong cash contributor. Has been for a long time, will continue to be well into the future. Now, where will we focus? Let me make a couple of simple statements here. We will continue in every possible way to strengthen the Verbund, to find synergies, and to add more value wherever we can do it. Secondly, we will always maintain our high profitability, no question, with a focus on process technologies and very, very strict and stringent cost management.
We will grow, but we will say we will grow externally with the market. What do I mean by with the market? You heard from Kurt, we have a, I think a relatively unique set of portfolio with a unique set of value chains, and some will grow a little bit more than the market over time, some will grow with the market over time, some maybe a little bit less. As a whole, we will grow with the market. What we mean is we do not aspire to, and we do not intend to somehow outrace the market when it comes to commodity chemicals. That's not our mindset. Our mindset is not to try to grab market share and grow rapidly with commodity chemicals.
Our mindset is to grow profitably because our strategic focus with the Chemical segment is to enable and support growth of the whole value chain and the downstream specialty units, and also to enable and support growth of BASF in the emerging markets. Finally, one more message. Shale gas, and when I say shale gas, we mean North American shale gas here, is a real outstanding opportunity for BASF. Okay, let's start with some figures. Simply the sales development over time. You heard from Kurt that we sell externally to the merchant market, but we also transfer quite a bit of product internally to the value chains. You can see both components here. When they add up together, we talk about consolidated sales, external and internal, it's about EUR 23 billion, and it's grown rather rapidly over time.
11% average annual growth over the years. The important component here is the volume growth. You had a little structural change in there. You have some price development, but the volume growth averaged year-on-year about 5%. We point out here in 2012, I think most of you know we had to restate our figures. Two reasons, accounting rule changes with IFRS, we could no longer consolidate 50/50 joint ventures, so this took some sales out of the Chemicals segment. But at the same time, we eliminated our Plastics segment and took the upstream precursors, the commodity precursors, and we put them into Chemicals, so this added some sales back. Here we show a chart that compares our margins, our EBITDA margins, with developing oil price.
Clearly, the world has grown to be able to deal with and adjust to a structural change in oil price over the years. You can see our margin, in terms of the Chemical segment, stays within a certain band and is not really correlated with that. What's correlated with the oil price, of course, is our top line price. The margins, to be very, very clear, and Kurt referenced this, when we talk about commodity chemicals, margins are a function purely of supply and demand of individual product lines. We have many of them, and you have to look at each product line by itself. You can also see here is a little bit of cyclicality. Kurt referenced that. Again, with commodities, you will have some cyclicality.
Our margins today are down a few percentage points from where they were at their all-time peak in 2010 and 2011. Stable earnings contributor. Here we have EBITDA of BASF and the relative contribution of Chemicals, stable, growing over time. As you saw from Kurt's chart as well, from an EBIT after cost of capital standpoint, we have always returned a very, very significant premium, even in the lowest points of the financial crisis. Finally, I think you know BASF, to a certain degree, we can think of it, BASF, as a cash-generating machine. The Chemical segment has been a very nice contributor there. In fact, since 2001, the Chemical segment has spun back into BASF more than EUR 17 billion of free cash flow. This is after Capex development.
If I can summarize, I think historically nice growth, very good profitability, and to a certain degree, a cash engine in the Chemical segment. It's made up of the three divisions. Maggie referred to the three divisions: Petrochemicals, Monomers, and Intermediates. I highly encourage you to stay this afternoon. I hope you can all stay and have a chance to really dig a little bit deeper here. All of the divisions have the commonality of the fact that they sell commodity chemicals, and they're all deeply rooted in the Verbund. Each presentation this afternoon will take a slightly different angle to highlight something a little bit different. Rainer Diercks in Petrochemicals, I mean, this is really the beginning point of the Verbund, and he'll show you how it's developed the structure around the world over the years, how we're building that.
Talk a little bit about a couple of technology examples that are interesting. Stefano Pigozzi will focus more on the cost management and the tremendous efficiency drive that we try to drive in the entire segments of chemicals. Sanjeev Gandhi will highlight a little bit more the innovation activities that we have in the Chemical segment, and even highlight a couple of interesting renewable-based programs that's operating in the Intermediates division. Okay. You know the numbers. It's a big segment, EUR 23 billion of EBIT. Many, many products as you saw in Kurt's slide. The question might be. How do we think about this portfolio? How do we organize it? What's common, what's not?
First and foremost, if we have a product in the Chemical segment at BASF, it has to be interconnected into a profitable and growing value chain. Has to be. All right? Now, the downstream units at the end of the value chain, these tend to be driven by innovation in terms of application, product functionality, close work with the customer to get customized solutions for that customer. Little bit different drivers. Value-based pricing. In the upstream part of the value chain, I mean, we're focused on cost, we're focused on margin, we're focused on high reliability and operations of our plants, capacity utilization. These are the key topics. But we can think about maybe two broad groups. One group in the blue side on the left-hand part of the chart, this is more driven by the downstreams.
In other words, if we were to make an investment in the Chemical segment, it's more likely driven by the downstreams. Take a couple of examples on the chart here. Would we ever build a cracker to supply olefins to the merchant market in BASF? Answer is never. Okay? We would build one to feed the value chains of the whole unit. Would we ever build an acrylic acid plant simply to serve the merchant market? The answer is never. We would build it in conjunction with downstream units with an intent to drive a good portion into the specialty divisions. You can even see there's, in the dotted line portion here, there's some products that never leave the Verbund. They're basically intermediates. These are product names you've seen, but we make them, they feed the chains, and they never.
We don't sell anything to the merchant market. Now, the other side of the chart on the orange shows that we also have some big pieces of the value chains that have interesting markets to sell into, even within the Chemical segment. Within TDI, poly-THF, a whole host of amines businesses, these are within the Chemical segment, but frankly, we might make investments just to serve the merchant markets. We stay interconnected with the Verbund, but the driving force might be the opportunity in the merchant market. Both of these categories have slightly different drivers, but at the end of the day, what binds them together is the need, the absolute need for economic advantage, for competitive cost advantage through interconnections in the Verbund, through process technology and efficiency.
Kurt talked a little bit about this already in terms of how the portfolio and the structure of the Chemical segment has developed over time. This shows a timeline of some of the major investments we've made. If you go back, 1999, 2000, up to maybe 2004, there were some very significant investments made by BASF because we were essentially very much extending our footprint of the Verbund around the world. We built two new Verbunds, one in Kuantan, Malaysia, one in Nanjing, China. We built a new cracker in Port Arthur, Texas. These were some heavy investments. I'll say in the intervening years, we have extended these and developed, and further developed these Verbunds.
We've invested less stringently or less intensively, but really developing those existing Verbunds. Now, at the same time, Kurt also mentioned we have consequently looked at what doesn't fit anymore within BASF, and we've pruned the business, but I would say pruned some pretty big branches. You can see. Okay, we've talked about a long time ago, 1999, PVC, we exited the market. Polyolefins 10 years ago. Kurt mentions both styrenics and fertilizers more recently. What's the common trait here of why we stepped out? When we see a situation where there's a relatively short value chain and we don't see the opportunity from an innovation standpoint to further differentiate either through cost, process technology, or through product differentiation, this doesn't fit for BASF.
If we can't add anything except the raw material advantage to compete, it's time to get out. These were some big decisions. The portfolio has changed. I think at the end of the day what we can say is, at least from my perspective, I think we have a very interesting portfolio, a whole number of growing and profitable and interesting value chains. If you add them up, you say half of our external sales, half of the EUR 17 billion in sales are represented by products that we have the number one position in the world. The other 50%, we have very many leading positions, either on a regional basis, we're on the top one, two or three. Okay. Now, let's talk a little bit more about the Verbund.
I think you all know the concept of the Verbund, this composite of integration and interconnectivity. It's not a new concept, but I'd like to try to bring it a little bit more to life. Very simple statement. This is one of our 4 core strategic principles in BASF. We add value as one company. I can tell you everything we do in BASF is designed to be interconnected, designed to find some synergy or some additional value. Now, maybe if you think about a diversified conglomerate structure in some industry. Broad-based set of industries you serve, broad-based set of markets, many different businesses, decentralized individual strategies all tied together at the top via simply a shareholder structure or some small holding company structure. I can tell you BASF is the exact opposite of that, 180 degrees opposite.
Everything we do, we try to think about how do we interconnect? How do we integrate? You know, we have 112,000 people in the company. I'll tell you, everyone knows this statement, everyone believes this statement, and everybody lives this statement. What we're gonna talk about in a few minutes is the production Verbund. I think this is what you all know. This is easy to visualize. This is many, many production plants hooked together with physical pipes, sharing raw materials, balancing energy, and so on. I think this is clear. The Verbund concept is really more than that within BASF. It's this concept of tying together and finding linkages. If I use an example, the technology Verbund. We spend around about EUR 1.8 billion every year in R&D. We have 10,000 people in R&D.
I mean, can you imagine? 10,000 people in R&D. We have the broadest technology platforms, set of technology platforms in the chemical industry. You would think, in principle, in a perfect world, if we could tie together the minds of these people, can you imagine what we could do? This is not easy, of course, but this is what we aspire to with an organization which is open, transparent, team-based. This is the idea behind the technology Verbund. We also talk about the customer Verbund. With as many big industries we serve, maybe construction, packaging, consumer products, automotive. I think a lot of you had the opportunity to visit our Automotive Day a couple years ago, where we said we serve between EUR 9 billion and EUR 10 billion every year into the automotive industry.
Every single OEM in every single region of the world has a significant relationship with BASF. Catalysts, coatings, polyurethanes, engineering plastics, fuel additives, you name it. We have a deep integration into that industry. I would say from a chemistry standpoint, who is more deeply integrated into this industry than BASF? It's clear. Nobody. What I'm trying to get across, this is the power of the Verbund, and this is why we believe in the concept of an integrated chemical company. Okay, now let's talk about the production Verbund. I throw up a simple chart here, and honestly, this is a simplified block diagram of the production Verbund. The only thing to say is the raw materials are in blue and some of the value chains are in orange.
What you can see and get an appreciation from is everything is interconnected. The products from one plant become the raw materials to another plant. The energy producing facilities are balanced with the energy requiring facilities. All the side streams, the byproducts, the waste streams are captured, they're grabbed, they're put back into the system, they're reutilized, or we turn them into something else that we can sell, and the infrastructure is leveraged. It's a tremendous advantage, and frankly, I think you can get the impression here it's not easily reproducible. What does it look like in real life? This is an aerial shots of Ludwigshafen. If you haven't had the opportunity, I know a lot of you have been to Ludwigshafen. If you haven't had the opportunity and you're interested, please speak with Mrs. Moll , because we love to showcase this because it's powerful, frankly. I mean, you can see the statistics. 2,000 buildings, 250 chemical production sites, almost 3,000 kilometers of pipeline.
I mean, these. I love these statistics. 400 rail cars per day in and out. This is unbelievable. I think if you laid this thing across the Manhattan Island, it goes something like Battery Park almost up to Times Square. This is impressive. We have six of them. We have six of them around the world. They're not static. We keep growing them. We keep finding ways to add more pieces to it, reutilize more streams. We have projects, active projects in every one right now. Nanjing, we just started up an acrylic acid plant, SAP plant, butyl acrylate plant.
We have some amines plants that are under construction in Nanjing. Kuantan, we're building an aroma chemicals value chain. Antwerp butadiene extraction, we're tying into the system there. Ludwigshafen TDI, you heard Kurt talk about it. Freeport, new dispersions plants under construction, an ammonia plant that we'll talk about later today. Geismar's new formic acid plant. These things are always growing. We're building, we're interconnecting and hopefully bringing more value. Okay, everything I've talked about so far is conceptual, but what's the bottom line? Bottom line is the Verbund concept brings cost savings, and it lessens the impact on the environment. Here we show a little bit of a breakdown of some of the cost categories.
If we talk about balancing energy requirements between plants that produce energy and plants that require, we estimate more than EUR 300 million a year are saved. Look at logistics. Unbelievable. More than EUR 600 million a year saved. You talk about a pipe for one plant to a pipe to another plant. Not a truck, not a rail car, not a barge in between, not moving things around the world. An unbelievable savings. Then clearly, infrastructure in many, many ways to be able to leverage another EUR 100 million a year. This doesn't capture all the costs, though. I mean, we transfer EUR 6 billion of products to our sister divisions. There's no marketing cost there for that production. There's no selling cost there. There's no technical service cost there. Working capital is minimized because it's a pipe between two plants. There's a lot more here.
Frankly, with the investments that we're making, the ones that are on the table that are underway, we estimate it could and should add another couple of hundred million EUR of benefit going forward into the Verbund concept. You can also see the impact on the environment. You use less energy, you save a lot of CO2. You save about 6 million tons of CO2 each year through the integration concept. Look at the logistics savings just in Ludwigshafen site, almost 300,000 less truckloads required than if we operated plants independently and had to move things around. I think a very impressive opportunity here. It's worth taking a moment to talk about the concept of flexibility, because sometimes we get these questions from the outside world.
You know, you talk so much about integration, does this mean that somehow you're locked in, and you don't have variables and things that you can move and change? The answer is no. It's a pretty sophisticated system. We have our engineers have built over the years these rather complex, gigantic simulation programs, Verbund simulators. So, for example, if some plant in the middle of the site experiences a temporary downturn in demand, they need to cut it back, what's the implication for everything else? 'Cause it's all interconnected. This is modeled. We drive these programs every week, and we know how to make the adjustments to try to overall optimize the situation.
Maybe the best example was during the financial crisis, 2009, end of 2008, beginning of 2009, where we dramatically took down production in the Verbund. Within a few months, we took the effective cracker capacity in Ludwigshafen down to 20% because we thought of the two sites, Antwerp and Ludwigshafen, as one unit, and we rebalanced through the simulator. We moved more than 900 people around where they weren't needed, where we needed some more help. We went to short time working and such, and we saved several hundred million EUR. I would say, from my perspective, I think BASF reacted faster and more intensively than most other players in the industry, despite the fact that we're all tied together here in a Verbund.
The other question we sometimes get is, "What about the portfolio? Does this integration somehow tie you up a little bit and make you less flexible in terms of changing your portfolio?" Again, I don't think so. We have two recent examples. Kurt mentioned them both, fertilizers and styrenics. So we sold our fertilizer facilities largely based on the Antwerp Verbund. Now we have another company, EuroChem, that operates those facilities. It's still interconnected to the Verbund. It's just through via service agreements. Everything operates the way it used to. Everyone captures the value. Same thing with Styrolution. We have a joint venture with INEOS. Those facilities continue to operate within the Verbund, simply organized via service level agreements. Now, there's a couple of more things of advantage. I mean, I talked about quantifying what we could out of the Verbund.
There's clearly more advantage, but it's hard to put a number on it. I mean, it's just hard. If you talk about supply security, right, supply reliability, when you're piping things between plants, it's a lot better than worrying about a logistical setup in trucks and rail cars and barges and hoping your material shows up on time. Forecasting, demand planning, scheduling, I mean, these are all people that work for BASF. They sit at the same site, and they work together. It works well. It's tightly integrated. Clearly, quality management, it's the same mindset, but there's a lot more clear benefits but a little bit harder to put a number on. Now there's one more thing I wanna point out 'cause I wanna show a couple of examples of these value chains and what we do.
Before we do that, because we talk about integration through all of our divisions, we have to address the question to you, how do we transfer product between the divisions? Right? It's basically transfer pricing. How do we manage this whole process within BASF? It's very, very simple. It's been this way for a long time, since long before I joined the company. It's a clear principle that each division in BASF needs to stand up on its own, needs to show its own profitability, needs to fight in the marketplace like it's a standalone company, so we transfer products that are linked to market prices. Very, very clear philosophy in BASF. We don't want any division to be subsidized by any other division. With that background, let me show you a couple of examples.
First one is our acrylic acid value chain. It's a big chain in BASF. It's simplified here, but it starts with propylene into acrylic acid, some acrylic esters. This is all within the chemical segment. Then we transfer down into the Performance Products segment, ultimately going into coatings, into paints, into fiber bonding, into adhesives, diapers, hygiene products, detergents from surfactants. It's a very broad, say, chain. Each and every step of the chain, we sell some product to the merchant market, and then we transfer some product downstream. It's tightly tied together through tight forecasting, high supply reliability. We're capturing all side streams, we're balancing energy, we're leveraging infrastructure, and at every step of the way, we're grabbing some margin for BASF. You add it all up in this chain, it's round about EUR 1 billion a year of cash flow.
Now I've talked a lot about integration. I don't want to give you the impression that integration is the only thing we think about. At the end of the day, with commodity chemicals, it's your cost position. Integration is a big driver of that, but your cost position is also very, very strongly dependent upon your process technology. Of the EUR 180 million that we spend each year on research in this segment, most of it is spent on process-related research designed to be more efficient, to be more cost-effective. Let me give you an example here, just to give you a flavor for it. We happen to believe we have the best acrylic acid process in the world, the lowest cost process, and I'll show you a figure in a few minutes. Why? We have an outstanding catalyst.
We think the best operating catalyst in the world. Don't forget, we have a catalyst division which is the largest producer of chemical catalysts in the world. This is an incredible advantage to feed this technology back into our segment. We have some downstream purification processes which are clever and better, frankly, than what else is out there. We have outstanding cost position here. I wanna point out, in acrylic acid, it's an important chain, despite the fact that we think we have the leading cost position, we have four research programs underway on new process development routes, including one that's renewable-based. Why? Why are we spending money on four new routes? Because we can never stop. If we don't stay in the low-cost position, over time you lose it. We drive it.
This is what, frankly, where we think our position is, just to give you a flavor of how we think about process technology. On the right here bar, this is indexed, say, benchmark, industry average. This is cost position. You see the middle bar, this is our classical process. Then even our latest process, which is implemented in the two new plants that are starting up soon in Nanjing, China, Camaçari, Brazil, we think even better from a cost standpoint. This afternoon, Rainer Diercks will talk a little bit more about this. In fact, he's gonna show an example of acrylic acid, innovation, which I think is very interesting, that didn't come out of the central R&D group. It was a clever innovation that came out of one of our sites in Malaysia, and it moved quickly around the world and implemented everywhere.
It's an example of the technology for Verbund and us taking advantage of opportunities everywhere. Okay, let's look at another value chain. This is an acetylene value chain. This one I think is interesting because there's a lot of activity within the chemical segment. Chemical segment's in the blue boxes, the downstream specialty divisions in the gray boxes. You can see we start with natural gas here to acetylene and then to a whole chain. Once again, we're selling externally at every step, and we're transferring downstream at every step. We're grabbing margin everywhere. A lot of that margin happens to stay, for this example, in the chemicals segment because everything in blue is considered upstream. At the end of the day, about half a billion EUR of annual cash flow from this chain. Okay.
Let me continue the conversation about connecting our businesses, but with more of a focus downstream. I wanna talk about the downstream, business connections of the chemical segment. Next three slides I show, we're not gonna go through in any detail. I only wanna point out that every division in BASF, every single one is tied into the Verbund in one way or another. Of course, some of them more than others, but every one is critically tied in. Here, Performance Products Division gets about 40% of its raw materials out of the Verbund. Functional Materials and Solutions takes about 30% of the raw materials out of the Verbund, and then we actually take a little bit of capabilities out of catalysts, and we feed them back to the chemical segment, as I described earlier. Even Agricultural Solutions.
Now maybe some of you have an impression that somehow our Agricultural Solutions business is a little bit of a standalone business. It's not. 35% of the raw materials are fed from the Verbund. If you stay this afternoon, you can talk to this with Sanjiv Gandhi and the Intermediates group. They're a critical supplier of very important precursors to the Agricultural Solutions division. This focus on interconnecting, downstream, we can also give a few more examples here. If we take the Ludwigshafen site. Virtually every molecule out of the two crackers there is fed into our downstream value chains. We sell almost nothing out of the cracker to the merchant market. Now this is, I would say, the ultimate of what we strive for at BASF. It's not the same everywhere, but this is what we try to drive towards.
We show an example at the bottom here, Nanjing. In 2006, we were feeding about 60% of our cracker output to downstream value chains, and today it's up to about 75%. That's the driver, that's the concept that we're trying to move forward with. I can give you a few more examples just to bring this home a little bit more strongly, and let me start with the polyurethanes value chain. First, let me give you a little bit of a background on polyurethanes. It's a fantastic market from my perspective. It grows very, very nicely. The MDI-driven polyurethane market grows at 6%-8% globally each and every year. Now why? Because it's a very versatile material that there are new applications that are found each and every year. Who's driving these applications?
It's the downstream specialty divisions that are working with the customers and finding new ways to use it. For us, this would be our, I don't know, we have 35 or 40 system houses around the world that are working on these specialties. We have a thermoplastics polyurethane downstream division or segment. We even have a Cellasto group where we make polyurethane parts and sell them to the auto industry. It's the specialty activities downstream that are growing and driving the growth in this market. Now in the chemical segment, we start with the big precursors, MDI and TDI. Let me give you an example here. MDI, we show the split between what's captive, what we supply downstream, and what we sell to the merchant market.
If I start with the developed regions, the Europe and United States, for example, you can see how much material we push downstream into the chains, grabbing margin at every step of the way. We can make a clear statement here. BASF would never build an MDI plant simply to serve the merchant market. It would always be in conjunction with the concept of driving downstream. Now if we look at the global picture, it's a little bit less concentrated downstream, and that's because in the emerging markets, the specialty units need more time to develop. They're emerging markets. The concept remains the same. We build, we funnel downstream. Same thing with acrylic acid. Okay. You can see in the developed parts of the world, the very high percentage that we funnel downstream.
You can see on a global basis, a little bit less, but for the same exact reasoning. You can even choose an example here of a product line that currently operates in a tough marketplace. This is Caprolactam. Caprolactam is a, it's a commodity precursor that feeds into the polyamide value chain. It happens to be a highly cyclical business. When times are good, and I'll tell you times were good in 2010, 2011, margins were high, made an unbelievable amount of money. Okay? Now we frankly are at the other end of the cycle here, a little bit too much capacity in the world with Caprolactam. But the important point to make here from a BASF standpoint, we're not in the Caprolactam market to sell product to the merchant market.
We're in the business so that we can funnel it downstream into our engineering plastics division, right, with specialty fibers, specialty packaging films, and this is what we're trying to accomplish. You can see in next year we bring on a new polyamide plant in China. This gets even more sort of focused downstream. We have enough caprolactam to serve our chain, to serve our downstream needs. We have no reason to build any more. This is how we try to drive the value chain. Okay. Let's now talk about the overall concept of Capex. Capital expenditures in the chemical industry, I know some people who follow our industry are a little bit concerned. Concerned about the industry. They wonder, is the industry spending too much? Maybe worried about BASF because our capital expenditures have risen in the last couple of years.
What I'd like to do is give you a flavor for how we think about this and how we manage the business and how we stay focused. Here's the BASF Capex plan for the next five years. EUR 20 billion. I mean, maybe one of the first things you take away from this chart is that chemicals and oil and gas represent about half of that. Well, how come? I mean, one simple answer is these are inherently capital-intensive businesses. Maybe just to drive home the point, if we were to build a world-scale acrylic acid plant somewhere in the world, depending on the scope and the location and such, maybe it costs us a couple of hundred million euros. If we were to build a specialty polyurethane system house somewhere in the world, maybe it costs us EUR 5 million. These are different businesses upstream and downstream.
You saw we spend EUR 180 million on research every year in chemicals. This is 10% of BASF's R&D budget. The upstream businesses are inherently more capital-intensive, but they're less research-intensive. The downstream businesses are the opposite. They need the R&D money because they're working with customers to drive new products, new ideas, new applications. It's just a business model difference. Okay, now to the question of what's happening in the chemical industry. Should we be concerned about the Capex development, and how does BASF think about this? First thing I would say is, again, we operate in commodity chemical space. Margins are completely a function of supply and demand. As Kurt mentioned, it's critically important to remember for BASF, this is individual product line supply and demand you have to look at. There is no monolithic chemical cycle.
Doesn't exist. The second thing is when you look at individual product lines or value chains, you have to look and determine are they fundamentally global chains, or are they fundamentally regional from a competitive standpoint. I'll take you through some examples here. Now from a BASF standpoint, I would say three things. One, we are very disciplined and very focused on how we spend our capital. We're focused on chains that ultimately go to the downstream. We follow a very rigorous methodology of looking at our cash cost position as it benchmarks against other players, and we make our decisions on this basis. Let me take you through each of these. When it comes to discipline, we spend about EUR 4 billion a year now. We're at this kind of level in Capex.
The board at BASF has to approve, and when I say approve, it means we have to read and discuss and approve every investment above EUR 25 million that's proposed to BASF. Now, EUR 25 million is a small number in this industry, so I have to read this every month. Kurt Bock, the Chief Executive Officer of the largest chemical company in the world, is reading this every month, and we discuss it, and we decide whether we approve or not. You might say, are we micromanaging capital? I would say, yeah, we're micromanaging capital. That's exactly right. It has to be focused. It has to be disciplined, or we're not gonna do it. Let's take a look at how we have spent some money in this segment as a percentage of sales over the years.
If you go back, and I talked about earlier, 10, 15 years ago, we spent at a very high level because we were dramatically extending our Verbund infrastructure around the world. Kuantan Verbund, Nanjing, new cracker. In the intervening years, we focused more on extending these, sweating these assets, driving them as hard as possible. We now reached a point in the last couple of years where we really do need to extend this Verbund concept and our backbone, the backbone of these value chains, a little bit more. We're not going anywhere near the peaks of the past in terms of percentage of sales, but you can see we've risen up a little bit. Where would we see this going in the next few years? You can see this sort of funnel concept.
Fundamentally, it's peaking and will work its way down, depending on what exact decisions we make in the next few years, but that's directionally where it's going. Also, there's quite a significant percentage of this Capex that we have for the future planned that is driven by profitability improvement. We'll talk about a couple of these. These are the shale gas projects in North America, where we're not putting new volume into the marketplace. We're simply driving our profitability dramatically higher. There's less merchant market risk, less us fighting in the marketplace to grow our volumes, and it's more about profitability improvement. I'll show you some of this. Now I mentioned this concept of benchmarking our cash cost position.
I'd like to take a few minutes to walk you through a couple of examples to give you a flavor for how we think about making decisions because, again, these are commodity chemicals. You have to have a low-cost position. If you're not a low-cost producer, forget about it. What we do with all of our major product lines is we ask our engineers and our chemists to constantly benchmark themselves against everything else that's out there. If I look at this conceptual chart here, we talk about in an industry, this could be a global chart, or it could be a regional chart, depending on the competitive dynamics. This would be plant number one, two, three, four, five in the industry. Maybe there's 20 plants there. Each one represents a new chunk of volumes.
This is volume as you go to the right. The vertical axis is the cash cost position. The cash cost position is going to be a function of, you see, your technology position, your degree of integration, your scale, what's your raw material position, and certainly to a little bit lesser degree, but certainly important, your selling costs, your transportation costs, depending on where you're producing and where you're selling. Our team studied this like crazy. It's not perfect information. Our information is perfect within BASF 'cause we know it. Our information about the outside world is not perfect, but I have to say, we spend a lot of time on this. We generally know the processes that are out there, how people are integrated, what their raw material location and situation is to a pretty good degree.
They're all assumptions, but I think it's pretty good. Now, if you look at this chart, the dotted line that's red, vertical line, represents the market demand. If this line were over here, you would have a balanced market where there's enough plants that just serve the volume that's required in the marketplace, and price would be pretty good. Margins would be pretty good. This particular case, we show conceptually that there are more plants or more supply than there is market demand, so you have a long market. Theoretically, prices could fall all the way to the marginal cost producer level. If that occurred in a very long market, plant number four could not operate cash positive, would have to turn off or continue to lose cash every day.
Plant number three would be cash neutral, and the best positioned plants here would make money. This is the basis of how we try to think about our investments. Let me give you a couple actual examples. Let's start with acrylic acid in China. Now why do I pick this? Because fundamentally, acrylic acid is a regional market. We have world-scale plants in every region of the world. There are some product flows that go between regions across the ocean, but it's relatively minor. It's fundamentally a regional market. Some people would say there's a little bit too much acrylic acid in China. Too many announcements, too many plants. What would I say to that? I would say, unfortunately, I think there's a little bit too much acrylic acid in China. Then you say, "Well, why are you making an investment?
You just started up a plant." Because we took this hard look at this, and we said, with our technology position, with our connection with our Verbund partner, Sinopec, and the raw material position out of that, okay, with the integration of our Verbund, and we benchmark ourselves carefully against everybody else to the best of our ability, we think we are here on the cash cost curve. In a hypothetical situation, in a long, long market, if prices fell all the way to the marginal producer, could we still earn premium on our cost of capital? If the answer is yes, then we build a plant. If the answer is no, forget about it. The answer is yes. Kurt referenced this earlier. We're building a big production facility in Ludwigshafen TDI.
You might say, "Why are you building a big plant in Europe? Europe is not the highest growth region of the world. This is a commodity. What are you doing, BASF?" This is a commodity, and it's been a commodity that's been good to BASF over the years, I have to tell you. You have to be the low-cost producer or you can't survive. If you are the low-cost producer, you can earn a lot of money. It's also fundamentally a regional market. Products do flow across the oceans, but not so much. This is why we are positioned in every region in the world with own producing plants. We're the leader in North America. We're the leader in Asia. We're the leader in China. Our European position was not so good.
We had a small plant in Schwarzheide, Eastern Germany, high cost position, challenged. We said, "If we found the right integration opportunity in Europe, could we consider a new investment?" We looked, frankly, both looked at Antwerp, and we looked at Ludwigshafen. We studied it carefully, and we said, "The Ludwigshafen site offers the perfect opportunity to integrate syngas, chlorine, nitric acid. Everything we need to make TDI is right there and interconnected." We believe when we start this plant up, this is our belief, this will be the low cost TDI plant in Europe. Period. Full stop. At the same time, we will close down our plant in Schwarzheide. We also, not too long ago, acquired a small Polish producer. We just acquired intellectual property and a customer list, and since then they have decided to shut their assets.
Those two consolidation moves add up to about 150,000 tons. This plant will start up on day one, fully loaded or not fully loaded, half loaded without impacting the market one bit. It's a consolidation opportunity, but it's possible because of the low cost position. Maybe just another couple of comments on TDI that I think are interesting because it drives this low cost position concept home. Over the last 10 years, many, many TDI plants have shut down forever. In fact, if you add them all up, it's about 750,000 tons of TDI that has disappeared from the marketplace. Why? Because these were small, subscale, less technologically favorable, less integrated facilities. They couldn't compete. If you read the trade press, you can go back and you can look around and you can add these things up.
There's been several more announcements that people have made. We'll see if it happens, but you could imagine adding up those figures that people have talked about, another 300-500,000 tons of TDI will also shut down in the next several years. I can't discuss why, these are other companies, but you could imagine that cost position is the challenge. Again, this is how we try to think about our investments. Let's even look again at this tough marketplace, Caprolactam. Again, we're at the bottom of the cycle now. It's less profitable than it was two to three years ago. Remember what I said before: We're not in the business to sell to the merchant market. We're in the business to drive it downstream. We have enough.
We don't need to build another plant. We're not gonna build another plant. The plants we have, look at how they're positioned. We're still able to make money in this market, even though the market right now is very long. The orange bar shows that this will get even better when we start up the ammonia plant in Freeport, Texas, in a couple of years. I need to make a disclaimer here now. I gave you three examples to give you a flavor for how we think about this. We cannot give you more. We do this for all our products. Please do not flood Maggie and her team with requests for all of our cash cost curves. We can't do that. Hopefully, this gives you a feel for how we think about life. Okay.
We talked about this chemical segment enabling investments to support downstreams and emerging markets. Here, Kurt already talked about Nanjing and Brazil, Chemicals Brazil, world-scale acrylic acid plants coming on stream, connected with downstream derivative plants, butyl acrylate, superabsorbent polymer. Again, enabling growth in emerging markets. Some more examples. Next year, we come online with a polyamide plant in the Shanghai region, 100,000 tons of polyamide, which will further take our internal caprolactam volumes. Isononanol, this is an oxo alcohol that goes into the plasticizer value chain, and it focuses on the fastest-growing segments and the highest-value segments of the plasticizer value chain. Interesting opportunity with our Verbund partner, Sinopec, to integrate with their refinery, get an outstanding raw material stream. They have great technology. You will see Rainer Diercks will show you a little bit more about this afternoon.
MDI, most of you are familiar with our Chongqing plant that's underway, 400,000 tons of MDI. At the last press conference, first quarter press conference, Hans Engel mentioned that this plant will be a little bit delayed. As you know, or as you may know, last year, the Chinese government rather dramatically and suddenly increased natural gas prices to industry. I would say this is not a total surprise that it came, but it was a surprise in terms of the speed and the intensity. We had to work with our Verbund partner, who's working on the precursors to the MDI plant, and we had to work to optimize and rearrange a little bit to make sure that we fully optimized the site for the new gas framework.
This will take us a little bit longer, and the plan now is to start up in the second quarter of 2015. Chongqing is in western China. It's in a region where there's about 270 million people. It's about the size of the United States in terms of people. MDI in China grows at double digits. It's the fastest growth market in the world for MDI. We will be the first plant in the West as industry develops in the West.
I also need to mention that you will see a new press release coming out very, very soon, but the news is out today, that we have our next MDI opportunity in China, and we have currently a joint venture in the Shanghai region, in the Shanghai Industrial Chemical Park, with Huntsman and two Chinese partners. Currently, it operates 240,000 tons a day, and we will double this to 480,000 tons per day, so an additional 240,000. Our piece, BASF, our equity piece is a third, so about 80,000 tons. It will come on in a couple of years from now, so it will phase in after Chongqing. Frankly, it represents what we think is the last license opportunity to produce isocyanates in the Shanghai region.
We were able to get this last opportunity and build upon it, leverage the current infrastructure that we have, and frankly, I think it's a great opportunity. In Europe, we continue to extend and develop the Verbunds. We talked about TDI and Ludwigshafen. Also, we have a butadiene extraction plant starting up in Antwerp in the third quarter of this year. Now let me finish or lead to the last section, which is talking about the opportunities that we see in North America for shale gas for BASF. Now, Kurt had mentioned earlier, said, "What is BASF's position or view about the shale gas opportunities in North America?" We would say, clearly, we believe this is an outstanding raw material advantage for a couple of components out of shale gas long into the future.
We spent a lot of time studying this, a lot of time thinking about it. The question is for us, given our strategy and the value chains that we're in, what's the best way for us to take advantage of this? This is what we'll talk about. First thing is just the basic introduction. When we talk about shale gas here, I think everyone likely knows this. This was driven by, say, new technology and horizontal drilling and fracking, combined with, say, an environment in the United States or North America in terms of the ability to own the rights to minerals below the land that you own, the fact that there was a tremendous pipeline network in existence, the fact that there's generally enough water. It's a water-intensive process. The fact that there's an incredible entrepreneurial environment in the U.S.
You put all that together with this new technology, and you can see that gas and oil now are fundamentally decoupled in terms of pricing. Now natural gas, when we talk about natural gas, there's really essentially three or four components that you have to think about in it. There's methane, and then there's ethane, propane, butane, which if you group them together they're called natural gas liquids. That's important for us to talk about. Before I do that, though, I wanna answer a question that sometimes we get at BASF. Will these new capacities and the sort of excitement about new chemical capacities in North America somehow threaten or harm or hurt BASF's business in Europe because we have such a European, say, stronghold? The answer is fortunately no, and let me explain why.
The shale gas opportunities in North America will be captured in big commodity products in the first step of the value chain. Why? Because it doesn't make any sense to subsidize further downstream steps in the value chain into specialties. You grab the advantage, you grab the margin, you sell it upstream, you make a lot of money. What you haven't seen in North America are lots of derivative downstream specialty announcements that are connected to this because frankly, again, it doesn't make any sense for anybody to subsidize anything. What you'll have are big volume commodity products with good margins, and it's very, very likely that these volumes will move outside of North America, because if you add up all the announcements, even if only half of these come true, North American market can probably not swallow all of that new capacity.
Some of it will go to South America, Asia, Europe. What will come overseas will be these large volume commodities like polyethylene, polypropylene, right? PVC, methanol. Now, will European chemical industry be influenced? I would say European chemical industry in certain segments, absolutely. They're already being influenced with lower margins. These are polyolefin producers who tend to be not so integrated. Okay? Standalone units. These are methanol players. These are PVC industry, which already suffers in Europe. From BASF standpoint, we're not in these businesses. We're not in PVC, we're not in the polyolefins, and frankly, we're a big methanol buyer in Europe, so if prices come down in Europe, good. Super for BASF. At the end of the day, being an integrated, fully integrated chemical company, we don't see a big impact. Let's come back to the opportunity.
Let's take a minute to talk about, again, the components of shale gas. You can think of it again as four components. The biggest fraction will be methane, and this is the big use for methane will be power generation facilities or some base chemical plants like ammonia and methanol. The next three components, ethane, propane and butane, these would be we call C1, C2, C3, C4, depending on the length of the carbon chain. They can be used as a fuel source. They can be used as an energy source. They can be used as a chemical feedstock. A lot of the cracker conversions in North America, this is what they take, ethane, propane, butane. They replace more expensive naphtha, and these conversions have taken place in the U.S.
Now, one important thing to think about is the relative competitiveness of these products against the rest of the world, because you have the oceans in between. These products are easiest to move around in pipelines. If you have to liquefy them, put them on a ship, it gets pretty expensive. If you liquefy and transport methane or do the same with ethane, this is very expensive. I think you know this. An LNG plant in North America will cost north of $10 billion. There was a number of announced. We'll see how many come ultimately, but at the end of the day, the cost to liquefy and transport and revaporize around about $5, $6, $7 per million MMBtu. There will always be a minimum difference of that price between North America and the rest of the world.
Same thing with ethane. There are some announcements about ethane export capacity that's coming forward, but again, it's expensive, difficult. I don't see it being a game changer in terms of moving it around the world. That means these two components will stay advantaged in North America versus the rest of the world for a long, long time. This is our belief. These would be the two most interesting molecules to invest in from a chemical industry standpoint. Propane and butane, they're relatively easy to move around the world. You can liquefy and remove them. These are fundamental fuels. They're feedstocks. They're used in cooking and heating situations of residential areas. These prices, it's our view, will over time rise up. As more export capacity comes into play in North America, these will become more linked to global oil prices.
This export capacity is rapidly coming. From a BASF standpoint, we would say, "Let's look for opportunities for methane or ethane." The next question becomes, "Well, what do we need?" Ethane is fundamentally used. You can feed it into an ethane cracker and make ethylene, and then make polyethylene or ethylene glycol. We're not in that business. We have an ethylene chain, but we have all the material that we need out of our cracker in Texas to support our future needs. We're fully satisfied. Our opportunity is to invest in the C1 value chain. This is where we see BASF making a move. What you won't see, you won't see us announce a new cracker investment in North America. Okay? We're not gonna make polyethylene. We're not gonna make ethylene glycol.
This would be for us maybe a good NPV, but it would be a completely opportunistic approach. Wouldn't tie into our value chains, wouldn't tie into our strategy. We're not gonna do it. Let's talk about, again, what the opportunity is here for BASF. Maybe some of you don't think of BASF as a United States chemical company. Okay. We're not. We're a European chemical company, but we're the second largest chemical company in the U.S. We have a pretty good presence there. We use a lot of natural gas. We use it as feedstock and energy source. We have big calciners for our catalyst organization that are fueled by natural gas. Our energy bill has already dropped almost in half over the past number of years.
We've also made dramatic changes to our cracker to take advantage of this. I'll talk about it more in a few minutes. As I just mentioned, we will look for opportunities to invest in methane. First situation is our Port Arthur cracker. We've already done a number of things. This is a joint venture with Total. It's been completely converted to be completely flexibilized, so we can take up to 90% of the feed as light feeds from the shale gas opportunity. It's very, very flexible. We can optimize this thing on a daily and a weekly basis with the particular feeds to get the best cost position going forward. We've also expanded it with a 10th furnace, and we have some more ideas going forward. Rainer will talk about this this afternoon.
We've also announced a joint venture with Yara to produce ammonia. You say, "Why do you need ammonia at BASF?" Well, ammonia for us is a critical precursor for a number of big chains: Caprolactam, isocyanates, our amines business. We buy a lot of ammonia in North America. We said, "Well, how can we take advantage of this cheap methane to really dramatically lower our cost position?" The answer is yes. We said, "Yeah, but to build a world scale plant to get the best possible cost position, do we need all of that ammonia?" The answer is no. We said, "Why don't we try to find a partner where we can match our needs?" We found a partner, Yara, one of the largest merchant traders of ammonia in the world.
We said, "Why don't we work together?" BASF takes everything we need internally in the JV, and Yara takes everything else, and they do what they do in the merchant market. It's a perfect fit. We're gonna build this in Freeport, Texas, 750,000-ton plant. We have also decided on the technology here. You can make ammonia fundamentally from methane, and this is what we've been talking about. In this particular case, there happens to be plenty of hydrogen, plenty of nitrogen in the Freeport area, and we've decided to start the process from that standpoint. We cut the Capex almost in half because we don't need a syngas plant at the front end of it.
We have pricing on the streams that are linked to the methane pricing. It's a perfect fit. At the end of the day, we don't take any merchant market risk because we're not selling ammonia to the marketplace. We're just dramatically improving our profitability. Same exact concept that we've recently announced a few weeks ago regarding propylene. Propylene, we are a big buyer of propylene in North America. We've always been a big buyer of propylene. The question is: Can we take advantage of the shale gas economics to dramatically improve our profitability? Where do we use propylene? We talked about acrylic acid, oxoalcohols, polyols. These go into the polyurethanes chain. We get propylene from our cracker now in Texas, okay? Again, we still buy a lot of it.
We say, "What can we do to improve our profitability?" We announced that we are fully interested in investing in a methanol to propylene plant and methanol to methanol to propylene plant, which will cover all of our internal needs. We will stop buying propylene externally. We'll make it ourselves, and we'll make it at world-class pricing or costs. Now, you might ask: "Why did you choose the methanol to propylene concept? We haven't heard anybody else talk about a methanol to propylene concept. We hear about propylene dehydrogenation units. We hear about other concepts. Why are you doing this, BASF?" Let me start by saying we took our time here to think this through. When we talk about making major investments, we're talking about putting steel and concrete in the ground for the next 30 or 40 years.
We wanna make sure we get it right. We wanna make sure we make the best decision for BASF. Since this is a make or buy decision, we don't have to rush. We make sure we try to get this thing right. Propane dehydrogenation, we own and operate a plant in Spain. We know it. We know how it works. We know the cost position. We know the technology. In fact, we even developed our own PDH technology in conjunction with Linde a few years ago. I can tell you, we fully understand the cost structure and the technology associated with PDH. We own and operate a metathesis plant in Texas, which is another way of producing propylene. We understand exactly how this works because we own and operate one. Clearly, cracker, same thing.
At the end of the day, we saw this methanol to propylene concept is giving us the best opportunity to have the lowest cost position, period. Flat out. Two reasons. One, the process, and secondly, our view of how methanol prices will develop over time and how propylene prices might develop over time, and what's the relative spread there against propane versus propylene margins. This is our view of the world. As I mentioned before, we fundamentally believe methanol will stay advantaged for a long, long, long, long time. I would say we worry a little bit that propane will rise over time because it's much easier to export, and this is the concept. We think this approach could lead to around about 20% cost improvement over next best technology, and that's total cost.
If we just look at variable cost, far superior to any other approach to making propylene. This is the concept behind our MTP announcement. At the end of the day, shale gas in North America is a great opportunity. We take a slightly different view because of our value chain setup here. We're talking about backward integrating into Verbund molecules to drive our profitability up. Our positions are very good in North America. Great opportunity for BASF. Let me finalize or finish by simply giving you an outlook for where we're heading in the chemicals unit. I mentioned that by and large, we add up all our value chains, we should generally grow with the market in this 4%-5% range.
We would see our EBITDA from the chemical segment growing faster, 6%, 7.5% a year, working its way up to EUR 4.5 billion-EUR 5 billion, this kind of directional placeholder by the end of this decade. Just the takeaways again. Please, this is what we're focused on. We're focused on profitability. We're focused on generally growing with the market. We're focused on strategically supporting the downstreams and enabling in the emerging markets. We just talked about what a wonderful opportunity shale gas is for BASF. Thank you very much. Appreciate your time and your patience this morning. I think now we have an opportunity for Q&A, and Kurt will join.
Yeah, thank you, Kurt, and thank you, Wayne, for your interesting presentations. I have seen the audience has watched you very closely, and I think there was a lot of new information that is certainly very helpful to you. We are now moving into the question and answer session. Before we start, I would like to introduce to you we have my colleagues, Amber and Anna, who are in the middle, bringing you the microphones. On the outside, Ingo and Florian. I would say we start with the right-hand side. I would request that you'd maximum ask two questions because otherwise it's a little hard to remember. Then we move on, and you can always requeue again.
I would say then we start immediately with Neil Tyler, and then we come to Jeremy Redenius, and then I have Paul Walsh here. Okay, good.
Thank you. Neil Tyler, Redburn. Two questions in that case, please. Firstly, on the financial metrics that are applied when you're reviewing the Capex, you know, all the way down to EUR 25 million projects, can you give us a little bit of color as to what the key metrics you look at are? Possibly any sort of idea of how many get rejected, what percentage get rejected, and maybe even an example of something that, you know, that didn't meet your criteria and why? And then secondly, if we look at the two of your charts, one talks about the EBIT after cost of capital and the other, the EBITDA development.
Obviously, over the last two or three years, the former measure has declined while the latter has increased. When we think about your 2020 EBITDA targets relative to the roughly EUR 1 billion of EBIT after cost of capital you generate now, can you give us an idea of where you think that measure will be in 2020?
I think I'm gonna take the first one and then the more difficult one, Wayne. Investment process, this is a very straightforward process. Essentially, it's an NPV calculation. It's based on a business plan. The real question is, what is the underlying assumption for the business plan? We scrutinize this very, very carefully. We have our cost of capital concept. This also drives the hurdle rates for investment decisions. We do apply regional add-ons to our discount rate reflecting perceived, at least perceived, political economic risk in certain parts of the world. Which with the benefit of hindsight, I have to say, is a kind of a strange concept because we always apply higher hurdle rates for emerging markets, but we don't apply higher hurdle rates for Germany.
In Germany, we have the high political risk given the political and energy situation. Anyway, we calculate our NPVs. At the end of the day, you get a list of projects where we can basically make up our mind, do we like it from a financial point of view, and do we also like it under certain stress scenarios? We work with assumptions. What happens if the world changes and does not develop according to our plans? I can tell you in most cases, it does not develop according to our plans. There are always deviations from reality when we look back at our investments. We do these stress scenarios. Then we ask the more important question at the end of the day, given underlying profitability, what is the strategic rationale?
Actually, the strategic question comes first before we go into really detailing an investment. Right now, we are in a situation where we have many more projects which are presented to the board than we can afford or want to approve. That is kind of an interesting situation because it's very different from six or seven years ago, when most businesses were very hesitant to come forward with new ideas. This might reflect, from your point of view, a little bit maybe over-enthusiasm on our side or side of our businesses, and maybe not reflecting the entire reality of the chemical world to come. For that reason, we scrutinize very carefully also, do these projects really make sense from a strategic point of view?
This is a concept which looks at a couple of criteria which are weighted, and then we get a value still. It's at the end of the day, it's a judgment call. It's not a mathematical exercise. We try to balance then strategic and economic consideration. At the end of the day, if there's a strategic fit, it makes sense strategically, then economics plays the most important role. Did we reject projects in the past? Yes, we did. I'm not sure I wanna go into detail here, but what I can tell you is, essentially all these projects were projects which were presented because they had very good underlying profitability, which we couldn't really argue about. When you look at the world as it is, very sound business case, but where we, from our point of view, saw a lack of strategic fit.
This goes very much back to what Wayne talked about. Just for the sake of making money, I make it now very blunt, for the sake of making money to invest in a business which we don't perceive to be strategic, just to make an opportunistic investment because, for instance, based on shale gas. You see for the next ten years, very good profitability. That is not our cup of tea. Again, we have enough projects right now. We have to cut back quite a bit, that we can really focus on those projects which essentially fit to what Wayne described, backward integration, growth in the emerging markets, supporting downstream operations.
Our EBITDA margins in chemical segment are down some percentage points since the peak. The peak was, if you remember, 2010. This was the depths of the financial crisis in 2009, and suddenly the economy rebounded. I think it caught many people, including ourselves, by surprise. We ramped our plants back up fast as well as possible. There was some tightness in the industry because not everybody had super success getting back online right away. Margins were really nice, really high. If we think about our big value chains, acrylic acid, butanediol, the acetylene value chain we talked about, isocyanates, we did very, very well. The cycle moves down a little bit. This is normal in our industry.
If you talk about 2020, what are the assumptions we used? We have looked into the investments that we're making, the contributions we'll get from them. From a cycle standpoint, we've simply assumed kind of a mid-cycle period in 2020. Could be some upside, but we've assumed a mid-cycle approach.
Hi, it's Jeremy Redenius from Sanford Bernstein. The first question I have is kind of a big picture question about the methanol to propylene project. I'm wondering if you're, in a sense, opening a Pandora's box here. Essentially, you've argued before that, you know, you're in different value chains than anything that's advantaged by low cost gas. But in this case, if you pull this off successfully and the economics are as good as you say, aren't you inviting new entrants into that value chain, into C3s and then further into your product mix? The second question I have is just on the amount of product that flows from the chemical segment into the downstream segments.
I guess I was a little bit surprised in that I thought the numbers would be bigger in percentage terms. I knew it for Solutions already, but I thought it would have been bigger for the others. Why am I surprised that it's small? Is it the geographic mix? Is it you don't make the products those segments need something else? Thanks.
Okay, good.
Go ahead.
Okay, the methanol to propylene project, I mean, we think will be highly profitable. Now, this is more capital intensive process than some other alternatives, but the variable costs, as I mentioned, are far, far superior. Could other people consider the same thing? Of course. Of course, they could. We already have the developed value chain, the acrylic acid, the polyols, the oxo alcohols. We have a huge business there that's driven by our access to propylene. The chain already exists. We're just looking at taking a big cut of the upstream profits. Could someone else invest in propylene? Sure. Could they jump into the extensive value chains that we already have? Not so easy. It takes many years. I'm sorry, second question.
The second question was the percent of downstream-
Upstream products.
Okay. Yeah, you could. Maybe this was a little surprising too, but an upstream investment, these big commodity chemicals, to get low cost position, you normally build the biggest plant you can build. If we're gonna build an MDI plant, even though we wanna feed the downstreams, it needs to be at least 400,000 tons because we wanna have low cost position. We don't automatically match that with that kind of downstream level. Each of the products are similar to that. By integrating into the chain, we get the cost advantage downstream and upstream. We're able to have a nice business ourselves in the chemical segment, with these products. If you wanna add to that.
You will see later on this afternoon the share of third-party sales is very different for the respective divisions. For instance, in intermediates, it's a powerhouse of chemistry, I'd say. They also have large number of customers outside of BASF. For them, the share which goes downstream, still considerable, but it's lower. Then there are also intra-segmental sales. Petrochemical sales to monomers and to intermediates is also important to keep in mind. There is also a Verbund within the chemical segment itself. MTP. Some people say these guys, it look almost like they come late to the party of shale gas. You know, even the argument was, you're a European-based company. You have a huge disadvantage because you're European based.
I think Wayne showed that we are the number two chemical company in North America. We took our time to find out what really makes sense. We didn't rush in with another PDH plant. There are lots of announcements, obviously, with another methanol plant. There are lots of announcements, and projects underway. We took our time, and the mindset was clearly, let's talk about strengthening our Verbund, backward integration, harvesting the synergies of scale, economies of scale, avoiding market risk. I think we found perfect solution in both cases. Ammonia makes a lot of sense, and we have the nice side effect now working with hydrogen, which is really, from an investment point of view, very, very attractive. There is a surplus of hydrogen available in the Freeport area.
It took us more time, but I think we found a better solution at the end of the day. That is really what count for us because it's not really rushing into the market, gaining market shares. It's all about strengthening the backbone of our chemical operations. Propylene, we found it kind of boring to build another PDH, frankly. I mean, we look for something different. Wayne explained our view. It's our view, and you can argue about it. It's our view about the methanol to propylene price differential. What he didn't stress very much is that the process we will invest in is very capital intensive. It's very capital intensive, much more than PDH. That is an inherent disadvantage. Still, he talked about the full cost, cash cost differences.
With these large investments, you don't wanna run a market risk because it kills you. It kills you. You still have a very nice cash cost position, but if you cannot fully load the plant, you are in a pretty challenging situation. Again, for BASF, I'd say it's an almost unique situation that we can backward integrate, and we have relatively little market risk. As a startup, it needs to be seen. There might be a little bit surplus propylene available, but we will grow into that as well very, very quickly. For other investors, and there have been quite a few investors who take a market revenue, the situation, I think, looks differently. It really looks differently. There is lots of propylene investment going on. You don't know whether all of these investments will become reality.
If I were a market-focused investor, I would think very hard about going into this process if I cannot secure very high utilization rates almost on day one. That was the thought process of BASF.
Now we come to Paul Walsh.
Thanks very much. Paul Walsh from Morgan Stanley. Two questions, please. Firstly, I wondered if you could quantify, Wayne, the kind of EBITDA contributions from the Capex programs that you've highlighted in the presentation. Within that, can you just talk about the likely progression towards your targets out to 2020? Obviously, that's a long, long way away. Just kind of interested how the business is performing. We've obviously been given guidance by Kurt for this year, but do you see a big slug of Capex next year coming in which helps? That's question one. Then the second question is specifically on Nanjing. Clearly, you've put the upstream investments in place in Nanjing. When do you see the downstream? You know, you've put a slide in there showing more captive use of raw materials going forwards.
I mean, is that critical to improving your margins and returns in China? 'Cause obviously that's been quite difficult over the last couple of years. Thank you.
Okay. Our contributions, how do they develop? I mean, it's fundamentally from the large investments that we talk about. If you look in the sheet here and some of our other releases, press releases, we talk about TDI, Chongqing, the isononanol plant in Maoming, the two acrylic acid plants. It's basically everything we talked about, ammonia, MTP. The way we model this thing going forward is when these things come online and how we load these plants, this is when the EBITDA contribution comes in. There's some that are near term that are coming online in the next 12 to 18 months. There's a couple that are a little bit further out, towards the end of the decade. MTP, we talk about 2019.
Okay. Whether it's the end of 2018, 2019, this is generally where we wanna be. Ammonia a little bit before that. They stagger in terms of the contributions, as the plants come on stream. China. China, we invest quite a bit downstream in Nanjing. I would encourage you to speak more, in more detail with Sanjeev Gandhi this afternoon. He has a lot of intermediate-based chemistry that in the Nanjing facility that we continue to develop and continue to grow. Overall margins in China are a little bit, you know, a little bit lower than we would like, for sure. You also have to be careful with BASF data.
When you look at the margins that you can see in our financial reports, it includes a lot of trading volume from material that's produced overseas and moved into Asia. The margin is captured in BASF somewhere else right now, so it's simply an accounting factor. Anything more to add? No.
Can I just follow up, Wayne? You sort of avoided giving any EBITDA absolute numbers around those Capex programs. Going from EUR 3 billion to 4.5 to 5 billion, you know, more or less within that from the Capex projects you've got right now, how much EBITDA do you think comes from those investments?
I don't think frankly we provide that number for them. I think you would be surprised if I had answered it more differently. We leave it there. Yeah.
Now we are moving to the other side. Here I have the first question from Tim Jones. He's at table 17A. Then the second question from Andrew Benson on 16A, and then Thomas Gilbert, 11B.
Thank you, Maggie. Tim Jones, Deutsche Bank. Two questions. First is on margins. Wayne, I think you very carefully avoided to say where margins are at this moment in time relative to the cycle. You said they're a bit lower than the peak. You said that by 2020 they'll be mid-cycle. Can you just go back to slide 27 where you show the chemical margin over time? It looks very low relative to history, about the lowest it's been. If you look at the blend of your products, would you say chemicals is low cycle at the moment, or has there been a structural shift as to why margins are lower today than they have been over the previous cycle?
Okay. Just quick correction before I start, Tim. 2020, we don't predict mid chemical cycle. For lack of knowing better six years from now, we just assume mid cycle just for an assumption standpoint. It's too far out to really tell. Our margins, again, you have to look at the big value chains. It's not one monolithic thing. It's everything we've talked about, acrylic acid, BDO, oxo alcohols, you name it, MDI, TDI. So you have to look at them each individually. Where would I say we are now if I were to make broad statements? Most of these big value chains that we talk about in the chemical segment, in fact, by far and away, most of them are fundamentally regional marketplaces. We mentioned some material flows around the world, but it's a small percentage.
We have plants in each region. In a broad statement, you could say for many of our big value chains, North America is generally balanced. Europe is generally balanced in a broad statement, and a broad statement is a little too much product in China, and maybe too many announcements for certain players. That's why we talked about how we have to think carefully about how we make these individual investments. Where are we in the cycle? I would say from a BASF value chain standpoint, you put the whole thing together, I don't see really further material downside. I don't see that. A little hard to tell when it picks back up again, but I'm not too fearful of, as a chemical segment, there being a lot of downside ahead of us.
Then can I ask another question? You showed the slide from the change of the industry from 1980, and obviously on the right-hand side there's quite a few new entrants or relatively new companies. Can you make a comment about how you see discipline in the industry for those, what we would call relatively new players? Because today you've obviously shown us that you have a very disciplined model, and I think most people would agree that many Western companies also claim to do the same. But with regard to some of the newer companies, and I don't suppose you wanna name names, but some of your competitors who maybe didn't exist at the scale they did a decade ago, how do you see discipline from their perspective?
Okay. You can define discipline in different ways. I'll simply say maybe discipline around Capex investments. I think most traditional competitors are disciplined here. They're not too crazy. I think that the chemical industry has learned in the last 15 years to be a lot more disciplined with its Capex. Maybe some of the new entrants are a little bit more exuberant when it comes to when times are good, spend a little bit more money. I don't know. This is from our standpoint, we can only say we have to focus on absolute lowest possible cost, strict comparisons like we looked at, and under tough scenarios, can we still make money? If the answer is yes, it's okay for BASF. If the answer is no, we have to step back.
It's hard to get a little bit more detailed than that, Tim.
I'm sorry. Can I just do a quick follow-up?
Sure.
It's not question number three. It's follow-up to question number one. I'm sorry to say this because I've just set the trap for you, really, when you said that margins in chemicals, you don't see downside risk. If I'm right, your guidance for the year is for margins to be down in the chemicals business. Can I just confirm, is that just solely due to start-up costs, or is there anything else in there we should be worried about for this year?
Did we say margins are going to be down? I don't recall that.
I think you said.
We said EBIT will be. I forget the wording.
It's start-up costs this year.
Start-up costs. It's not about margins.
Yeah.
Yeah. It's not about margins.
We talked on the absolute number.
Yeah.
Yeah.
Yeah.
If the question is about current trading, there probably is one coming here soon. Everything we have seen so far in April and May now doesn't change our outlook.
Yeah.
Andrew Benson here from Citi. I'll perhaps ask a question leading on from what Tim said. When do you think your utilization rates in the market environment will be consistent with you being able to push price with some very good volume growth? And secondly, but more strategic issue, you've given a very good overview of how you've considered the shale gas environment and how you're participating and benefiting from that and delivering value. I don't know whether we're gonna get it later on, but can you just give an overview of where you see your position and participation in Chinese coal to chemicals or whether you intend to participate in that in the future?
Okay. Maybe an extension of the margin questions. Again, I think for our value chains, again, in the developed part of the world, North America and Europe, not too bad. Generally balanced, okay. China, for a bunch of our value chains and others, maybe a little bit too much investment. When could we imagine? When you look at capacity utilizations, for most of our value chains, I would say you should be looking at a regional capacity utilization, not a global one. Doesn't necessarily make the most sense. When could utilizations in a place like Asia or China improve? It depends on how many plants actually are built. I mean, you see lots of announcements. We have to wait and see. Would we see a material upswing in margins in Asia this year? I don't think so.
Would we see them next year? Maybe, maybe not. Probably not. Beyond that, it's really a hard call because it depends on who actually invests, who starts up, how the plants run, and I would leave it at that. Coal?
You go ahead.
Okay, coal. I think, look at coal chemistry, first statement that needs to be made is when you look at total cost of a plant, it can be cost competitive. In fact, it can be cost competitive in the total cost, fixed and variable cost, with North American shale gas. It can be that competitive. The mix between fixed and variable, very, very different. The coal is incredibly capital intensive, so you have high fixed costs but low variable costs. The second thing to know about coal is it's a reality in China. Coal to chemicals is a reality. There are tens of millions of tons of ammonia already being produced from coal, tens of millions of tons of methanol. There are some olefins plants and many, many more operating and many, many more announced. It's simply an economic reality.
Now, how would it fit into BASF? It would fit in on a case-by-case analysis we have to look. Could we piece together the right scenario with the right set of value chains and the right economics, and then balance that with how could we properly take care of the sustainability topics. If we could find a way to do that, we would be open to it. We would be open, but I would simply leave it at that for now. Yeah.
Thank you very much for two questions, both on cost curves. You're showing us cost curves, consequences. You believe that's the logical way to look at economic decisions. The Caprolactam cost curves that you're showing looks incredibly steep, yet the high end is not shutting down. Please explain why that isn't the case. The second question is, are you seeing in any parts of your product portfolio dramatically flattening cost curves? I mean, you argue that you add at the low end of each cost curve, but is there any major product line for BASF where we have a steep situation and we go dramatically flat going forward?
Thomas, maybe
Sorry. I think the first question is a perfect question for this afternoon for Stefano Pigozzi to talk about Caprolactam. If you could bear with him, then he could go into a little bit more detail, maybe flattening out cost curves.
Yeah. What I didn't want to give the impression that we are the number one cost position in every product line we're in. This, of course, is not the case. There are steeper cost curves, there are flatter cost curves, depending on, let's say, how open the technology is, the access to technology the different players have, how proprietary something is or, many reasons. Some are flatter than others. There are some cases where we have many products in Chemicals Division where we have to license in technology. We don't have a process technology advantage in every single case, but we rely on our integration opportunities and our raw material sourcing to get us into an effective position where we can compete and feed the downstream. You have all kinds of cases, Thomas.
In very mature technologies, we have very flat cost curves, obviously. We have talked about a couple of examples where we stepped out of industries, so polyolefins, styrenics, where frankly, we have no proprietary technology advantage. For that reason, we have no belief or no reason to believe that we could move within these cost curves to any very, very attractive position over time. The flattening relates to maturity of the industry, certainly, and let's say the speed of innovation and the consequences we have drawn in the past. We don't see an opportunity for us in terms of technology innovation plus feedstock. We shouldn't be kidding ourselves. Feedstocks, there are very, very few situations in the world where you can really have company-specific proprietary feedstock advantages. It's really the rare exception.
I'm not aware of any material situation within BASF where we really have that. It really boils down to technology at the end of the day. If we don't feel we can provide another innovation step, we draw the consequences.
We move again back to the right-hand side. Here we have Herr Heine first, table number three. Then I have Herr Seitz, table number 15B, and we need one third. Mary-Fran, I can't see the number. Can you help? Good.
Twenty-five.
25. Good.
Yeah, two questions from my side. The first is on the Capex budget of the group. It is still EUR 30 billion-EUR 35 billion. If I take the investment from 2013 to 2018 of EUR 20 billion and what you have invested before, and if it stays at EUR 4 billion, I would derive to more than EUR 40 billion investment over the-
Horizon. Will the Capex budget you need to be more than what you have as an outlook? Secondly, on the regional split, especially in chemicals, you have some projects in areas where you have not invested so much before. It's Brazil, it's in Kuantan, the aroma chemicals and the TDI plant in Europe. The hotspot seems to be this shale gas in China. Going forward, will the regional mix be very much focused in the second half of this decade on these two regions and much less in all other places?
The projects we have talked about here today, they're all included in our Capex budget, so there's no reason from today's point of view to talk about different numbers. Yes, we do look at our investment planning on a yearly basis. It will happen again in October, November. I wouldn't be surprised if our divisions come up again with a bunch of new ideas, what we could do. I think I explained this process. We have to cut back on what we can really afford to do. What we do right now is something which we think makes sense strategically and we can afford financially, and that is the order of magnitude. I don't see other numbers coming from next or this year's planning cycle for the next five-year period.
Investment regionally, we have currently big investments in Europe going on, and we made the statement that for the next five years, the share of Europe will for the first time be below 50% of total Capex. That doesn't sound really exciting, but from a BASF point of view, this is quite material news because we have this big asset base in Europe, which we try to maintain in a competitive way. There is a move more into other markets. What has changed over the last couple of years is obviously North America shale gas. There's a rejuvenation of the investment climate in North America.
In relative terms, if you just look at costs, not talking about market growth, if you just talk about costs, certainly North America is a very attractive place to invest. That is something we have to keep in mind. Essentially, it's about, as Wayne said, it's about emerging markets where we do chemical investments and then the backward integration in North America.
The next question is from Mr. Veit, 15 B.
Thank you. Two quick questions, hopefully. Just first of all, starting with the MDI expansion in Nanjing, will that be in the existing joint venture structure? And question related to that, how happy are you with the existing joint venture structure? Because ever since the startup in 2004, I have the impression it was a rather complicated joint venture structure, which you know might want to fully own at some point in time. Second, looking at your Capital Markets Day focusing on chemicals in 2008, where you talked about coal to chemicals, by the way, as a direct investment from BASF. And looking at the world today, how much better prepared are you if and when another crisis would come?
If and when, all of a sudden, some of your major customers, like the automotive industry, would all of a sudden realize, "Oops, you don't sell as many cars as we would like to," like it happened with Daimler, for example, in 2008, shortly after your Capital Markets Day. How much better prepared are you in terms of IT systems, in terms of value chain insight, et cetera? Thank you.
I'll answer the second one. I think the right answer would be, we are better prepared. I think that's the case, because we have learned from the 2008, 2009 experience, which was the first time for BASF, and we have never shut down so many plants within a very short period of time and never really ran our crackers, as Wayne said, at such low utilization rates. Actually, we went down to utilization rates which we deemed to be impossible before we really tried to do it. That learning experience certainly helps us. We further developed our tools. We talked about this, Verbund simulator, which is very important, especially for the large sites in Europe.
Again, I mean, I don't try to answer hypothetical questions. What we do is we have stress scenarios. You can paint a picture where the entire world economy comes down at the same point in time, and then we are all sitting in the same boat, and we rearrange the shares, obviously. Our scenarios are essentially about our specific value chains and products, trying to understand what it really means if, for instance, demand drops by 20%, if prices drop by X%, if investment costs soar all of a sudden because we miscalculated our project. These are the scenarios we are working with.
Apart from that, when we do our operational planning, we also do some stress tests for the entire company, trying to find out what are the sensitivities of our earnings, cash flows to certain external factors. That is a quite complicated exercise, rather mathematical exercise, actually. Unfortunately, we don't really share that information with the public. You feel prepared.
Regarding the MDI in the Shanghai region. It's at the same exact site where we operate today, and it's with the same joint venture structure. Several partners. Are we happy with the joint venture structure? Of course. I mean, we have a good setup with our partners. It's a production joint venture, so we operate low cost. We each take our allotment, if you will, and we go out and do our business separately. It's relatively simple from that standpoint, and it works well, and yeah, very excited about it. Leverages the same site activity that we're at right now.
We move on to Laurent Favre from Bank of America, table 25.
Thank you. That's two questions on U.S. ownership structure. The first one is on Port Arthur. Is the 60/40% ratio here to stay, or do you think that you can actually increase that over time? And the second question is, have you looked into the opportunity of putting the assets, dropping the existing or the, well, I guess, new assets, the 2 new projects into tax-advantaged MLP structures? Thank you.
Second question. Are we aware of what's going on in the United States? It's a kind of a tax scheme which makes this kind of interesting. This is not really easy to implement from a corporate point of view. Our understanding so far is it's. We have looked into it. It's kind of probably not feasible to really do it. That's the information I have today. If there's further tax optimization possible, we will do it, but this is always an add on to our investment decision. This is nothing we really build into our base case. This would be a nice windfall at the end of the day. Ownership structure in Port Arthur, we have a longtime partner here. It works well. We are happy. That's all we can say.
Okay. We are done with this side. We're moving over here to the left. Here I have the first question from Mr. Grüten. It was Grüten 10A. I have Martin Rödiger, 5A, and I have Marcus Sieber at 5B.
Yeah. Thank you. Sorry. Two questions regarding the Verbund synergies you have mentioned. First of all, can you share with us how you have benchmarked your company against peers or your historic performance in that field to come up with the EUR 1 billion? Have you benchmarked against the average of the industry or best in class? Just to get a better feeling for how you have calculated the EUR 1 billion. The second regarding the Verbund synergies is talking about the 2020 targets on a group level. I think you also did your bottom-up homework here. What's the best guess for the EUR 1 billion synergies? Should we inflate that with sales or is something coming on top here?
Conceptually, how we come up with EUR 1 billion number has not been benchmarked against anybody else. It's simply saying, if we took this collection of plants and operated them ourselves, but apart, how would it look? Pretty rigorous sort of analytical look to try to come up with these numbers. It was benchmarked simply together versus apart, BASF. Second question was about the
2020, the potential synergies.
Yeah.
-inflated by sales or-
I gave a little bit of a broad number. We said, "Look, if we add up all these projects that we're talking about, that we've talked about, we could imagine another EUR 200 million additional benefit through the Verbund from these projects." Because these are all Verbund-based projects. They're all chemical segment-based projects. This is our reasonable estimate.
Going back to the synergy question. I mean, we have to be realistic here. We calculate this based on our model. If we had, let's say, sizes only five or maybe 10+, what would we really mean? Other companies do integration as well, and they also are very professional about it, so they also can create these synergies and benefits, which means that it's kind of a level playing field out there. We are not saying that this EUR 1 billion number goes down immediately to the bottom line because obviously we are competing against guys who also do it. We still do believe or we are convinced that with our set up, we are most probably still one of the better companies doing this type of Verbund. Yeah. This is a careful statement.
Next question comes now from Martin Rödiger, five A.
Martin Rödiger, Kepler Cheuvreux. First question is on research and development in chemicals. You spend around EUR 180 million, and this is mostly for process innovation. So that means there are no new products coming out, but you help other areas to save costs. My question is to which extent do these investments in R&D help to reach your targets for innovations, which are EUR 10 billion sales and EUR 2.5 billion EBITDA for the year 2015? I guess just for the latter, but not for the first. The second question is on more general question on within the chemical segment.
You talked about TDI, but I would like to know for the other areas, MDI, acrylic acid, polyamide, where do you see product capacities are taken out of the market and therefore then utilization rate can move up? Thanks.
R&D, again, fundamentally, most of our R&D in the commodity segment is on process-based activity, but not all of it. You'll hear today from Sanjiv in Intermediates. We do a lot of interesting things, looking at new molecules, even new applications. He'll show you a nice example with formic acid today where we spent quite some time developing new applications which have dramatically grown that market. It's mostly process development. You'll get a good feel for it. Contributions to our overall targets. Yeah. Process improvement. Rolls in or not? I can't remember.
Okay. Maybe I would ask this afternoon. I don't want to misspeak here. I would raise that question.
Yeah.
Okay. Second question on where would we see or like to see capacity coming out in some of these other chains? I would love to see capacity come out. TDI I mentioned because there have been clear announcements and there's been clear history of it, and it's kind of a dramatic example of if you run a commodity, you better have the best cost position. Some of these other value chains we will see. We will see. China is clearly a spot where in some value chains a little bit too much announcements. It's also a spot where you see if prices do come down, some plants shut down. They just do. I don't know that I can give you more specifics beyond that.
The question is, are there companies out there who are willing to cross-subsidize underperforming losing operations? That is not the case within BASF. We made that very clear. We look at the underlying performance of each business individually. I cannot rule out that in some parts of the world, people have kind of a different view. Sometimes they also apply a little bit lower cost of capital, don't really think about capital at all. We have seen this in some emerging markets. Clearly, yet, when the pain becomes big enough because you really lose cash whenever you produce, and the more you produce, the more you lose, then normally people become rational again, at least at some point in time. In some parts of Asia, this process might take a little bit more time.
Hi there. It's Marcus YU from J.P. Morgan. Yeah, you highlighted your strong positions on the cost curve in some products and also clearly the Verbund synergies. To what extent do your customer want to have a share, an increasing share of that as well? More on the downstream products. Probably more a question for Kurt. With all those benefits, I mean, how much at the end of the day really stays within just BASF and how much has to go to the customers as well?
The advantages of the Verbund, of the integration?
Yeah. Basically the customers say, "Okay, you have massive advantages here, and this we want to have." Basically, what is the—from those benefits, what is the pricing power still in the more downstream businesses?
First of all, I think we clearly said we have very little pricing power in upstream, virtually nothing. We can sometimes try to read markets in an intelligent way and try to adjust a little bit how we operate and where we put volumes, but this has a rather limited effect. It can sometimes, if you do it at the right inflection point, it can help to move prices into the right direction, but only if the fundamental situation also plays along. I mean, we should so clearly state upstream, we are a price adjuster. We see what's happening. In downstream, it's a completely different space. It's a completely different space.
The question is, whenever you pass on, for instance, lower prices to the downstream operations, does it mean that the downstream prices also come down? There are some people who have a very clear view of what's happening in upstream or customers in downstream, and they want to have price adjustments. We have seen this. I mean, a good example clearly is surfactants, which is within our cosmetics and detergents business, which is also a bloody commodity at the end of the day. They are basic surfactants, where you have very little pricing power. There are some specialties where you do have pricing power. There are other markets which are pretty unrelated from what is happening in upstream, but they still ask for a price concession all the time.
We talked about the automotive industry two years ago in very detail, which was a prime example for for an industry where all of the time we have to offer better pricing or better services, condition, quality in order to satisfy the needs of these guys. There's a constant pressure on our cost structure. There are some businesses, especially in the plastics, engineering plastics area, where clearly upstream prices also got reflected then in the downstream operations. It's a mixed picture. For us, it's all about margin preservation and margin management at the end of the day. What is important, again, and we have to keep this in mind, we transfer at market price.
We put real pressure on our downstream units to always compare themselves with standalone companies who are not backward integrated, who have to buy from the market. I think this is an entirely right concept to make sure that all of our individual businesses are performing according to benchmarks.
In principle, the further you go downstream, the more differentiated you can get or real specialty, the pricing principle would be a value-based pricing. We would try to understand what's it worth to the customer in terms of making his process better, his cost position better, the functionality is different, it fits his needs. If we can understand what it's worth to him, that's the principle of how we set the price. You have to be differentiated and really specialized the more you go downstream to do this.
Now we're coming back to the right-hand side. I have Mr. Köhler, Ronald Köhler at table 43. Then I have Evgenia Molotova. She is table 49. Florian, you have to find one-third. Oh, wonderful. four. Okay.
Now we do three, and then we switch them back. Okay. Okay.
Yeah. Thank you. It's Ronald Köhler from MainFirst. First question perhaps to Wayne on China Chemicals. We have seen a bit of shift, let's say, in policy, I would call it, after the build up of overcapacities. The Chinese government seems to be more, let's say, cautious on capacities on upstream business, big investments. We have seen Sinopec and so scaling back some of their plans.
You mentioned, and rightly, that MDI might be the kind of last license you see for next time. Can you elaborate on China and the ability to get new license, on the ability of China to bring the market back into balance and the kind of timeframe you would think about in a broader scheme? A second question, more specifically on joint ventures you still have. You mentioned shale gas, you are out of PVC. Do you still have this 25% joint venture SolVin? The question is how do you see that in the light of shale gas, and potentially also Styrolution, any kind of plans, ideas, how you react, let's say, on this shale gas theme on these producer companies?
Okay, China. Again, you have to look at product line by product line. I'll start with MDI because you mentioned this. I said the last license in China, in Shanghai region. There's some precursors here that are challenging materials, dangerous materials to work with, and therefore, the government specifically initiates or gives a license or pulls back a license for particular producers. We believe in that Shanghai region, that's the last facility to get that done. It's a great opportunity for us. MDI is again a great market. It grows 6%-8% globally each and every year. That's about more than 400,000 tons of new demand every single year. That's the equivalent of one world-scale plant somewhere in the world every year.
China grows double digits. There's been a lot of capacity put into China, though, however. We will get some bumps and some rises and some bumps. It's a little bit turbulent, like all products, but in general, it moves in the right direction, and we feel very good about it. Some of the others, another extreme Caprolactam, clearly, there's too much in China, too much announcements. Will all these things be built? When will things, say, grow back into a proper balance again? I would speak with Stefano again this afternoon to get his feel for it. I would say not real soon, not in the immediate term. It's case by case development in China. Anything more on-
Joint ventures, there's very little we can say. We are partner in both joint ventures. In the Styrolution case, we clearly said right from the beginning, this is for us, an opportunity to exit the business at the end of the day. What I can say here is that the business has developed very nicely. The integration synergies which we expected to be realized became reality. Really, the management team at Styrolution did a very, very good job from our point of view. It has built a pretty strong, very strong player in that industry, which is good from our point of view. Going back to China very quickly.
I don't know who phrased it or who coined this phrase of irrational exuberance, but there is a little bit of that in China, certainly, or has been in the chemical industry because many people treated investments like no regret and if you just do it and if you build it, people will come and buy. I think there's now a new sense of realism, which from our point of view is helpful and necessary. Actually, the price hike in natural gas also was helpful in that respect because it again sends the right signal to the industry, "Don't overdo it, become more careful." The problem has been a little bit that the central government tried to direct investments in a certain way.
Obviously, the provinces also had their say, and there were many projects at the provincial level which were started essentially because they were seen as a money-making machine, and that was sometimes a little bit naive. We now have to go through this phase of adaptation and going back to a new reality, which from our point of view will mean in certain parts you will also see less investments than we have because we have to adjust supply and demand. Demand will grow, yes, but obviously demand is also growing slightly lower than what most people had expected four or five years ago, when many of the investments which are currently in the market were initiated.
Yeah.
Good afternoon. It's Evgenia Molotova from Berenberg. I have two questions. One is on recent capacity build-up in U.S. What you were saying that most of the chains that are affected and where the imports will come are not your chains, so polyols and polyester and et cetera. But with all the capacity announcement in PDH and methanol to propylene, don't you think that this will affect your main chains, which is propylene and acrylic acid, et cetera? So how do you view that? And the second question is on your own PDH capacity in U.S. You said that you will be self-sufficient by 2019 in propylene on U.S. level. Can you comment on the group level, what the balance will be? Thank you.
Okay. Yeah, in the U.S, you asked specifically about the propylene chain. Again, we already have this big demand, so it feeds all these downstream chains. We will stop buying, and we will replace it with our own low-cost material. That's the concept. Now, what's the potential impact of a lot of these other announcements on propylene? We will see. It depends how many are built. At the end of the day, would it really change the supply and demand dynamics that much? There's been a lot of announcements. Frankly, I would not assume that they will all be built. How many will be built? We simply have to wait and see. Sorry, second part of the question.
Global.
Whether you will be global.
Oh, global. Yeah, okay. Global. We are a net buyer of propylene also in Europe. Asia, I think we're a little bit more balanced.
No.
No? We're a net buyer in Asia as well, but not to the same magnitude. You take all our three crackers in Europe and all the propylene they produce. Since our value chain is so big, we even buy more. We're a net buyer around the world. Yeah.
Do you plan to correct this as well, or so far there are no plans?
To correct that?
Do you plan to correct this as well, or so far there are no Capex plans for this?
Well, we would have to find the right approach. In the U.S., we talk about backward integrating to capture this raw material advantage. We don't have that raw material advantage in Europe right now. We would have to find the right approach to do such a thing. Right now, we don't envision anything big in Europe.
Thank you.
Yeah.
I think there was a third question, Geoff. Here I saw, and then I saw the lady. Yeah, yeah.
Hello. This is Iliana van Hagen from APG Asset Management. Actually, I only have one question. During your presentation, you explained a little about the shale gas advantage and how you're taking advantage of that in your U.S. operations. Actually, there's a European petrochemical company that claims they can bring the economics of shale gas to Europe, and they have all this huge project of importing natural gas to Europe, and they claim they will be able to revolutionize the petrochemical industry here. I understand you don't sell base chemicals to the market, but clearly it's an integral part of your Verbund strategy to produce petrochemicals at the lowest price. My question would be, have you looked into this project? Are you planning to do something similar, or you think it's just too risky?
I'm sorry, just to clarify, you mean bringing natural gas?
Yes.
to Europe?
Importing.
Ethane or methane. Okay.
Yes.
For BASF, it would not make sense. There's two reasons. One is it costs quite some money to do this. As I mentioned, to move methane across the ocean, it's $5-$7 per MMBtu, so it's not such. You're always stuck with a higher cost material. Some people are considering it for ethane. Talk about bringing some ethane over, putting it in their crackers. These would be ethylene, ethane crackers, which make ethylene, okay? Again, we're not really in that chain. We need a naphtha-based feed to our crackers in Europe because we need all the specialty products that come out the other end. If you put ethane into your cracker, you don't get that. You get one product, ethylene. It just doesn't fit our value chain structure in Europe.
I mean, we don't wanna now talk about natural gas pricing in Europe, and you see that the world is changing as we speak, and we see what's happening in China. We could also talk about shale gas in Europe, but that would then open a completely different discussion, and I think maybe we are running out of time here.
We have two more questions.
Anyway, yeah.
Then we finish. There's one more coming from Geoff here. This is table number 51A. Then the other on this side is from James Knight, 36B.
Hello. Just got one question. On the MTP project, how do you plan to hedge yourself against the volatility of the natural gas price given when you look back historically, natural gas prices have been very volatile? Thank you.
Yeah. We frankly don't have plans to make a major hedge movement on this process. I mean, it's a very liquid market, methane in the U.S. It's you can buy forward a couple of years, but you can't buy forward for long term. Will there be some volatility? There's always volatility. Let me point to the fact, if you look at this last winter in North America, this was the most extreme cold winter in, I don't know, 50 years, whatever it was in North America. When you watch the natural gas price, the methane price, it blipped up to five or something for a very short period of time. It's right back down to wherever it is, 4.5.
It's the quantities that are being produced now at the economics that they can make money on with this fracking process is unbelievable. Will there be volatility in the foreseeable future? Of course, there will be. We're comfortable that this can be managed, and we wouldn't have any major hedging program involved.
We don't believe there's an availability risk. There is a liquid market. There's enough methane to tap into, and the volatility of the price is just right. We do this with other products as well. What we do, we look at our overall price volatility situation, price risk, including our value chains and our raw material needs. Then we also look at our price adaptability, meaning can we adjust selling prices downstream if raw material prices change? Actually, we have pretty cute model for doing that. Then if there's an underlying risk, we sometimes do short-term hedges. This is really an operational hedge. As Wayne said, you can't really strategically hedge methane, and we don't see a need to do that.
Now we come to final question from James Knight from Exane.
Okay. Given the time, I'll ask one as well. We've talked a lot about cost benchmarking. How about reliability? How do you think BASF measures up on that score, thinking back to the problems in Port Arthur, I think, in the second half of 2012 in particular?
Okay. I don't have figures for you, James. I can only give you my feel and my comparison to where I've worked elsewhere in the chemical industry. I'm with 10 years with BASF, but 25 years in other places. I mean, this is an engineering-driven company. This is a process-driven company. This company's proud about what we build and how we operate it. Now, are we perfect? Of course not. These are big plants, big operating machinery. Things go up and down. In general, reliability levels are as good as the industry, and I would say in many product lines, we would feel maybe even better. That's just a broad general statement. You refer to Port Arthur. We had a big turnaround, a five-year turnaround, two years ago.
In coming out of that, we had some challenges, but this happens once in a while. I don't think it's. It's not so unusual.
I think it's a good point also. It's also a good point to stress this afternoon with our individual divisions, to understand a little bit how they operate, how they run their operation, and how they see their own performance. There are slight variations to the theme, but in general, I think we are definitely not behind industry standards to make this as a very careful statement. Okay.
Yes. With this, I would like to thank both Kurt and Wayne for their extensive and very interesting Q&A and their comments. Ladies and gentlemen, I would still like to get your attention for two minutes. Namely, I'm going quickly through the procedure for the breakout sessions. First of all, we now have planned for an hour lunch, so you have plenty of opportunity for networking. Secondly, the breakout rooms then are located in the adjacent building. Whoever has been here at the Automotive Day knows that you have to walk out here and enter into the adjacent building from the outside. Now, on the back of your badges that you carry, you see the sequence of your breakout sessions.
Each group will this time be accompanied by one of my IR managers, and we will start with Ingo, who is right here. He will lead the orange group. He will first take you to Monomers. Then Florian here on the right side, he will lead the blue group and start off with Petrochemicals. Martin, who is all the way in the back, he will be responsible for the red group, and he will begin with Intermediates. In case you should forget, there is a piece of paper also on your table that explains your rotation procedure and which breakout room you have to be and when. Now at this point, I would like to thank you for your attention this morning. I wish you all a very enjoyable lunch. Use the time for networking as senior management.
We'll all be here and provide you with additional answers I'm sure. Get as many insights as possible that will help you with your analysis of BASF. Thank you so much.