Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the BASF conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question, you may press star followed by one. When preparing to ask your question, please ensure that your phone is unmuted locally. If any participant has difficulty hearing the conference, please press the star key followed by zero for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of the board of executive directors and currently available information. Forward-looking statements are not guarantees of the future developments and the results outlined therein. These are dependent on a number of factors.
They involve various risks and uncertainties, and they are based on any assumptions that may not be proved to be accurate. Such risk factors include those discussed on the opportunities and risks report from page 111 to 118 of the BASF Report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. I would now like to turn the conference over to Stefanie Wettberg, Head of Investor Relations. Please go ahead.
Morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call. Analysts, investors, and also journalists were invited to join this call on the signing of the non-binding memorandum of understanding regarding the establishment of a second Verbund site by BASF in China. On the call with me this morning are Dr. Martin Brudermüller, Chairman of the Board of Executive Directors of BASF SE, and Dr. Stephan Kothrade, President Functions Asia Pacific, as well as President and Chairman Greater China. We will begin with a presentation by Martin Brudermüller. Following the presentation, Martin and Stephan will be happy to answer your questions. Please understand that we will not give any updates on BASF's Q2 results before our reporting on July twenty-seventh. Your questions in today's call should therefore be focused on the intended investment project.
Please be aware that we already posted the slides on our website at basf.com. With this, I would like to hand things over to Martin.
Thanks, Steffi. Good morning also from my side. I would like to begin with by emphasizing the relevance of Asia and particularly China for the chemical industry. As you can see on slide three, China's share of the global chemical production is expected to continue to increase from around 40% to around 48% between 2015 and 2025. Already today, and even more so in the future, China is the key market in Asia as well as globally, both for BASF and for the chemical industry overall. In recent years, growth is driven by increased domestic consumption, higher standards of living, as well as more local value creation and the shift from made in China to created in China. BASF is very well prepared to capture future growth in China. We have built an extensive network throughout the country.
Slide four gives you an overview of our business and sites in China. The most important ones are Shanghai, home of our Greater China headquarters and the innovation campus, as well as the Caojing production site. Nanjing, where our joint venture Verbund site with Sinopec and the wholly-owned site are located, as well as Caojing, with the MDI production complex, which is also wholly owned by BASF. These cornerstone sites are the backbone of our activities. In total, BASF has almost 9,000 employees in Greater China and 25 production sites close to our customers. Sales to customers in Greater China are amounting to around EUR 7.3 billion in 2017. If you include our 50% share of BASF-YPC sales, the figure increases to EUR 8.7 billion. BASF's strong position in China was not built overnight, even in the last couple of decades.
Slide five documents that BASF has a very long-standing and successful history in China. We have been doing business in the country for more than 130 years. Since the 1960s, BASF started investing in production facilities in China. The Innovation Campus Shanghai, which we established in 2012, has developed close cooperation in joint innovation projects with Chinese customers in high-end applications, such as lightweight materials for automotive, cosmetics, and detergents. We continue to invest in the country in production and innovation to support our customers in many different industries. BASF Verbund site in Nanjing is an excellent example how high efficiency can add value. Like at our other Verbund sites worldwide, all plants of this joint venture with Sinopec are interconnected. They use products, by-products, and energy in the most efficient way to save costs and minimize environmental impact.
On slide six, we provide you with some financial details. Even in economically challenging years, the EBITDA of BASF-YPC remained at a high level. The plant site turnaround in 2015 reduced sales. Nevertheless, profitability improved in 2015 compared to the low levels in 2014. In 2016 and 2017, profitability further increased. Closely linked to BASF-YPC is our wholly owned company, BASF Specialty Chemicals Nanjing. It is a showcase for the advantages of backward integration as BASF Specialty Chemicals Nanjing is connected via pipeline to BASF-YPC, its most important raw material supplier. The Verbund goes beyond raw materials. BASF-YPC also provides utilities to the company like water, steam, and pressurized air.
These are clear advantages of our Verbund concept, which we also want to apply at the new site in South China. Our Verbund concept fully meets the guiding requirements of the Chinese government for the petrochemical industry, focusing on clustering and integration, as well as the development of more high-end specialty value chains. With the second Verbund site in China, we want to ensure BASF continued participation in the growth opportunities offered by the world's largest chemical market and strengthen our commitment to China. The high-end Verbund site in Guangdong Province would supply customers based in South China and enhance BASF presence in this fast-growing and still undersupplied market. The GDP growth of around 7% per year in Guangdong, one of the two economic powerhouses in China besides Jiangsu, is driven by industrial investments of innovative customer industries such as automotive, consumer goods, home and personal care.
The province has more than 110 million residents, and its GDP already today exceeds the GDP of Spain and will soon reach South Korea's GDP. South China, especially Guangdong, is the home of key customers from fast-growing industries. The province is a manufacturing hub. Let me illustrate this with a few facts. Guangdong is the province with the largest automotive production in China. The transportation industry is overall strongly represented. Automotive, high-speed rail, and aviation companies form a strong customer base. Many internationally active electronic producers also having their production facilities in Guangdong. Most of the diaper producers are located in South China. In recent years, household consumption in Guangdong also grew noticeably. In a nutshell, there is a fast-growing local demand for innovative chemical products and solutions.
The Verbund site we intend to build in Guangdong Province would operate a world-scale steam cracker with a capacity of around 1 million tons per year of ethylene, which would be used to produce ethylene oxide and ethylene glycol. These are important raw materials for the production of amines and surfactants. Propylene would provide the feedstock, for example, for acrylate and oxo-alcohols. The scope would also include intermediates as well as more consumer-oriented products like superabsorbent polymers. Let me share some further relevant details. The site would be built in accordance with BASF high global EHS standards and local laws and regulations. BASF intends to implement a comprehensive smart manufacturing concept based on cutting-edge technologies. The new Verbund site would evolve in phases, require estimated capital expenditures of up to $10 billion by completion of the project around 2030.
First plants could be completed by 2026 at the latest. Yesterday, the executive vice governor of Guangdong Province and I signed the respective non-binding memorandum of understanding in the presence of the German Chancellor Merkel and Chinese Premier Li in Berlin. Our new Verbund site is an important step to participate in the opening up of the chemical industry in China. Until recently, ownership of a steam cracker was limited to maximum 50% for a foreign company. BASF would be once again a pioneer in China as the first company using this opportunity. Once again, such an important step of market opening would occur in Guangdong. The province has a long history in China in that respect. Please keep in mind that the signing of the MoU is only a first step. Many further steps will have to follow to make this investment a reality.
The immediate next step in the completion of a pre-feasibility study. To conclude, I will summarize my presentation in a few key messages. First, Asia and China continue to dominate global chemical production. Second, BASF is a well-established and highly recognized company in China. Third, Guangdong Province is ideally located to serve the fast-growing, undersupplied market in South China. Fourth, BASF intends to build a world-class Verbund site in South China to serve fast-growing customer industries in the region. This investment will be an important contribution to BASF profitable growth in China and also globally. Now Stephan and I are happy to answer your questions.
Ladies and gentlemen, I would now like to open the call for your questions. The first question is from Patrick Lambert, Raymond James. Patrick, please go ahead.
Hello. Good morning, everybody. Can you hear me?
We hear you.
Yeah, excellent. Two little questions. The first one regards the location. I know you have already started the Maoming site on
I think it's all known, I think. Have you already chosen the exact location of the Verbund site? The second question is regarding profitability. Could you share with us, actually, the historical IRR of your Nanjing site? Do you expect a pretty similar type of returns for your new site?
I think Stephan will answer the first one on the location.
If you look at the potential locations for our new Verbund site in South China, in Guangdong Province, there is only a handful of chemical parks that are, in principle, suitable to host such a large-scale project. Our preference definitely is to go for a coastal site also because of the import and export logistics opportunities we would have at a deep sea port located at the South China Sea. Maoming, the site you mentioned right now, is hosting one of our joint ventures with Sinopec. It's an isononanol plant that we started up 2.5 years ago. The reason why we chose this site is the availability of a key raw material for this specific product.
We don't think Maoming is a suitable location for our big plans now, for the new Verbund site. We would rather go, as I said, to one of the coastal locations, where there's only two or three.
With respect to profitability, you know that we don't give any details on sites or single operations. I think the page eight is giving you already a pretty good idea by the first time we basically offer you the numbers of the BASF-YPC site. You see, this is a pretty consistent and good stable picture of returns. It is fully meeting our expectations. Maybe the only indication I can give you that this site in Guangdong, yes, it will have a steam cracker, and it will have the value chains, but it will also serve in the future as a kind of a container also of more downstream products. Because it has become increasingly difficult in China to open new sites for the chemical industry. It's pretty restricted.
There's a lot of relocation, and they basically bring the chemical industry into clusters, petrochemical clusters. We will use this also as a hub where we gain economies of scale by bundling all the kind of operations we have. With this, also serving on utilities and wastewater treatment and logistics and all, basically what we also do in Ludwigshafen. You could expect that this will have an overall, across all the businesses of BASF, attractive return. Maybe that's the only thing I can give you today, you should not think that this is just a steam cracker plus. It is really a site that will develop into downstream and will have also some non-integrated operations which overall will help the profitability of the site.
Thank you.
Thanks.
The next question is from Andreas Heine, MainFirst. Andreas, please go ahead.
Good morning. I basically have four small ones. At first, could you please outline from your learning from building up the Antwerp site and then the Nanjing site, what will be different with this one? Is there anything you have learned, what you can do better building up this site? Second, when do you think you will start with the investments? I guess it is most in the chemicals segments, at least in the first phase. Does it mean that, let's say, you scale down the investment in other sites to have enough resources to build up these sites? Some words on this would be helpful. Third, could you give any indication how much the split is in building up the new site?
How much is infrastructure, this waste management, water treatment and all this, and what will be spent for the plants itself? There was one last one. Yeah. The investment you outlined already that it will be also a hub for the other downstream activities. Is that something which will come then beyond 2030? You outlined that the first plants will come on stream in 2026, going on to 2030. That's probably then going beyond this phase. Thank you. These were my questions.
Let me answer the first question, Stephan speaking. Of course, we have a very long experience in building Verbund sites. I mean, you mentioned Antwerp, which is an extremely efficient and well-thought through and designed site, but of course it was designed and erected starting in the 1960s. Now, in the meantime, we have, in terms of technology, in terms of experience, much more possibilities to go beyond such a setup. I give you an example. We have now the unique opportunity to design a whole Verbund site in one go.
That means the way how you structure utilities and infrastructure for the site can be optimized in a way that you have, for instance, a hub kind of concept, where you put all the infrastructure and utilities at the core of the site, and then you can supply in all directions to the production sites surrounding it. You can have central control room that you would not have established 40 years or 50 years ago. We have 3D planning. We have all kind of smart manufacturing concepts, be it in augmented reality, be it in predictive maintenance. Now, all these concepts mean that you have to install sensors and DCS systems that are capable to support the smart manufacturing ideas. Now, if you have an established site, you would have to revamp it.
Now we can do this from the very beginning. Already when we do the detailed planning in the engineering phase, we can integrate all this. This will also save us a lot of cost. Putting all this together, I think the way how we structure logistics, infrastructure, how we do the concept of steering the plant in central control rooms and the smart manufacturing aspect, all this will go beyond what we have been doing at the other six Verbund sites so far.
Andreas, you asked about when is chemicals and downstreams and what is basically the first core. It's very clear that the steam cracker is the first big thing, and then also the major downstream product because you have to take care about the products the steam cracker produces. I might also say that as soon as we have defined the site and we have basically our major contracts, we might use the site even to build some downstream plants before the steam cracker. That could happen. It's not yet known because we have certainly a list of investments which we wanna do in China, and we will also look when the major part of that is directed to this new site. It could be that we even started a downstream plant.
That depends a little bit on the negotiation, because at the very end, we have now to negotiate and start from here, a lot of things. I mean, this is not only the site and all the framework conditions. It has also to come with a lot of permits. That includes the permits to import raw materials, at least partially. There's also a lot of tax questions like VAT tax and all this stuff. There is several permits coming with it, and we have to build this package. That is also what takes a little bit time. On the other hand, what we really sensed yesterday in the talks around the negotiations is that Guangdong Province is really eager to support that and make that happen soon. I think we are confident on that.
You said the split on infrastructure and plant, that is really too early because as Stephan just alluded, we have some first ideas, but we have then to fix that. How does this fit really to the size? You can imagine that we want to have a huge piece of land, that it is a container for several decades where we really can invest. It depends also on that one. We have to see, we want to use harbor facilities. We have to see how much we have to do on our own, how much we can use. There are too many questions open to that. One thing is clear, and you know that. If you do a greenfield site, that you have a higher share of infrastructure.
That is always the burden with the first wave coming and other waves benefit from that. Then you basically ask, when does this whole thing start and when do we start to spend? I think with this, I think we indicated that basically 2021, 2022, 2023, that is basically when we start to invest. I know that some people say this is a long time until 2026, but keep in mind, when we did Nanjing, we announced actually 1995. We started to build 2000, and it took in operation 2005. It was almost 10 years between the announcement and the operation. I think we are faster in this way. You clearly see we have an indication of seven to eight years, but still it is a major endeavor.
There is too many uncertainties to go further at that point. Anything not answered, Andreas?
No, I think that's covered all my questions. Thank you.
The next question is from Laurent Favre, Exane BNP Paribas. Please go ahead.
Yes. Good morning, all. I have a question on slide number nine with the flowchart and the $10 billion. Can you help us understand the size of the first tranche in terms of CapEx? When I look at this flowchart, I'm struggling to get beyond $5 billion of spend, and maybe I'm missing the infrastructure as part. The $10 billion looks like a very big number. When we think about the first tranche versus the total number, are you looking at the downstream part that is missing from that flowchart? Is it scaling up those assets? Or is it other upstream products like other finance to get to the $10 billion? Thank you.
EUR 10 billion really includes all the downstream plants which you do not have on the list here. There is several downstream plants in the planning, and then we have to see how they fit in this whole Verbund. I think you are right. If you compare the numbers with the Nanjing investment, we certainly have an escalation in cost today because it's some decades ago we have built this. I think that you plan something like around half for the first phase. I think it's not a wrong number. That is also, as I said, there's many uncertainties yet. There's a plus and a minus on infrastructure and everything. That is the heavy part that comes first.
Don't expect that the EUR 10 billion are spent until 2024 or 2025. We said until 2030. I think this first assumption of roughly 50% in the first wave is not a totally wrong number at that point of time.
Thank you. Just as a follow-up, when people try to build sites like this, usually there's a negotiation involved and some tax breaks and things like that. I guess in this case, there is a strategic element to it with the first site that is beyond the 50% ownership. Can we assume that the structure of YPC in terms of taxation, et cetera, is applied here, or can we assume that you may get some tax breaks, for instance?
It's much too early to give anything on that because we just start on that and see what is Guangdong providing in terms of support and anything. There are so many preferential elements of subsidies or helping or supporting. It can be that they support on the infrastructure investment and not giving tax breaks. I think we have to very much look at the end of how we get out here. I think now to promise you any special tax credits or whatever, which you put into your model, I think would not be the right thing to do. Certainly, they are very eager and very happy that we come because I think we mentioned that Guangdong is an economic powerhouse, and it is actually undersupplied by chemicals.
Particularly when we talk about more specialty-oriented chemicals. If you look on the list of investment that's currently happening in Guangdong, that is the who's who of the Fortune 500 companies. It's a lot of our customers already today that have manufacturing hubs over there. I think there is so much uncertainty yet to this. You can imagine that Guangdong is very eager to get investments of that kind into their province. They will be creative in helping us in anything. Let's see over the next months and quarters where we get there.
Thank you.
Question is from Markus Mayer, Baader Helvea. Please go ahead.
Yeah, good morning. Two questions. One is basically a clarification question on the start of the investments will be 2021, 2022. Does it mean that there will be no change of your midterm CapEx guidance? The second question is, will there also be plans that existing sites will then also move to the new Verbund site, so maybe small existing sites? That's my two questions.
Move, you mean relocation?
Yeah, exactly.
I mean, I think the midterm CapEx guidance for the first one is 2019 until 2022. I think this will not be very much affected. On the other hand, it's also clear to you, and you saw that in the past, when you do a project like this, whether it was Nanjing or Kuantan or TDI, you have for several years slightly higher spending on that. I think it will not totally distort what we do here. I think you can keep your CapEx guidance for the next years as it is. As soon as we know how the stretches and the phases will look like, we will adapt. It will be in those years slightly higher, but I think you know us also that we are overall disciplined.
It will work a lot on also on OPEX so that we can debottleneck plants. We always, I think, very creative to smoothen that spending line as much as we can, but certainly it has some highs and some lows if you do such a project. In the moment, we do not foresee anything we have to relocate. It is really that we rather look in where to put the new investments. I have to say also our Caojing site is increasingly full. There's not so much space left anymore. There's actually also not to get new land over there. We have to cater. Actually, I mean, if the downstream industries are in Guangdong, that is for sure the best location you can have.
Because I would also expect in future, not every chemical is easy to transport. There's a lot of regulation in that. The closer you are with your customers, the better it is. We had only to face two relocation issues in Shanghai, which is in the Gaoqiao area. That was when the refinery had to close, and we have to shut down something here. We have shut down also our dispersion plant over there, which anyway, let's say from market perspective, was the right thing to do. There's no plan that we shut down anything and relocate. Everything that will come there will be for growth in China.
Okay. Thank you.
Now we are moving on to Tony Jones, Redburn. Your turn, Tony.
Oh, good morning, everybody. Should we be reading that China is the next major expansion and therefore some of the other regions are not likely to get CapEx much above levels of depreciation? I was thinking about the North America, for example. Are some other regions being de-emphasized for significant expansion? Thank you.
First of all, we should invest where the growth is, and that is definitely the emerging countries, and above all, it is China. I mean, you saw these amazing numbers that in 2025, almost half of the global market is China. If you look on the contribution, it was in the last years, up to 70% of the global growth in chemicals came from China. For that reason, yes, you can assume that this is our major focal point for investments. I don't see such big projects in Europe because they have a much lower growth rate. In the U.S., I would say, first of all, investments in the U.S. are very, very expensive at that time.
Second, there is a lot of announcements also based on shale gas, which is mainly also cracking of C2 production polyethylene, which is most probably going to be exported. I leave it to your imagination what that means maybe in a world that is more harmed by trading issues in the future, particularly also between U.S. and China. We have already in the past had the strategy that we normally build the assets where the growth is. We have done it in the past, I would say rightfully, and looking back today in hindsight, I would say we were really lucky and right to do it. Because our risk mitigation at that point was that we wanted to have cost for production revenues and earnings in the same currency. Basically, we wanted to protect ourselves against shifts in exchange rate.
Now today with the major trade frictions, it's still the same strategy, but the driver is not to be exposed to any duties and trading restrictions. For that reason, very clearly, yes, you can expect that the main emphasis on investments and capital investments will be in China. I think, and I clearly want to say this, we are proud of that step and that we have also the support as the first chemical company to do that in China. Because I think if you look on these growth numbers, every global company that has aspirations to grow with GDP has to have a China strategy. I think there's no other company like us who can do such a step. We have proven that with YPC and the joint venture.
We have proven that to do something like that 100% alone in MDI, in Chongqing, and now we even go one step further. I think the real advantage is we have a mature team that is totally capable to execute something like this locally. In that respect, it will be our focus point for major CapEx in the years to come.
Perfect. Thank you very much. That's helpful.
One more person in the line to ask a question. If you would like to ask a question, please indicate that now, and we will move on to Sebastian. Please go ahead, Sebastian.
Good morning, and thank you for taking my questions. I would have two, please. The first is the scale of this facility relative to Nanjing in terms of existing ethylene capacity. Could you please give us an idea of what Nanjing is currently sitting at? Is it slightly less than 1 million tons? Could you also please give us any idea of this capacity for derivative products such as butadiene at this new site? The second is on the number of employees. Could you remind us of how many employees are currently at Nanjing, and perhaps give us a preliminary number for the new facility? Thank you.
See, for the site in Nanjing, we operate a steam cracker with a nameplate capacity of 740,000 tons of ethylene. For the new project with the roughly 1 million tons, we would obviously build a bigger capacity. In terms of the number of employees, we have roughly 2,000 own employees operating the Nanjing Verbund site. Then, of course, well, high number of contractors depending on project activity, maintenance activities, and so on. For the new site, I would, as a first rough estimate, assume that roughly we talk about the same number of people, and thinking in terms of productivity gains, smart manufacturing, and so on, we would have a much higher production output with the same number of people.
Thank you.
We have another question from Peter Spengler, DZ Bank. Please go ahead.
Yeah, thank you. Good morning. I have actually two small questions. One is on the chart. It's on where you shown us the EBITDA and sales of the Nanjing site, page six. So it's 100%. So it's not your joint venture part, but it's the full plant. The second question is was there a change of strategy in China to go away from joint ventures? And how difficult was it to get it 100% fully owned? And are there other competitors with such large projects in other provinces? And last question in this regard, is it then the biggest chemical site in China by 2030 overall?
The information we provide on slide six is indeed 100% of BASF-YPC operation. With respect to joint venture and our ambitions to do something in joint ventures or alone, I think it's very natural and very clear. I mean, as a potent company like BASF, whenever it makes sense to do something alone, we do it alone because that gives freedom to operate. You can decide much quicker and you maybe also bring some technologies which you don't want to share with the joint venture partners. That gives you all freedom to operate.
On the other hand, we have always been reasonable enough to see when we can join forces with someone who can bring in either technology, market access or raw materials, then we are eager to do that if that is at the very end, a win-win. I think we have a really good operation in Nanjing. We are happy with Sinopec. On the other hand, aren't we with almost EUR 9 billion sales mature enough to build our own Verbund site? I think, yes. We should have also the ambition for that.
Actually, now after the opening of some restrictions in the automotive industry and the banking industry, we have been pushing and asking the Chinese government, isn't that now also the right time in the chemical market to get away with all the restrictions that exist? Actually, we found positive resonance over there. I think they very clearly bet on us and say, "Yes, BASF is the right company to do such a step as a pioneer in China," because I think we built on this very reliable partnership. Over the years, we have always been reliable. We did what we say.
I just remind you, in 2008 when we announced the Nanjing, the Chongqing MDI facility, and that was at the time when we had the financial crisis, everyone disappeared in China in terms of their investment plans. We have been, at that time, really the only sizable investment that was announced. That is something the Chinese people don't forget. This is something where they say, "This is a reasonable company." They also know our facilities. Many officials have visited us in Ludwigshafen. They know how we operate safely in the middle of a city. They all know Nanjing, and most of them have visited that. They are impressed in how we do it. I think it is not astonishing that they also have chosen us to go for that way.
I think there will be others again following us, and that's right. That's why I think we are opening a door here for the chemical industry, and we contribute one more step in the overall request of China to open their markets, even more. I think that is something we are proud of, and we will walk in front of all the others that I think will over time follow. As I said earlier, we are proud that we have a China strategy which we can execute and that we can really participate in this growth. Because I ask myself, how you can be top-notch in the chemical industry without having a China strategy.
There are no further questions at this time. This brings us to the end of our conference call. Should you have any further questions, please do not hesitate to contact a member of the BASF Investor Relations team or the media relations team if you're a journalist. Thank you very much for joining us today and goodbye for now. On July 27, Martin Brudermüller and Hans-Ulrich Engel will report on our second quarter results. Thank you very much.
Thank you. Thank you.