Good morning, ladies and gentlemen. On behalf of BASF, I would like to welcome you to our conference call on the second quarter results. Throughout today's recorded presentation, all participants will be in listen-only mode. The presentation will be followed by a question-and-answer session. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. This presentation contains forward-looking statements. These statements are based on current estimates and projections of the Board of Executive Directors and currently available information. Forward-looking statements are not guarantees of the future developments and results outlined therein. These are dependent on a number of factors. They involve various risks and uncertainties, they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in opportunities and risks of the BASF Report 2020.
BASF does not assume any obligation to update the forward-looking statements contained in this presentation above and beyond the legal requirements. On the call with me today are Martin Brudermüller, Chairman of the Board of Executive Directors, and Hans Engel, Chief Financial Officer. Please be aware that we have already posted the speech on our website at basf.com/q22021. This brings us to the point where Martin begins with the speech.
Good morning, ladies and gentlemen. Thank you for joining us today. On July 9th, BASF released preliminary figures for the second quarter of 2021 and increased the outlook for the full year. Today, we will provide you with further details. Let us begin with the highlights of the second quarter of 2021. The strong growth momentum of the previous two quarters has continued. We achieved volume growth and price increases across all regions and all segments compared with the prior year quarter. In some businesses, we were able to restore, and in some cases, increase our margins with the price increases. In others, there are still some way to do. EBIT before special items rose by more than EUR 2 billion compared with Q2 2020 and reached EUR 2.4 billion. This is also considerably above the pre-pandemic level of roughly EUR 1 billion in Q2 2019.
Considerably higher earnings in our upstream businesses were the main driver for the strong increase in earnings overall. Compared with Q1 2021, margins in some commodity product lines such as isocyanates slightly declined in Q2 2021, but remain on a high level. In our downstream segments, we managed to increase volumes and prices based on strong demand. However, pressure from increased raw material prices remained high in several downstream businesses. Let us now turn on to the macroeconomic data. The indicators for the second quarter are estimates, as most of the countries have not yet published their figures. According to the currently available data, global chemical production increased by almost 10% in Q2 2021 compared with the previous year quarter. With an increase in volumes of 28%, BASF Group grew well above global chemical production. All regions recorded strong demand growth.
This was most pronounced in Asia, excluding China and in Europe. In the prior year quarter, these regions, as well as North America, were significantly impacted by the COVID-19 related lockdowns. In comparison, chemical production in China had already grown in Q2 2020. This slide shows our volume growth by region. Sales volumes are compared with volumes in the respective prior year quarters. During the past three quarters, we increased volumes in all regions. In Greater China, we recorded double-digit volume growth during the past five quarters. In Q2 2021, volume growth in China was less pronounced as the recovery was already in full swing in the second quarter of 2020. Volume growth, however, remained strong at 10%. In Europe and in North America, volumes grew considerably in Q2 2021 as the prior year quarter in these regions have heavily been impacted by the lockdowns due to the pandemic.
We move now on to the volume development by segment. In Q2 2021, we increased volumes in all our segments. The volume increase was strongest in the Surface Technologies and Material segment. Volumes also grew considerably in the Industrial Solutions, Chemicals, and Agricultural Solutions. Overall, volumes increased by 28% or EUR 3.5 billion in absolute terms compared with the prior year quarter. We now look at our sales development compared with the second quarter of 2020. Sales of BASF Group increased by 56% to EUR 19.8 billion. As already alluded to, considerably higher prices and volumes were the driver for this. In total, organic sales growth amounted to 63% in Q2 2021. Currency effects of - 7% were mainly related to the depreciation of the U.S. dollar. Portfolio measures had a net negative impact on sales. As I already mentioned, EBIT before special items came in at EUR 2.4 billion.
We achieved considerably higher earnings in the chemicals, materials, surface technologies, and industrial solutions segments. Further details on the earnings development in these segments can be found in our half-year financial report published this morning. In the Nutrition & Care and Agricultural Solutions segments, EBIT before special items declined considerably. I will talk about that on the next slide. Earnings in others also declined considerably compared with Q2 2020. This was mainly due to higher additions to provisions for variable compensation components as a result of the strong earnings development. Let me now provide you with further details about the performance of Nutrition & Care and Agricultural Solutions in Q2 2021. Both segments were able to increase volumes and prices but recorded a considerable decline in EBIT before special items. In Nutrition & Care, EBIT before special items declined by 46%.
The earnings decline was mainly driven by the Nutrition & Health division. Compared with the strong prior year quarter fueled by an exceptional demand during the pandemic, margins declined on account of negative currency effects, lower prices, and higher variable costs, due mainly to higher raw material costs. In animal nutrition, the earnings decline was most pronounced. Lower volumes in Vitamin A, particularly due to the tie-in and startup of the Vitamin A capacity expansion in Ludwigshafen, as well as higher costs from several turnarounds in Q2 were the main drivers. As announced, we plan to bring our Vitamin A plant expansion on stream in the second half of 2021. The project is well on track. In the Care Chemicals division, earnings also declined compared with a strong second quarter in 2020. This was mainly driven by higher raw material prices and put pressures on margins.
Higher fixed costs, in part due to higher maintenance activities, also had an impact. During the second half of 2021, we expect an improvement of our earnings in the Nutrition & Care segment compared with the second half of 2020. In Agricultural Solutions, EBIT before special items declined by 38%. This is particularly disappointing because our Ag team was very successful in driving volumes up by 15% and increasing prices by 3%. Due to our regional exposure, the ongoing strong FX headwind, mainly in the U.S. and in Latin America, dragged sales down by 7%. Higher fixed costs as well as freight cost increases due to higher sales volumes burdened earnings. Furthermore, margins developed unfavorably due to product mix effects. At that point, I will hand things over to Hans.
Thank you, Martin. Good morning, ladies and gentlemen. Let me first give you an update on our recently announced acquisitions. In May 2021, BASF and Shanshan, a leading Chinese lithium-ion battery material supplier, agreed to form a BASF majority-owned joint venture to produce cathode active materials and precursors in China. The purchase price for BASF will be in a mid-triple digit million euro range. Hunan Shanshan Energy operates four production sites for CAM and PCAM in Hunan and Ningxia, with an annual capacity of 90 kilotons by 2022. By forming the intended joint venture, BASF further strengthens its position in Asia, building up an integrated, unique global supply chain for customers in China and worldwide. Through this joint venture, we will increase our annual capacity to 160 kilotons by 2022, with further expansions underway, making BASF the first company with production capacities in all major markets.
Closing of the transaction is targeted for later this summer, following the approval of the relevant authorities. In June 2021, BASF and Vattenfall signed a contract for the purchase of 49.5% of Vattenfall's Wind Farm Hollandse Kust Zuid by BASF. The purchase price amounts to EUR 300 million. Including BASF's contribution to fund the wind farm construction, BASF's total commitment amounts to around EUR 1.6 billion. Please consider that following the intended resale of around 50% of our share in this project to a financial co-investor, we expect to consolidate our participation at equity. As a result, the related CapEx will then not be reported as such in the financial statements of BASF Group. The wind farm is expected to become fully operational in 2023, with first electricity produced already in 2022.
It will be the largest offshore wind farm in the world, with 140 wind turbines and a total installed capacity of 1.5 GW. It will also be the first offshore wind farm without public subsidies for the power produced. BASF is acquiring the electricity from the wind farm for its ownership share through a long-term power purchase agreement. This will enable us to substitute gray power with green power and thus implement innovative low-emission technologies at several of our production sites in Europe, mainly in Antwerp. Closing of the transaction is expected in the fourth quarter of 2021, subject to the approval of the relevant authorities. We have also been successfully working on divestitures. On June 30th, we closed the divestiture of our global pigments business to the fine chemical company DIC, following the fulfillment of clearance conditions.
With DIC, we have found an acquirer whose portfolio is excellently complemented by our pigment business. The purchase price on a cash and debt-free basis is EUR 1.15 billion. Special items in the Industrial Solutions segment include a preliminary disposal gain of a mid-double digit billion euro amount from the sale of the pigment business. The disposal group in the Dispersions & Pigments division was derecognized end of the second quarter of 2021. Since July 1st, the name of the division is now Dispersions & Resins. In July, BASF and Clayton, Dubilier & Rice signed an agreement to sell Solenis to Platinum Equity. With the agreed divestiture of our 49% share in Solenis, we will benefit from the value creation that was achieved through combining the complementary strengths of Solenis and BASF's Paper Wet End and Water Chemicals business in 2019.
The transaction implies an enterprise value for Solenis of EUR 5.25 billion, which includes net debt of around EUR 2.5 billion. We thus expect our share in the disposal proceeds to amount to around EUR 1 billion. From the third quarter of 2021 onward, the non-integral equity participation in Solenis will be classified as disposal group. Pending approval by the relevant authorities, closing of the transaction is expected before the end of 2021. Upon the closing of the transaction, we expect a disposal gain in a EUR mid-triple digit million range. This disposal gain will be reported as special item below EBIT in net income from shareholdings. In June, we announced the postponement of the IPO of Wintershall Dea to a later point in time.
Oil and gas prices at the spot market, as well as at the shorter end of the forward price curve have recovered considerably, this improvement is not yet fully reflected in the forward-looking broker consensus assumptions. Market valuations of oil and gas companies have, for various reasons, not yet reached the level the shareholders expect in order to kick off the IPO. Due to its very robust performance, Wintershall Dea is a strong cash contributor to its shareholders. Strategically, we remain fully committed to divesting our share in Wintershall Dea. Let me now turn to the financial figures of the BASF Group, compared with the prior year quarter in more detail. Martin covered the top-line development already. I'll start with EBITDA before special items, which increased by 162% to EUR 3.2 billion. EBITDA amounted to EUR 3.2 billion compared with EUR 1.1 billion in Q2 2020.
EBIT before special items came in at EUR 2.4 billion compared with EUR 226 million in the prior year quarter. Special items in EBIT amounted to -EUR 39 million, compared with - EUR 167 million in the second quarter of 2020. EBIT came in at EUR 2.3 billion in Q2 2021, compared with EUR 59 million in Q2 2020. At - EUR 44 million, net income from shareholdings improved by EUR 744 million in the second quarter of 2021.
In the prior year quarter, BASF incurred a non-cash effective impairment of its shareholding in Wintershall Dea. Net income amounted to EUR 1.7 billion, compared with - EUR 878 million in the prior year quarter. The tax rate was 18%. Reported earnings per share increased from - EUR 0.96 in the prior year quarter to EUR 1.80 in Q2 2021. Adjusted EPS increased to EUR 2.03 in the second quarter of 2021. In the prior year quarter, it was at EUR 0.25.
I will now move on to our cash flow development in Q2 2021. Cash flows from operating activities increased by EUR 295 million to EUR 2.5 billion in Q2 2021. The improvement was mainly driven by the considerable increase in net income compared with Q2 2020. This was partly offset by the lower release of funds from changes in net working capital. Cash flows from investing activities amounted to + EUR 323 million, an improvement of about EUR 1 billion compared with the prior year quarter. This was mainly due to the proceeds from divestitures, particularly the divestment of BASF's pigment business. With EUR 767 million, payments made for property, plant, and equipment and intangible assets were slightly above the prior year level. Cash flows from financing activities amounted to - EUR 4.1 billion, down by EUR 4.5 billion compared to Q2 2020. Repayment of financial and similar liabilities exceeded additions by EUR 1 billion.
While in the prior year quarter, net additions in the amount of EUR 3.5 billion increased financing cash flows. Dividend payments were slightly above the level of Q2 2020. Free cash flow increased by EUR 254 million to EUR 1.8 billion due to higher cash flows from operating activities. Turning to our balance sheet at the end of June 2021 compared with year-end 2020. Total assets increased by EUR 2.6 billion to EUR 82.9 billion on account of higher current assets.
They rose by EUR 3.3 billion to EUR 33.1 billion. This was primarily due to higher trade accounts receivable and increased inventories resulting mainly from the stronger business performance and higher raw material prices. Other receivables and miscellaneous assets also contributed to the increase, mainly due to higher precious metal trading items. Net debt rose by EUR 1.6 billion to EUR 16.2 billion. This resulted from reduced cash and cash equivalents and a slight increase in financial indebtedness.
Compared with the respective figure at the end of June 2020, net debt decreased by EUR 4.3 billion. Equity amounted to EUR 38.1 billion at the end of June 2021, an increase of EUR 3.7 billion compared with year-end 2020. This was driven by net income and other comprehensive income, mainly due to actuarial gains and translation effects. On June 30, the equity ratio was 45.9%. With that, back to you, Martin.
Before I turn to the outlook, I would like to share an example that illustrates how BASF innovations contribute to a circular economy and the success of our customers. Plastics are versatile materials. If they remain in use as long as possible, and ideally do not even end up as waste at all, they can also make an important contribution to sustainability. To support our customers in driving sustainability connected with plastics, BASF's plastic additives teams focused its sustainable solutions under the new global brand, VALERAS. We help our customers to reduce CO2 emissions with our focus on lower product carbon footprints and bio and renewable feedstocks. VALERAS builds on the extensive experience in stabilization protection, technical and regulatory support of BASF to strengthen in two technology approaches to the circular economy, extend the loop and close the loop .
VALERAS includes additive solutions that reduce VOC emissions in foams, enhance biodiversity in plastic greenhouses, and reduce energy consumption during PP nonwoven fiber production. To help achieve global recycling targets, which are ranging from 25% to 100% in the packaging industry, the portfolio will expand to include BASF additive packages for mechanically recycled plastics and applications. Ladies and gentlemen, we will conclude with BASF Group outlook. As already announced on July 9, we increased our outlook for 2021 based on the strong business development in the first six months of the year. We now expect sales in the range of EUR 74 billion - EUR 77 billion. EBIT before special items is anticipated to reach between EUR 7.0 billion and EUR 7.5 billion. The return on capital employed is expected to be between 12.1% and 12.9%.
The considerably increased earnings expectations in the chemicals and materials segments are the main reason for the increase of our forecast. We continue to expect a certain normalization in margins, and thus earnings of the upstream businesses in the second half of the year, but to a lesser extent than previously assumed. Regarding our accelerator sales, we now expect EUR 21 billion - EUR 22 billion in 2021. No changes have been made to the forecast of our expected CO2 emissions. Our adjusted outlet is based on the following assumptions regarding the global economic environment in 2021. Gross domestic product is expected to grow by 5.5%. Industrial production and chemical production are expected to grow by 6.5% each. We now assume an average exchange rate of $1.20 per euro and an average annual oil price of $65 per barrel Brent crude.
Our forecast assumes that there will be no more severe restrictions on economic activity due to measures to combat the COVID-19 pandemic in the second half of 2021. Now, we are glad to take your questions.
Ladies and gentlemen, I would like to open the call for your questions. Anyone who wishes to ask a question may press star, followed by one on their touch-tone telephone. For the best sound quality, we kindly ask you to be sure to unmute your phone and use your headset when asking your questions. Please limit your questions ideally to only two at a time so that everybody has a chance to ask their questions. The first question is from Markus Mayer, Baader -Helvea. Please go ahead.
Yeah, good morning. I have two questions, if I may. The first one on the magnitude of the startup costs in Nutrition & Care on this vitamin A plant. The second one is on the product mix effect you experienced in your Ag division. Maybe if you can also give some light on this effect as well. Thank you.
Yeah. Good morning, Markus. This is Hans. On the startup cost that we have in Q2 in Nutrition & Care for vitamin, I give you a round figure there, that's between EUR 20 million and EUR 30 million. Keep in mind, though, that this is the startup effect that I'm talking about. We also had a number of turnarounds, which we typically don't specify the respective costs, but that's also something that plays a role when you look at the results of Nutrition & Care.
Okay, thank you.
Oh, sorry. The product mix in Ag, what do we have there? We had Q2 of last year, which had to do with weather development. We had actually still higher sales, in particular in seeds and traits than we had in Q2 of this year. Seed and trait business, higher margin business than the crop protection business, that plays a major role in the product mix and the resulting outcome. Let me say, in addition to that, if you look at the earnings, this is on the EBIT before special items level of Agricultural Solutions. If you look at the currency effect that we have in there somewhere between EUR 40 million and EUR 50 million. That's actually the key explanation of the decline in results that you see there at the back. You have a quarter at the same level than where we were last year. Thank you.
Thank you.
The next is Christian Faitz from Kepler Cheuvreux. Please go ahead.
Yes. Good morning. Thank you, Steffi. Good morning, everybody. Two questions from my side, please. Is it because of the late cyclicality of your customer industries and Performance Chemicals that price momentum is so comparatively weak? The second question would be on nutrition. Can you please elucidate a bit the price pressure, particularly in Nutrition & Health, which is consistent since Q2 last year. Is that mainly coming from the vitamin side? Thank you. Also obviously congrats on the results, minus Ag.
Thank you, Christian. I start with your first question on Nutrition & Health. Yes, there is some price pressure. There is also something else. That is raw material cost pressure that we need to keep in mind here. You know how this works. Our upstream segments, they pass on any type of price increases on the raw material side relatively quickly, I tend to say within 30 days. The further you go downstream in the portfolio, the longer it actually takes. That's something that we typically see. You know how it is when prices go up, you see the kind of margin pressure that we have. When prices come down, raw material prices, you'd see typically the margin expansion. That is exactly what we have here. Maybe one more word to put things in perspective for Nutrition & Health.
Please also keep the comp in mind, which is extremely strong. You may recall that last Q2, we talked about the resilience of the business, the very high demand that we had seen, in particular in the months April and May 2020, the pre-buying that took place there. I think all that needs to be factored in to put overall Nutrition & Health in the right light with what we consider and admit is a weak quarter. The first question, could you help me again with that, please?
Yeah, it was Performance Chemicals. The price momentum is relatively weak compared to any other traditional chemicals segment. Is that because of the late cyclicality of your customer industries, i.e. oil and gas, et cetera?
Thanks again for repeating the question. When you look at the Industrial Solutions segment, I think we have overall price increase there of 13% in Q2. That does not fully compensate for the kind of raw material price increase that we have. Again, the general explanation that I gave earlier is true here. You're moving a step downstream from our two upstream segments, i.e. chemicals and materials. It just takes a little longer to pass on the prices. I'd say overall, and if I understood you correctly, you included the Industrial Solutions segments in your congratulations. Nice strong performance that we have seen there.
Okay. Thank you. Fair enough. Thanks.
The next question is from Andrew Stott, UBS. Please go ahead, Andrew.
Yeah, morning, Stefanie. Morning, Martin and Hans. I had two questions. The first one's on the decarbonization debate. Just maybe a question for Martin here. What are your thoughts are on the proposals from the Fit for 55 program? Where do you think chemicals ends up being within the CBAM mechanism? If so, what are the implications for BASF's decarbonization strategy, if any? That's the first question. Second question, a bit more straightforward on CapEx. I wonder if you could give us an update now on CapEx for 2021, 2022, and 2023 on the basis of Vattenfall coming in. I assume you've got to take about half of that EUR 1.3 billion of CapEx, but I just don't know the phasing on that, so appreciate any help. Thank you.
Andrew, good morning. The Fit for 55 package is a package which you have to digest first. It's 3,427 pages of regulation. Quite amazing. I have to say, not so many surprises. We have also been able, I think, in the dialogue before, to change the one or the other thing to a minor, heavy impact, but it is still a heavy package. It's 55% reduction, which I think was clear to everyone that this will come. It has also translated in the meantime into a more tight climate law in Germany, which is also accelerating this path and even more reduction in a shorter period of time. Actually, it's no big surprise, and that is all factored in in our plan, which we have showed you in Capital Market Day in March. The CBAM is actually something I'm personally very critical about CBAM.
I think it's just not going to work. It's not only the WTO compliance, it is a very bureaucratic piece because if you apply that to chemistry and you just think about how value chains are branching out, you have to know for each and every product that's imported and exported, what actually the fair CO2 carry is. I think it's almost impossible. That's why we in the Cefic, which is the European Association for the Chemical Industry in Europe, have actually decided not to hunt for participation in the CBAM, but rather let that first be tested in other big commodities. It's now the five commodities, and there's only one from chemical industry, which is ammonia, which is a relatively easy- to- understand commodity. With that also the fertilizers.
It will affect us not dramatically much, but certainly we are also a large ammonia producer, and you know also that with CBAM now the free allocation of CO2 certificates are actually cut off in 2023, and that is a major burden in cost. That really hits the whole industry. I think it's a good example to now learn how that actually impacts export, import, and also certain value chains. It is the starting point of a long journey, and there's a lot of question marks, and I can only repeat myself here. If we really want to manage that and convert that into an advantage, where I think we can do, we need a lot of dialogue that overall regulation is positive.
So far Fit for 55 is actually a wish list, what they want to do, but it is not a list of regulations to help us to actually really realize those targets. Maybe we have some more time in future, then I will talk more in detail about that. I think about CapEx, I would say we are so far very well on track, and I think also the EUR 3.6 billion for this year, we will most probably around spend also around that amount. Going forward with CapEx 2022, 2023, that is stepping up. That's always what we said, because then the big investment in China and Zhanjiang will kick in. I cannot give you detailed numbers now.
We will do that with the next five years numbers, where we can provide also a little bit more, let's say maybe an outlook, how that will develop and how steep it will increase. We will also then show you a bit more in the battery materials, what we intend to do, and this is both the drivers. In the same moment, we are very harsh and very disciplined in the allocation for all the other businesses. I would say it doesn't bear any surprises, Andrew, but give us some more time to provide, I think more detailed numbers.
The next question will be from Matthew Yates. We have then Jaideep Pandya, followed by Laurent Favre, and now it's Matthew Yates, Bank of America. Please go ahead.
Hey, good morning, everyone. Two questions. First one, sorry for going back to Ag, but you're making substantially less profits in the quarter than you did a few years ago before you even acquired the Bayer assets. When we think about the moving parts you've talked about, is it really foreign exchange that's the big problem? When you talk about higher fixed costs, is that specifically relating to freight, or is that something more of an investment in the business that maybe we see some return on going forward? The first question. The second one is around Wintershall. I wanted to ask you what the strategic options are for that asset and how we can avoid this becoming somewhat of a stranded asset if the market continues to be resistant to valuations in the oil and gas sector.
Other than an IPO, are you also exploring options for a trade sale, or could you even contemplate some sort of spin-off to shareholders if, given the improvement in the rest of the business, you're making good progress on deleveraging anyway? Could you simply just spin the asset off? Thank you.
Matthew, this is Hans, let me take your two questions. I'll start with Ag. We talked about the significant FX effect that we have that burdens the earnings of Ag. I mentioned already, without that, we would have been at the same level as in Q2. There is one very simple explanation for that, which is the U.S. dollar, which was locked in at $1.10 in Q1 and Q2 of last year. We have it slightly above $1.20 in Q2 of this year. There's also something to be kept in mind, when you compare then later on, once our competitors report and report their figures, in U.S. dollars at this point in time, simply the disadvantage of showing the numbers in euro terms. Yes, we have increased fixed costs, as Martin has explained already.
Pulling through higher volumes means also that your fixed manufacturing costs increase. We have in line with the higher volumes also, higher selling costs and as part of that, also higher freight costs. Then we have something that is also true, and I mentioned this already, isn't in the fixed cost, it's in the variable cost, but significant increases in raw material prices. In part in situations where prices for the products are fixed at the beginning of the season, and these raw material prices then hit you during the course of the season. Hope that helps to put this in perspective. Wintershall Dea, they are a stranded asset, I would say definitely not.
We made a conscious decision here, seeing where the broker prices were, when it comes to valuation and when it comes to valuation for an IPO, what is at this point in time, in particular of relevance are the years 2022, 2023, 2024. We saw the strong move on the front end of the curve, but 2023 and 2024 were clearly lagging behind. It's slightly improving as we had expected. It also looks like the multiples are improving. From that point of view, I think we made economically here the right decision. You're asking with other alternatives, I can tell you that between the shareholders, we have agreed on a path for an exit, which is the IPO, and we'll continue on that path. Let me also reiterate what I said during my brief speech earlier. The strategic decision for BASF is absolutely clear.
We will implement as we have implemented on the divestitures of the water and paper treatment chemicals business, the constructions chemicals business, the pigments business. We will also implement in this case.
Thank you, Hans.
Next question is from Jaideep Pandya On Field Research. Please go ahead.
Thank you. I want to go back to the CMD you guys did in 2018, where you gave the 3%-5% EBITDA sort of CAGR target. Obviously at that time flagged that this is not going to be easy. As of today, you're probably going to do almost all the CAGR, in 2021 if your EBITDA is close to roughly EUR 12 billion, based on a EUR 9 billion base of 2018, roughly. Just want to understand, as we think about life ahead for BASF, how sustainable is this earnings level today? Do you think that, basically if you add all the sort of over-earning you're doing in certain upstream areas versus some of the investments/under-earning that is in the downstream areas, there's still room to grow from the current profitability level of roughly sort of EUR 12 billion?
Is it really an exceptional year this year and therefore we should actually be thinking about some moderation in the outer years and therefore go back to this more like a 3% growth rate level rather than the 5% growth rate level in terms of the range? That's my first question. The second question really is around your battery business. Obviously you've announced a big joint venture with Shanshan. How do you actually unlock value in this business from a capital markets point of view? In the longer term, do you plan to sort of separate this business with a focus strategy? You intend to just keep it in BASF, and therefore, this is going to be an important part of your strategy, but it is always going to be for the capital markets to ascertain a value to it. Thanks so much.
Yeah, Jaideep, this is Hans. I'm trying to find the right answer for your first question. Let me say this. With the new corp strategy that we launched in the end of 2018, we announced a number of measures. These measures included the divestitures that I talked about briefly. In other words, changes in the portfolio, upgrading the portfolio overall. It included certain cost measures on which we have put into what we call the Excellence Program, on which we will deliver, as you will see by the end of this year, I have no doubt. We have put a strong focus on the customer, where some of you have asked me over time, "Well, Hans, should an organization like BASF be always focused on customers?" I always said the same, "Yes, absolutely. But at times it may make sense to put even more focus on it.
With that, also fuel more growth in BASF. As Martin has explained, as it looks both in Q1 and in Q2, our growth, and this is measured in volume, is stronger than volume growth overall of the chemical industry. We've implemented a number of other measures in the meantime that should all help us to increase profitability of the BASF Group. Let's see whether this one year will be the catch-up year and form then the new baseline for the 3%-5%. As Martin and I sit here, we are firmly convinced that the BASF Group is able to deliver that. We will do everything to actually also fulfill the promises that we made there.
Nothing to add from my side, Hans. Jaideep, I will try to answer your question about the battery material business and our acquisition in China. You know that we have a footprint which includes North America, Japan, and now with the investment also Europe. We have no capacity in China, and this is the largest market in the moment. Nevertheless, this chain is in a whole move, I would say, overall the different steps of the value chain. There is new alliances. There is a lot of investments coming up, gigafactories, material factories, also investments in the mining. It is very important to have a position also in China because the Chinese suppliers are delivering a major part of the material for the value chains globally in the current moment. It allows us to also link in very quickly via Shanshan's position into some of these opportunities.
You see that when we bought ourselves into this enterprise, that also Shanshan was interested because the world is not only China anymore. They also want to get, let's say, access more to the Europeans. I think with this, we have a good opportunity to really exploit all the different constellations and setups you have in this value chain worldwide. Don't forget that we also, for this, got a very quick access in additional capacities because now we will be really a big animal. It's the only one, by the way, to have the global footprint. We have 160,000 tons of capacity come at the end of 2022. That gives us really the opportunity to very quickly grow and to build up these new alliances and customer bases and be very flexible in the demand of the customers.
As I said, this is very dynamic. With this, I think we can accelerate the growth, we can build our position, and we can increase or enlarge our customer base. I think with this, we should be able to also really unlock value quickly in this business. I hope that answers your question.
Thanks a lot.
We will continue with Laurent Favre, Exane BNP Paribas. Following him, we will have Tony Jones, then Charlie Webb, and then Andreas Heine. Now, Laurent Favre, please go ahead.
Thank you, Stefanie. Morning, all. My first question is on that normalization in the upstream. As you said, you still assume that conditions will normalize, but just less than before. I was wondering if you could give us a bit more color on the various moving parts there of your assumptions. In particular, do you see now the risk of further normalization into the first half of 2022, or do you think that that scenario is off the table? If you could separate, I guess, chemicals and materials in your comments, that would be great. Secondly, Hans, on the Ag side. Compared to February, when you issued the guidance for slight EBIT growth, there are new moving parts on higher costs and better soft commodities. I guess currency, if anything, are slightly better.
If you net all of those new increments, do you think you can grow EBIT slightly in Ag for the full year? Thank you.
Laurent, I take the first question. First of all, let me say that the conditions for chemicals and materials segment in the second quarter overall were better than in the first quarter. That was coming on one hand, very strong demand because in all the different businesses, there is really solid demand globally. There's also, I think the world has been a little bit surprised by low inventories and then big business, they have also to fill. We have also the supply chain topic. Some of the markets are actually because also of the supply chain issues and the shortage of containers, there is not in every business an arbitrage business from one region to the other. Partly they are a little bit more segregated markets, that's also why everything reacted quite sensibly in a pattern.
Also where some of our players in the major commodities had supply problems, even coming back to the big freeze in the U.S., which took weeks actually partly until today to really normalize and to work down the backlog. If we look in a lot of the margins, I have to say we really have super margins in the moment. Very high level, and it's just not right to assume that this is going to stay forever. If you look in products also like acrylic acid, but also BDO, but then also MDI, TDI, this is all very much on the high level. Simply with the effect that in some areas the supply normalizes, and even the demand stays strong, you just have a certain relaxation of margins. I expect, however, that even in the second half, this is still a super margin level.
It's not record margins anymore, it is very good margin. For that reason, we have to figure into our numbers that there is a certain normalization. You know how sensitive that is. In the MDI case, one of the competitors had a force majeure, immediately prices react. That is always, let's say, the choker in the pocket that there could be some unfortunate or unplanned outages which would change the situation. Overall, margins level are so high compared to the last five, six years that they have to go down to a certain extent. That should not send you the signal that they are now collapsing on the floor. It's just really a normalization.
The past, the level of H2?
Pardon again?
That was more my question. The risk beyond that H2 normalization you are factoring in in your new guidance. You would still say that they are abnormal in your new guidance, in your new scenario for H2 for this year?
Yeah. This is what I said. We have factored in a high level of margins, but not that high as in the first half.
Thank you.
This is Hans, Laurent. Thanks for your question on Ag. Yep. We had expected to be slightly ahead of half one last year. We're in fact down by order of magnitude EUR 45 million-EUR 50 million. Things have actually, from raw material cost to currency, have not gone in our favor.
It remains to be seen how the second half will develop. You know that this is seasonally weaker than the first half of the year. It is predominantly the business in South America. We need to see how this will go. It looks definitely more challenging now than it looked when we gave the guidance in February. Hope this helps.
Thank you.
Looking at the time, I think we have to speed up a little bit. Perhaps if you can restrict yourselves to ideally only one question, that would be great. Now we have Tony Jones, Redburn. Please go ahead.
Yeah. Good morning, everybody. I've got one question. Actually, I have two, but I'll go with one. For cash flow and capital allocation with EBIT this year, the new guidance is going to be well over EUR 7 billion. How are you thinking about returning any excess cash to shareholders in a sort of peak earnings year, or are you favoring growth investments, and strategic M&A? Thank you.
Maybe I'll take that, Tony. This is Hans. Great question. First of all, let's bring the year home, number one. Number two, you know what our priorities are for cash, and they have not changed a bit.
Okay. Thank you.
Short answer. Now we have, Charlie Webb, Morgan Stanley. Please go ahead.
Morning, gentlemen. Thank you, Steffi. Just the one from me. As we look at the auto sector, maybe you can just provide us a bit more detail, in terms of what you're seeing into the second half, and in particular how that relates to surface tech. Clearly, it seems regs are still very positive on the auto cat side, as well as precious metals obviously helping out in Q2. Just how do you see surface technology kind of through the second half of the year would be helpful.
Charlie, maybe I take that one. Automotive, I think I said that already in February that the semiconductor issue is not an issue and a blip for one or two quarters, but it is a more long-term problem. I think that has shown that I was right on that. We clearly reduced our number for assumption for cars produced. We are currently thinking about 83 million units to be produced in this year. That is definitely lower. We have, however, been surprised that the Q1 was stronger than anticipated with about 800,000 units. That means for the other three quarters, this is actually a minus of 1.3 million units. Second half will be a little bit weaker respective the opportunities. That has nothing to do with demand, because the demand is strong.
You see also in the U.S., the inventory of cars is really low. You see also that the delivery times of the OEMs increased. It is really a semiconductor shortage that really provides this framework not to produce more cars. This overall move into e-mobility is very exciting because now more and more of the players are accelerating their plans to change from combustion to e-mobility. I think a very clear commitment. It's a proof point that we have been right with our assumptions for the battery materials. I talked about that already. That's really very dynamic. Let me really say here also, we have a lot of other projects that are connected with e-mobility because a lot of things are differently constructed in a car that has an electric power drain.
Overall, I think we mentioned that there's much more chemistry in terms of value in a car that is electrically driven than a combustion. Overall, that is really good news for a supplier like BASF. Let me give you one example. If you think about the different fluids you need in a car, you think if you don't have a combustion engine, you don't have to cool it anymore, then you need actually less. It's exactly the opposite. You need about 3x to 4 x as much fluid to also cool the battery. There's a lot of opportunity and a lot of the projects we have with even higher attention and faster execution than we thought. Overall, quite challenging, but also very interesting and dynamic development.
Just on surface technology in terms of the auto cat business, obviously strong first half. Just wondering how that looks into the second half. How far are we along in that kind of regulation upgrades in Asia, in China?
Yeah. Overall, still, for the years to come, the combustion engines are the big numbers here. There is also Euro 7 and the China 7 coming up for a further intensifying regulation. That still drives innovation. We need new cat systems. We'd have to adapt. I would say over the next years, that is still a good business.
Okay. Thank you very much.
We have Andreas Heine, Stifel, and then we have three more analysts in the line. That will be Peter Clark, Chetan Udeshi, and Sebastian Bray. So now, Andreas Heine, Stifel. Please go ahead.
Well, I tried to, but very brief. In Q3, in chemicals, if I look to the prices, I can see, I would say, on average, prices might be even higher than in the second quarter. Is there anything I miss, if you look on what you see for that particular segment in the current quarter? Second, in agro, we have seen soft commodity prices being very much up, but no one in the crop protection and seed business could react on this as the season was already running. Now I guess everyone is hoping for price increases, especially for the second half in the Latin American season. Is there anything you can share with us on this price increases for LATAM in the
Second half, especially also to offset what you have lost on the currency last year.
Andreas, a short answer on the chemicals margins. If you look in some of the margins, they already, at the end of Q2, turned down a little bit. If you see MDI and TDI in Asia, a caprolactam more flat and some others also, let's say, started already to normalize a little bit. We expect simply with the higher availability that this is going to continue. I would say the Q3 in average margins are a little bit lower than we had in Q2.
Thanks.
Yeah, Andreas. This is Hans. I think your summary was great. FX needs to be taken into consideration for the business in the southern hemisphere. Increased raw material prices have to be taken into the equation. I think that will also be reflected in the pricing policy.
Thanks.
Now, Peter Clark, Société Générale . Please go ahead.
Yes, good morning, everyone. I think you've sort of alluded to this, but it's the flip side of the super profitability upstream and looking at the lag effect you're talking about downstream passing some of this stuff on. I know they're different inputs, whatever. If coatings are for an example, some of your peers are talking about peak impact of the inflation probably in terms of Q3, then stabilization from the winter and then perhaps gentle moderation on the supply disruptions easing. I'm just thinking if your thoughts are similar to that and how it might impact some other businesses being squeezed at the moment as well.
Peter, this is Hans. Thanks for your question. I'd say, in general, we have a similar view. Martin just described what our expectations are for Q3, second half of the year for prices in upstream. Coatings business, typically a business where it also takes definitely longer than upstream to pass on the price increases. Despite the semiconductor issues that we have, demand overall is good and strong, which is also reflected in the results of Q2 and the first half of the year. There's definitely some work to be done on the price front.
Just to add, let's not get depressive now if we are at the peak and we enjoy as long as we can do. As I said, if you talk about normalization, this is not collapsing margins. As long as the demand stays healthy, and that's what we can see also from the order entry and everything, I think there's no reason for concern too much.
Got it. Thank you.
Okay, now Chetan Udeshi, J.P. Morgan. Please go ahead.
Yeah, hi. Morning. Two quick questions. One just, it seems you are alluding to maybe slight reduction in margins in the upstream businesses. Should we take that as a sort of guide for, let's say, what Q3 could be in terms of earnings? Maybe a slight reduction from Q2 levels of, say, just around EUR 2.4 billion? Do you think there are some other factors we need to take into consideration when thinking about Q3 versus Q2? Secondly, can you remind us what is the existing sales and profitability of your cathode active materials business right now? Thank you.
Chetan, for the first one, I think we alluded to it already. It is a certain normalization. If you look on some of the margins, they are just not healthy in the moment. They are so high that you cannot expect that customers overall stay with that. With a better supply, it is just immediately reacting to somehow go down. As I said, it is still margins in most of the lines, which is far above a normal average. It's still a very attractive margin. There is one element coming in, seasonality in some areas, and that's always factored in. BASF pattern has that as well, that in summer months, sometimes they draw a little bit less because some of the companies also shut down or reduce or whatever, go down with the shift or something like that.
I think that is then also now, let's say, going in the same direction that is simply normalizing. Please consider that this is still very attractive margins in commodity areas. Hans, you go second.
On the battery materials business, Chetan, as you know, we don't provide the financials for our strategic business units. What I can tell you is that this is a nicely growing business, and it certainly grows in line with the overall growth that you see in electromobility.
Thank you.
Now, the final, ideally one question from Sebastian Bray, Berenberg.
Yes, hello. Thank you for taking my question. This is on the battery materials business. What exactly was the purchase price that BASF paid for the 51% stake in the Shanshan materials business? Was it about $650 million? Why was this not disclosed? Just as a follow-up to this, what is the total organic CapEx investment that BASF will make in battery materials to reach the 160 kiloton by the end of 2022? The company has previously disclosed EUR 400 million in Europe. How much on top of that will come to reach the 160 in total? Thank you.
Sebastian, maybe on the second one, with the battery materials on the investments. We have currently our EBMI, that is the European investment, which is in execution, which will then be finalized next year. All the other parts that are actually coming in now are coming in via China. There is no other capacity expansion in the moment in the numbers from our side. Hans, the secret about the price.
Yeah. With respect to the price, we've given you what we can give you, following the agreements that we entered into. I can't tell you more than that it is a mid triple digit million figure. Sorry for that.
Was it a condition of the agreement that the price not be disclosed?
Pardon me?
Was it a condition of the agreement that you signed with the shareholders of Shanshan that the price not be disclosed?
These are the usual confidentiality rules that are in place and as a result of that, we haven't disclosed more than what we just said.
That's understood. Thank you.
Welcome.
Ladies and gentlemen, this brings us to the end of our conference call. Let me take this opportunity to draw your attention to another virtual event we will offer on Monday, September 27. The BASF Investor Update, scheduled to begin at 11:30 A.M., Central European summertime, and end at around 3:00 P.M., will be dedicated to our major growth projects, the new Verbund site in Zhanjiang and our battery materials business. Martin Brudermüller and Markus Kamieth will give speeches, and in the Q&A sessions, they will be joined by the respective presidents. Should you have any further questions at this time, please do not hesitate to contact the members of the BASF IR team. Thank you for joining us today, and goodbye for now.