Growth in industrial production fell short of our expectations in the third quarter of 2018, primarily due to developments in the automotive industry in September in particular. The introduction of new emission standards had an impact in Europe. The effects of the trade conflict between the United States and China are also showing. This is leading to a slowdown in economic growth in Asia in particular, mainly in China.
We have therefore adjusted our assessment of the global economic environment in 2018 as follows (forecast from the BASF Half-Year Financial Report 2018 in parentheses):
The signing of the definitive transaction agreement on the merger of Wintershall and DEA reduces the BASF Group’s sales and EBIT by the contribution of its oil and gas activities – retroactively as of January 1, 2018, and with the prior-year figures restated – due to their presentation as discontinued operations.1 This was explained in the BASF Report 2017.2 Furthermore, the risk of a growth slowdown has increased. Otherwise, the statements on opportunities and risks made in the BASF Report 2017 continue to apply overall. According to our assessment, there continue to be no individual risks that pose a threat to the continued existence of the BASF Group. The same applies to the sum of individual risks, even in the case of another global economic crisis.
On September 27, 2018, we adjusted the BASF Group’s forecast3 for the full year 2018 made in the BASF Report 2017 as a result of the changed presentation of the Wintershall Group (previous forecast from the BASF Report 2017 in parentheses):
1 For more information, see Other and the Restated Quarterly Figures for 2017 and 2018 of this quarterly statement.
2 For more information, see the Outlook of the BASF Report 2017.
3 For sales, “slight” represents a change of 1–5%, while “considerable” applies to changes of 6% and higher. “At prior-year level” indicates no change (+/–0%).
For earnings, “slight” means a change of 1–10%, while “considerable” is used for changes of 11% and higher. “At prior-year level” indicates no change (+/–0%).
4 For an explanation of this indicator, see BASF Report 2017.
For 2018, we expect the global economy and chemical production to grow at roughly the same pace as in 2017. We assume an average price of $65 for a barrel of Brent blend crude oil and an exchange rate of $1.20 per euro. In this environment, we aim to continue to grow profitably and slightly increase the BASF Group’s sales and income from operations (EBIT) before special items in 2018.1 This forecast takes into account the agreed transactions with Bayer and Solvay. In contrast, it does not include the intended merger of our oil and gas activities with the business of DEA Deutsche Erdoel AG and its subsidiaries.
Our forecast for 2018 includes the agreed acquisition of significant parts of Bayer’s seed and non-selective herbicide businesses, which is expected to close in the first half of 2018. Based on the timing of the acquisition, the seasonality of the businesses to be taken over and the anticipated integration costs, this is likely to have a positive impact on sales and a negative impact on earnings for the Agricultural Solutions segment and the BASF Group in 2018. This outlook also includes the intended acquisition of Solvay’s integrated polyamide business in the third quarter of 2018. However, we currently do not expect this transaction to have any material effect on sales and earnings for 2018.
We anticipate slightly higher BASF Group sales in 2018, largely as a result of volumes growth. We expect considerable sales growth in the Agricultural Solutions and Oil & Gas segments, and slightly higher sales in the Functional Materials & Solutions and Performance Products segments and in Other. Our planning for the Chemicals segment assumes slightly lower sales due to price factors.
EBIT before special items is expected to be up slightly on the 2017 level. This will mainly be driven by significantly higher contributions from the Performance Products, Functional Materials & Solutions and Oil & Gas segments. We are forecasting a slight improvement in the earnings generated by Other. After a strong result in 2017, we expect considerably lower EBIT before special items in the Chemicals segment, primarily as a result of lower margins. We anticipate a slight decrease in the Agricultural Solutions segment: The agreed transaction with Bayer is likely to have a negative effect on earnings in 2018. Excluding this acquisition, we would expect the segment to record slight growth in EBIT before special items.
EBIT for the BASF Group is forecast to decline slightly in 2018. We anticipate special charges in the form of integration costs in connection with the agreed acquisitions. In contrast, the Performance Products and Oil & Gas segments in particular recorded special income in 2017. EBIT in the Chemicals and Agricultural Solutions segments is expected to be considerably below the 2017 figure. We are forecasting slightly higher EBIT for the Performance Products and Oil & Gas segments and Other, and considerable growth in the Functional Materials & Solutions segment.
We aim to once again earn a significant premium on our cost of capital in 2018. However, compared with the previous year, the BASF Group’s EBIT after cost of capital will decrease considerably. This will mainly be due to lower EBIT as well as the additional cost of capital from the planned acquisitions. In the Chemicals and Agricultural Solutions segments, we anticipate a considerable decrease in EBIT after cost of capital, and a considerable increase in the Performance Products, Functional Materials & Solutions and Oil & Gas segments.
The intended merger of our oil and gas activities with the business of DEA Deutsche Erdoel AG and its subsidiaries is not taken into account in this outlook. On signature of the final transaction agreements, the Oil & Gas segment’s earnings would no longer be included in sales and EBIT for the BASF Group – retroactively as of January 1, 2018 and with the prior-year figures restated. Rather, this would be presented in the income before minority interests of the BASF Group as a separate item, income from discontinued operations. From the transaction closing date, we would presumably account for BASF’s share of income generated by the joint venture – Wintershall DEA – using the equity method and include this in EBIT for the BASF Group. The gain from the change from full consolidation to the equity method would be shown in income from discontinued operations.
This page 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; and they are based on assumptions that may not prove to be accurate. Such risk factors include those discussed in the Opportunities and Risks Report of the BASF Report 2017. BASF does not assume any obligation to update the forward-looking statements contained in this outlook above and beyond the legal requirements.