Financial opportunities and risks
- Exchange rate volatility
- Interest rate risks
- Risks from metal and raw materials trading
- Liquidity risks
- Risk of asset losses
- Impairment risks
- Risks from pension obligations
The management of liquidity, currency and interest rate risks is conducted in the Treasury unit. The management of commodity price risks takes place in the Global Procurement & Logistics Competence Center or in the appropriately authorized Group companies. Detailed guidelines and procedures exist for dealing with financial risks. Among other things, they provide for the segregation of trading and back office functions.
Exchange rate volatility
- Exchange rate volatility a significant risk factor; sales-side opportunities and risks in particular from U.S. dollar exchange rate fluctuations
- Production-related foreign currency risks limited by having local sites
- Net position in foreign-currency-denominated receivables and liabilities as well as planned foreign-currency transactions hedged with derivatives
Exchange rate volatility: Our competitiveness on global markets is influenced by fluctuations in exchange rates. For BASF, opportunities and risks arise in particular on the sales side when the U.S. dollar exchange rate fluctuates. A full-year rise in the value of the U.S. dollar/euro exchange rate by $0.01 would result in an increase of around €50 million in BASF’s earnings, assuming other conditions remain the same.
On the production side, we mitigate foreign currency risks by having local production sites in the respective currency zones.
Financial foreign currency risks result from the translation of receivables, liabilities and other monetary items in accordance with IAS 21 at the closing rate into the functional currency of the respective Group company. In addition, we incorporate planned purchase and sales transactions in foreign currencies in our financial foreign currency risk management. These risks are hedged using derivative instruments, if required.
Interest rate risks: Interest rate risks result from potential changes in prevailing market interest rates. These can cause a change in the present value of fixed-rate instruments and fluctuations in the interest payments for variable-rate instruments, which would positively or negatively affect earnings. To hedge these risks, interest rate swaps and combined interest rate and currency derivatives are used in individual cases.
In addition to market interest rates, BASF’s financing costs are determined by the payable credit risk premiums. These are mainly influenced by our credit rating and the market conditions at the time of issue. In the short to medium term, BASF is largely protected from the possible effects on its interest result thanks to the well-balanced maturity profile of its financial debt.
Risks from metal and raw materials trading: In the catalysts business, BASF employs commodity derivatives for precious metals and trades precious metals on behalf of third parties and on its own account. In addition, we use our knowledge of the markets for crude oil and oil products to generate earnings from the trade of raw materials. To address specific risks associated with these trades, which are not part of our operating business, we set and continuously monitor limits with regard to the type and size of the deals concluded.
Liquidity risks: Risks from fluctuating cash flows are recognized in a timely manner as part of our liquidity planning. We have access to extensive liquidity at any time thanks to our good ratings, the commercial paper program and committed bank credit lines. In the short to medium term, BASF is largely protected against potential refinancing risks thanks to the balanced maturity profile of our financial indebtedness as well as diversification in various financial markets.
Risk of asset losses
- Export credit insurance and investment guarantees to hedge country-related risks
- Reduction of credit risks through credit checks and transaction limits
- No concentration of risk of default on receivables at any individual business partner
- Use of credit insurance and bank guarantees
Risk of asset losses: We limit country-specific risks by internally determining country ratings, which are continuously updated to reflect changing environment conditions. We selectively use export credit insurance and investment guarantees to limit specific country-related risks. We lower credit risks for our financial investments by engaging in transactions only with banks with good credit ratings and by adhering to fixed limits. The credit ratings are continuously monitored and the limits are adjusted accordingly. We reduce the risk of default on receivables by continuously monitoring the creditworthiness and payment behavior of our customers and by setting appropriate credit limits. Thanks to the worldwide activities and diversified customer structure of the BASF Group, there is no large concentration of credit default risk. Risks are also limited through the use of credit insurance and bank guarantees.
Impairment risks: The risk of an asset impairment occurs if the assumed interest rate in an impairment test increases or the forecast cash flows decline. In the current business environment, we consider the risk of impairment of individual assets such as customer relationships, technologies and brands, as well as goodwill, to be low.
Long-term incentive program for executives: Our executives have the opportunity to participate in a stock-price-based compensation program. The need for provisions for this program varies according to the development of the BASF share price; this leads to a corresponding increase or decrease in personnel costs.
Risks from pension obligations: We predominantly finance company pension obligations externally through separate plan assets. In addition to the large pension plans of our Group companies in North America, the United Kingdom and Switzerland, this applies particularly to BASF Pensionskasse VVaG and BASF Pensionstreuhand e.V. in Germany. To address the risk of underfunding due to market-related fluctuations in plan assets, we have investment strategies that align return and risk optimization to the structure of the pension obligations. Stress scenarios are also simulated regularly by means of portfolio analyses. Furthermore, new employees are almost always offered defined contribution plans.