Letter from the Chairman of the Board of Executive Directors

Dear Shareholder,

For you and for BASF, 2014 was an unstable, or even ambivalent, year. We started off cautiously optimistic, not least because demand in Europe was picking up slightly. But then from summer onward it was clear: Europe was hardly going to grow at all. In the first half of the year, we were burdened by a strong euro, which then began a downward slide in August. We struggled with increasing costs for some raw materials in the first six months – a consequence of the high price of oil – before this development, too, reversed. A year ago, no one could have foreseen that the price of oil would plummet from $110 per barrel to a price as low as $50 per barrel of Brent crude. And the political uncertainty in some parts of the world also continued to grow.

Our share price reflected these ups and downs. Although you, our shareholders, were able to enjoy a new high in June, our share performance was unsatisfying by the end of the year – also as compared with the DAX 30 and the global chemical industry. It’s only a small consolation that BASF still remains among the top performers when viewed over a ten-year period.

“We have grown – despite disappointing developments in Europe.”

Especially against this background, it’s important to keep in mind that we nevertheless achieved our goal for 2014. We wanted to once again increase our earnings. And despite the disappointing developments in Europe, we did just that: We grew. We further strengthened our chemicals business and in turn improved our margins. We have our costs firmly under control.

“We once again propose raising the dividend, from €2.70 to €2.80 per share.”

We once again propose raising the dividend, from €2.70 to €2.80 per share. All of this has only been possible through the extraordinary accomplishment of our employees. On behalf of the team of the Board of Executive Directors, I offer them my heartfelt thanks.

“We create chemistry” strategy

In a volatile year like 2014, it makes sense to ask whether BASF’s fundamental direction – our “We create chemistry” strategy – is still the right path. The answer is a clear yes: The chemical industry will continue to grow worldwide, although somewhat more slowly than was predicted a few years ago. And we want to participate in this growth – through the largest investment program in decades. We are investing in emerging markets. We are investing to take advantage of shale gas in the United States, and we are investing in the competitiveness of our European sites. A whole range of new plants will start up operations in 2015 – plants that will keep producing for the next 10, 20 or 30 years.

We made advances in the regional diversification of our oil and gas business. We acquired additional reserves and development fields in Norway, and have already made good progress there. The swap of our gas trading business for oil and gas reserves from Gazprom in Russia did not happen, however. We will continue our successful joint ventures in western Europe and Russia, even though the current political situation is difficult.

We also continued restructuring our portfolio. This included, for example, exiting the textile chemicals and styrene plastics businesses, yet also establishing a joint venture with Toda Kogyo, a leading Japanese company in battery chemicals. We are intensively researching and developing this area.

“Innovation is and remains the driving force for chemistry.”

Innovation is and remains the driving force for chemistry. That is why we once again spent more on research and development and globalized our activities. In Mumbai, we are setting up a research center that will focus primarily on crop protection. The Innovation Campus in Shanghai – already the largest research site in Asia – will be expanded. At a new laboratory in Amagasaki, Japan, our employees are developing electrolytes and electrode materials for more high-performance batteries. You will discover even more examples of BASF’s innovations in this report, including substantially improved superabsorbents for diapers.

The new diapers will also contribute to sustainability, which continues to serve as the benchmark for our actions – whether economic, environmental, or social. This includes the thorough analysis we conducted of our products in more than 60,000 applications. The findings help us steer our portfolio. We can specifically develop even more sustainable products together with our customers or find alternatives for products that no longer fulfill our standards.

“We will use our anniversary year to find answers to pressing questions through inventiveness and innovations – together with our customers and partners.”

Innovation and sustainability are also at the core of our anniversary activities. We will celebrate BASF’s 150th birthday. And yet above all, we will use 2015 to find answers to pressing questions through inventiveness and innovations – together with our customers and partners. The great thing is, everyone can join in – including you – at: creator-space.basf.com.

Outlook for 2015

The outlook for the 2015 business year is subject to significant uncertainty. We do expect the global economy to grow by 2.8%, somewhat faster than in 2014; and chemical production should also increase by a good 4%. However, a reliable forecast is impeded by volatile raw material prices and exchange rates.

We currently anticipate an average oil price of $60 to $70 per barrel (Brent) and an exchange rate of $1.20 per euro. For the Oil & Gas segment, this would result in income from operations before special items considerably below the previous year’s level. We want to once again improve earnings in our chemicals business, however. In the end, the price of oil will be among the factors that determine whether we increase our earnings overall. With the oil price range mentioned above, income from operations before special items at the same level of the previous year is achievable.

Investment will be substantially lower in 2015: We were able to successfully conclude several major projects in 2014, and more plants will start up in 2015. In the Oil & Gas segment, investment levels will be lower than in the year before. We plan total capital expenditures of €4 billion, compared with €5.1 billion in 2014. We will once again increase research and development spending, primarily to support further globalization.

One thing I can assure you: We will continue to concentrate on what we do best – researching, developing and offering our customers attractive solutions. This is something we have done successfully for 150 years. And the entire BASF team is committed to making sure that this holds true in the future, as well.

Yours,
Kurt Bock