Financial opportunities and risks
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 Procurement functional unit 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
Our competitiveness on global markets is inﬂuenced by ﬂuctuations in exchange rates. For BASF’s purchasing, opportunities and risks arise in particular 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 €40 million in the BASF Group’s EBIT, assuming other conditions remain the same. On the production side, we counter foreign currency risks by producing in the respective currency zones.
Financial 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 necessary.
Interest rate risks
Interest rate risks result from potential changes in prevailing market interest rates. These can cause a change in the fair 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 credit risk premiums to be paid. 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 indebtedness.
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.
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, our unrestricted access to the commercial paper market and committed bank credit lines. In the short to medium term, BASF is largely protected against potential reﬁnancing risks by the balanced maturity proﬁle of its ﬁnancial indebtedness as well as through diversiﬁcation in various ﬁnancial markets.
For more on the maturity proﬁle of our financial indebtedness, see the Notes to the Consolidated Financial Statements
Risk of asset losses
We limit country-speciﬁc risks with measures based on internally determined country ratings, which are continuously updated to reﬂect changing environment conditions. We selectively use 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. Creditworthiness 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. Due to the global activities and diversiﬁed customer structure of the BASF Group, there are no major concentrations of credit default risk. Risks are also limited through the use of credit insurance and bank guarantees.
The risk of an asset impairment occurs if the assumed interest rate in an impairment test increases, the predicted cash ﬂows decline, or investment projects are suspended. In the current business environment, we consider the risk of impairment of individual assets such as customer relationships, technologies and trademarks, as well as goodwill, to be nonmaterial. Nevertheless, a continuing decline in the price of oil below our assumed planning level would result in impairment risks for the Oil & Gas segment’s assets.
Long-term incentive program for senior executives
Our senior executives have the opportunity to participate in a share-price-based compensation program. The need for provisions for this program varies according to the development of the BASF share price and the MSCI World Chemicals Index; this leads to a corresponding increase or decrease in personnel costs.
Risks from pension obligations
Most employees are granted company pension beneﬁts from either deﬁned contribution or deﬁned beneﬁt plans. We predominantly ﬁnance company pension obligations externally through separate plan assets. This particularly includes BASF Pensionskasse VVaG and BASF Pensionstreuhand e.V. in Germany, in addition to the large pension plans of our Group companies in North America, the United Kingdom and Switzerland. 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. An adjustment to the interest rates used in discounting pension obligations leads immediately to changes in equity. To limit the risks of changing ﬁnancial market conditions as well as demographic developments, employees have been almost exclusively offered deﬁned contribution plans for future years of service in recent years.