Availability and price volatility of raw materials
- Economic upturn increases risks related to raw materials availability
- Procurement risks minimized by a broad portfolio, global purchasing activities and careful selection of suppliers
- Continued high volatility in raw materials prices expected
- Use of commodity derivatives to minimize cost risks
Availability of raw materials: As a result of the unexpectedly rapid economic recovery, there were some cases of procurement bottlenecks in 2010. We are not expecting any significant bottlenecks of this type in 2011. But with the considerable rise in demand, also in the medium term, the structural shortage of some raw materials is increasingly relevant for the segments Performance Products and Functional Solutions. In addition, China has limited the export of rare earths, which are used in the production of our catalysts, for example. There continues to be a risk of non-performance among some of our suppliers owing to their weak financial situation.
We minimize procurement risks through our broad portfolio, our global purchasing activities and the purchase of additional quantities of raw materials on spot markets. If possible, we avoid procuring raw materials from a single supplier. When this cannot be avoided, we try to foster competition or we knowingly enter into this relationship and assess the consequences of potential non-delivery. We continuously monitor the credit risk of important business partners, both customers as well as suppliers. We adopt a similar approach regarding the purchasing of services.
In addition to economic criteria, both new and existing suppliers are evaluated on the basis of environmental protection, occupational safety and social standards. If we establish that our standards are only being partially or not met, we agree on corrective measures and provide help with implementing these.
Raw material price volatility: The volatility of prices for feedstocks, especially oil-based chemicals, and for energy is one of the three main drivers of opportunity and risk at BASF. We continue to assume that the volatility of raw materials prices, at least in the short term, will be above the historical level. Our dependence on the oil price is reduced through the contribution of our Oil & Gas business. Earnings in this business rise by around €35 million for every $1 increase in the average annual barrel price of Brent crude.
Furthermore, we minimize cost risks by using commodity derivatives. These measures help to secure margins when sharply rising raw materials prices are expected, which in times of low demand cannot be passed on via product prices, or only to a limited extent. This could lead to expenses if prices do not move as expected.
Research and development risks
- Risk that activities do not lead to the development of marketable products and therefore are not commercially successful
- Reduction of risks through Know-how Verbund as well as continuous review of the efficiency, chances of success and operating environment of research projects
- Ongoing dialogue with customers and consumers to improve chances of success
Research and development: Due to the high degree of complexity and uncertainty involved in chemical and biological research, there is a risk that projects might be discontinued for technical or economic reasons, budgets may be exceeded or developed products will not receive regulatory approval for sale or will not achieve the expected commercial success.
Our global Know-how Verbund, our collaboration with partners and customers as well as our innovation process reduce this risk. Within our project management framework, we continuously review the efficiency, chances of success and the underlying assumptions of research projects; this review includes all phases from idea generation to product launch. The trust of customers and consumers is essential for the successful introduction of new technologies. That is why we enter into dialogue with stakeholders at an early stage of development.
Exploration: Geological uncertainties can result in varying degrees of success in the search for and development of oil and natural gas reserves. We lessen such risks by using state-of-the-art exploration methods and having a balanced exploration portfolio.
- Intensified global competition for highly-qualified specialist and management candidates
- Danger of loss of expertise through numerous retirements and undesired turnover
- More effective personnel recruitment and retention with the help of various measures
Personnel: Particularly in Germany, flexible working time models including short-time work were an effective way of avoiding redundancies during the economic crisis. These also allowed us to take advantage of the opportunities offered by the rapid economic recovery in 2010. The new agreement between BASF SE management and employee representatives at our largest site in Ludwigshafen comprises a package of measures, which also include increased flexibility in allocating personnel resources; this offers opportunities to manage fluctuating capacity utilization.
Our senior executives have the opportunity to participate in a stock-price based compensation program. The need for related provisions varies according to the development of the BASF share price and leads to a corresponding increase or decrease in personnel costs.
The continued improvement in the economic environment in 2010 led to an increase in global competition for highly-qualified employees and managers; in the medium to long term, this will be further intensified by demographic change. This increases the risk that job vacancies cannot be filled with suitable applicants, or only with a significant delay. In Europe, this affects the engineering and scientific professions in particular; a decline in the number of suitable applicants is already noticeable. In this field, and among business graduates as well, we are facing the challenge of positioning BASF as an employer of choice worldwide.
The loss of expertise due to the high number of retirements in North America and Europe and the comparatively high level of undesired turnover in Asia may have negative effects on business in the medium to long term.
With our global programs Generations@Work and Diversity + Inclusion, the further development of our employer brand and an emphasis on personnel development as well as additional regional initiatives, we want to make BASF an attractive employer and retain our employees in the long term.
Overall, we currently rate the risk of a negative impact on our business due to the loss of managers and employees as low. However, we expect this risk to increase in the medium to long term, and are already working to counter these developments using the above-mentioned methods as well as increased investment in human resources marketing and personnel development.
- Voluntary commitment to environmental protection and socially responsible conduct
- Adherence to standards assured by monitoring systems
- Global management system for early recognition of important issues
- Ongoing dialogue with stakeholders
Sustainability: BASF is committed to integrating environmental protection and socially responsible conduct into its business activities. Contraventions to our voluntary commitment to sustainability or to laws represent a reputational risk and could lead to operational or strategic risks. We have set up a global issue management system for sustainability to enable us to promptly recognize risks and opportunities related to sustainability. The results are then used to initiate change processes in the company in order to be prepared for any risks and to exploit opportunities accordingly. We have established global monitoring systems to enable us to ensure the adherence to laws and our voluntary commitments in the areas of environment, health and safety as well as to labor and social standards. These systems include our entire supply chain. In order to assure society’s acceptance of our business activities, we remain in continuous dialogue with relevant stakeholders.
Information technology: Risks are caused primarily by the non-availability of IT systems and applications, delayed provision of important data, loss or manipulation of data and the disclosure of confidential information. This can have negative consequences for the respective business processes.
To minimize such risks, BASF has stable and redundantly designed IT systems, back-up processes, virus and access protection and encoding systems as well as integrated, Group-wide-standardized IT infrastructures and applications. The systems used for information security are continuously tested and updated. In addition, our employees receive regular training on information and data protection. IT-related risk management is conducted using Group-wide regulations for organization and application, as well as an internal control system based on this.
Due to the measures taken, we regard the probability of a risk to our IT system as limited. However, the potential impacts would be high.
- Avoidance of legal risks with the help of an internal control system
- Estimate of monetary effects from legal disputes and proceedings as realistic as possible
- Regular employee training as part of Group-wide compliance program
Legal risks: In order to assess the risks from current legal disputes and proceedings and any requirement to recognize provisions, we prepare our own analysis and assessment of the circumstances and claims considered. In addition, in individual cases, we consider the results of comparable proceedings and independent legal opinions. Furthermore, assumptions are made regarding the probability of claims being successful and their potential financial impact. The actual costs can deviate from these estimates.
We limit risks from potential wrongdoing or legal infringements by using an internal control system. For example, we try to avoid patent and licensing disputes whenever possible with the help of extensive clearance research. As part of our Group-wide compliance program, our employees receive regular training.
For more on our Group-wide compliance program, see
Acquisition risks: Implementing acquisition and investment decisions involves complex risks. The evaluation of risks and opportunities already plays a significant role during the assessment of potential acquisition targets. A detailed analysis and quantification are conducted as part of due diligence. Examples of risks are: increased staff turnover, delayed realization of synergies or the assumption of obligations that were not exactly quantifiable in advance. Therefore implementation and follow-up assessments take place along defined processes. By nature, the acquired businesses are subject to general market risks and business-specific risks. For this reason, acquired businesses are promptly incorporated into BASF’s risk management process. The recently acquired Cognis business is currently being integrated into our risk management process.
Based on the measures taken, we classify the risk of damages as low and the potential of an impact on earnings as medium.
Technical risks: In addition to risks related to raw materials availability, there is the risk that unscheduled shutdowns of our plants will be required for safety reasons or due to technical problems, which could result in delivery bottlenecks for our products. For example, as a precaution we shut down plants at our sites on the U.S. Gulf Coast in the event of hurricane warnings.
We minimize technical risks through continuous monitoring and improvement of facilities and processes as well as through our global production Verbund; therefore we consider the probability of occurrence and impact to be low.