Development of demand
- Decrease in uncertainty regarding the development of the economy
- Ongoing refinancing risks for our customers, with short-term sales risks for our business
- Taking advantage of opportunities arising from higher demand as far as our production capacities allow
Development of demand: The development of demand in our sales markets represents one of the three most important sources of opportunities and risks, in addition to the volatility in currency exchange rates and raw materials prices. Our assumptions regarding short-term growth rates for the global economy, regions and key customer industries (in particular the chemicals, automotive and construction sectors) can be found in the .
In addition to this baseline scenario, we also consider risk scenarios such as another recession in North America or a significant decrease in growth in China. This could lead to a decline in global demand, a devaluation of the U.S. dollar and a drop in the price of crude oil, which together would have a negative impact on our income from operations.
Some of our customers are still very dependent on credit. If credit were to become less accessible and our customers were therefore unable to refinance their businesses, this could also have a negative impact on our business in the short-term.
Inversely, we also have the possibility to take advantage of increased demand as far as our existing production capacities allow.
Development of supply
- Growing global product supply expected due to completion of new plants in the Middle East and China; increased risks regarding capacity utilization, prices and margins
- Long-term goal to make our business less cyclical
- Demand-driven, product-specific plant expansion and construction
- Divestitures of businesses that do not provide sufficient opportunity for differentiation from our competitors
Development of supply: In the chemical industry, 2010 was characterized by unscheduled plant shutdowns and project delays, also at our competitors, which resulted in supply bottlenecks. In 2011, we anticipate that new petrochemical production facilities will be completed, particularly in the Middle East and China, which will lead to better product supply.
Our planning takes into consideration the related declines in capacity utilization and prices as well as less opportunity to pass on higher raw materials prices to our customers. In this respect, there is a risk that our assumptions could turn out still to be too high. However, if the product shortages existing in some value-adding chains at the end of 2010 continue, this would offer the opportunity to keep the respective margins stable or to improve them.
Where possible, risks related to the development of sales markets are mitigated using operational measures, for example, through close cooperation with customers, optimized production management and appropriate scheduling of maintenance shutdowns. We manage the construction and expansion of plants and sites for each product based on expected demand. Having customers from various regions and industries also reduces our risk.
We are pursuing our goal of making our business less cyclical. We are exiting markets in which we do not see satisfactory opportunities to differentiate ourselves from our competitors in the long term.
In order to achieve lasting profitable growth, we are committed to operational excellence, innovation and investment in growth markets. We concentrate our research and business on innovative business areas, such as crop protection and plant biotechnology, which we also develop through strategic partnerships with important partners.
Regulatory and political risks
- REACH: competitive disadvantage for European companies due to cost-intensive testing and registration procedures
- Emissions trading: risk of undersupply and additional costs due to need to purchase certificates
- Intensification of geopolitical tensions and erection of trade barriers
Regulatory and political risks: Due to the European chemicals directive REACH, which came into force in 2007, BASF and our European customers face the risk of being placed at a disadvantage to our non-European competitors due to the cost-intensive test and registration procedures.
Within the framework of E.U. emissions trading, the BASF Group was allocated emission certificates for the second trading period from 2008 to 2012. We do not currently expect any undersupply of certificates for our activities in Europe in this second trading period. It is still unclear how many CO2 certificates will be allocated free-of-charge from 2013. BASF will likely be required to purchase several million additional certificates annually. Depending on the trading prices for CO2 certificates, this will affect our cost position and therefore the global competitiveness of our German and European sites.
This also applies to the most recent increase in the electricity tax and the German government’s plans to limit the exemptions for energy-intensive industries from paying levies under the Renewable Energy Sources Act (EEG).
Due to the amendment of the E.U. directive on industrial emissions (IED), additional costs could arise for the conversion of existing plants and to meet additional reporting obligations.
Other risks for us include further regulation, for example, for the use of chemicals or in the gas business as well as the intensification of geopolitical tensions, the destabilization of political systems and the erection of trade barriers (for example, Chinese restrictions on exports of rare earths or OPEC quotas for oil production).
Overall, the probability that regulatory and political risks will occur has increased; the financial impact can be classified as low in the short term and elevated in the medium term.
Weather: Colder or warmer winter weather can result in fluctuations in gas consumption, which can have positive or negative effects on the performance of our gas trading business. Similarly, growing seasons that are wet and warm or dry and cold can have positive or negative effects on the performance of our crop protection business.