Development of demand
- Possible negative effects on demand due to intensification of the national debt crises and extensive fiscal austerity measures
- Taking advantage of opportunities arising from higher demand as far as our production capacities allow
Demand fluctuation due to volatility in market growth: The development of demand in our sales markets is one of the strongest drivers of opportunities and risks. More details on our assumptions regarding short-term growth rates for the global economy, regions and key customer industries, such as the chemicals, automotive and construction sectors, can be found under . In accordance with this baseline scenario, we are planning to achieve volume growth in nearly all segments. In addition to the baseline scenario, we also consider risk scenarios. These include, for example, an intensification of the national debt crises in Europe and the United States, which would dampen private demand and limit the ability of businesses to get refinancing. There could also be strong negative effects on consumer and industrial demand from extensive fiscal austerity measures in the form of tax increases and cuts to government spending. In these risk scenarios, a demand-driven decline in oil prices can be expected; the dollar/euro exchange rate would remain at a similar level to that in the baseline scenario as both the United States and Europe are similarly indebted.
Our average capacity utilization rate is already at a very high level. However, in some cases, there is still the possibility to take advantage of increased demand as far as our idle production capacities allow.
Gas consumption can fluctuate due to colder or warmer winter weather, which has 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 our crop protection business.
- Oversupply expected to lead to lower margins in some value-adding chains
- Raw material costs remain high
- If demand declines, increasing risk that raw material costs cannot be passed on to the market
Margin volatility due to fluctuating raw material prices and/or product oversupply/shortage: We anticipate stable margins in 2012. For some products and value-adding chains, however, there is likely to be pressure on margins, which would have a negative effect on our earnings.
The average oil price (Brent crude) in 2011 was around $110 per barrel, which was attributable primarily to high demand from emerging markets, in particular from China. For 2012, we also anticipate an average oil price of $110 per barrel. We therefore expect the price level of the raw materials and petrochemical basic products that are important to our business to remain high. Due to the good demand situation until now, we have largely been able to pass raw material costs on to our customers. If there were a considerable decline in demand, this could lead to significant narrowing of our margins and the need to write down inventories.
Our dependence on the oil price is reduced through the contribution of our Oil & Gas business. Earnings in this business rise by around €30 million for every $1 increase in the average annual barrel price of Brent crude.
- Emissions trading: risk of undersupply and additional costs due to need to purchase certificates
- Opportunities arising from regulatory decisions: higher demand for products to increase energy efficiency
Regulation and political risks: Due to the European chemicals regulation 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.
Under the E.U. emissions trading scheme, it is likely that the CO2 certificates allotted to BASF Group will exceed our demand during the current (second) trading period (2008-2012). One major reason for this is that we invested early on in highly efficient gas power plants (combined heat and power, or CHP, plants) for our energy supply infrastructure.
In the third trading period, which begins in 2013, all certificates for industrial electricity supplies will have to be purchased. For chemical production, on the other hand, the number of CO2 certificates allocated free-of-charge is based on very ambitious benchmarks. As a result of the above-average efficiency, we expect allocation for our chemical plants to be nearly sufficient. However, due to the auctioning of all certificates for electricity generation, we expect that, overall, the BASF Group will face an annual undersupply; the number of certificates we need each year ranges in the middle of the single-digit millions. The extent to which this can negatively affect the global competitiveness of our European sites depends on the trading price of these CO2 certificates.
Other risks for us include further regulation, for example, of 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).
On the other hand, regulatory decisions also offer opportunities that we want to exploit: As a result of Germany’s decision to phase out the use of nuclear power, as well as global programs to support the expansion of renewable energy and measures to increase energy efficiency, we expect higher demand for our products. Construction of low-emission gas power plants could raise demand for natural gas, which would present an opportunity for our gas trading activities. Our building insulation materials are used in the energy-efficient renovation of housing and office buildings. Furthermore, we offer a diverse range of solutions for the construction and operation of wind turbines, such as intermediates, coatings and foams for rotor manufacturing as well as construction chemicals for the base and supports. Our catalysts business benefits from the tightening of vehicle emissions regulations.
- Avoidance of unplanned shutdowns through high technical standards and diversification within our global production Verbund
- Procurement risks minimized by a broad portfolio, global purchasing activities and careful selection of suppliers
Delivery bottlenecks resulting from interruptions in production or the supply chain and raw material shortages: We try to prevent unplanned plant shutdowns by adhering to high technical standards and continuously improving our plants. We limit the effects of unplanned shutdowns through diversification within our global production Verbund.
China continues to limit the export of rare earths, which are used in the production of our catalysts, for example. 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.
Information technology risks: BASF relies on a number of IT systems in order to carry out its day-to-day operations. The non-availability of critical IT systems and applications can have a direct impact on production and logistic processes. If data are lost or manipulated, this can negatively affect process safety and the accuracy of our financial reporting. Unauthorized access to sensitive data, such as personnel records, competition-related information or research results, can result in legal consequences or jeopardize our competitive advantage.
To minimize such risks, BASF has implemented application-specific measures such as stable and redundantly designed IT systems, back-up processes, virus and access protection and encryption systems as well as integrated, Group-wide standardized IT infrastructure 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 these regulations.
Litigation and claims
- Limitation 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
Litigation and claims: In order to assess the risks from current legal disputes and proceedings and any potential need 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, we make assumptions regarding the probability of claims being successful and their potential financial impact. The actual costs can deviate from these estimates.
We use an internal control system to limit risks from potential wrongdoing or legal infringements. 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.