Short-term opportunities and risks
Development of demand
- Development of demand in sales markets one of strongest drivers of opportunities and risks
- Possible negative effects on demand due to intensification of sovereign debt crises and extensive fiscal austerity measures
Demand fluctuation due to volatility in market growth: The development of 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 in Economic environment. In accordance with this baseline scenario, we are planning to achieve volume growth in our chemicals business in nearly all segments. In addition to the baseline scenario, we also consider risk scenarios. These include, for example, an intensification of the sovereign 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 exposed to similar debt-related risks.
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, have positive or negative effects on our crop protection business.
- Oversupply expected to lead to lower margins in some value 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 generally anticipate stable margins in 2013. For some products and value 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 2012 was around $112 per barrel, slightly higher than in the previous year. For 2013, we 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. If there were a considerable decline in demand, this could lead to significant narrowing of our margins and the need to write down inventories.
The influence of 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 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 costintensive test and registration procedures.
In the third E.U. emissions trading period, which begins in 2013, all CO2 certificates for industrial electricity generation will have to be purchased. For chemical production, on the other hand, the number of certificates allocated free-of-charge is based on very ambitious benchmarks. As a result of the above-average efficiency in our production facilities, we expect allocation for our chemical plants to be nearly sufficient. However, due to the auctioning of 100% of certificates for electricity generation, we expect that, overall, the BASF Group will face an undersupply of certificates; the number of certificates we need each year ranges in the low end 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. These effects will likely be limited by national financial compensatory measures for energy-intensive production facilities competing at a global level.
Other risks for us include further regulation, for example, for the use of chemicals as well as the intensification of geopolitical tensions, the destabilization of political systems and the imposition of trade barriers (for example, Chinese restrictions on exports of rare earths or OPEC quotas for oil production). We are closely observing the political situation in Argentina that led to the partial nationalization of YPF S.A. and the intensification of foreign exchange restrictions, in order to be able to react quickly and appropriately. However, we do not currently see an acute threat to our activities there.
On the other hand, regulatory decisions also offer opportunities that we want to seize: 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. Our building insulation materials are used to increase energy efficiency in 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 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 unscheduled plant shutdowns by adhering to high technical standards and continuously improving our plants. We limit the effects of unscheduled shutdowns through diversification within our global production Verbund.
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 nonavailability 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 applicationspecific measures such as stable and redundantly designed IT systems, backup 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.