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 from intensification of sovereign debt crisis in Europe and deceleration of economic growth in China
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 all segments. In addition to the baseline scenario, we also consider risk scenarios. These include, for example, a renewed intensification of the sovereign debt crisis in Europe, which would dampen private demand, unsettle investors and limit the ability of businesses to get refinancing. In this case, Europe would be faced with a new recession and a further increase in unemployment.
Relevant risks also include an unexpectedly sharp deceleration of growth in China. Despite stabilization in the second half of 2013, there is a danger that increasing the focus of economic growth on private consumption will not occur without short-term losses. Furthermore, the course of 2013 showed that the Chinese interbank market reacts to liquidity shortages with sharp interest rate fluctuations.
A demand-driven decline in oil prices can be expected in these risk scenarios; the euro would depreciate relative to the U.S. dollar compared with our baseline scenario, since Europe is particularly exposed to debt-related risks. We consider a massive sovereign debt crisis in the United States to be unlikely.
Climatic influences can also have positive or negative effects on our crop protection business.
- Possible oversupply could 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 fluctuating product supply: We generally anticipate stable margins in 2014. However, for some products and value chains, it is possible that margin pressure could be increased by, for example, new capacities. This would have a negative effect on our earnings.
The average oil price of Brent crude in 2013 was around $109 per barrel, slightly lower than in the previous year. For 2014, 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 €15 million for every $1 increase in the average annual barrel price of Brent crude.
- Risks include regulation of use of chemicals and intensification of geopolitical tensions
- Opportunities for our catalysts business from tightening automobile emissions regulations
- Energy policies result in risks and opportunities
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.
Other risks for us include further regulation, for example, of the use of chemicals; the intensification of geopolitical tensions; the destabilization of political systems; and the imposition of trade barriers, such as Chinese restrictions on exports of rare earths or OPEC quotas for oil production. Moreover, we are closely observing the political situation in Argentina that led to the intensification of foreign exchange restrictions in 2012.
Since December 2013, the E.U. Commission has been investigating whether the exemption of energy-intensive companies from the German Renewable Energy Act’s surcharge promoting renewable energy sources (“EEG surcharge”) constitutes a violation of E.U. regulations on state aid. This does not represent a material risk for the BASF Group, since we produce large portions of our electricity in our own power plants and self-generated energy is not subject to the EEG surcharge. However, the German government is considering an EEG amendment in 2014 that would partially include companies’ self-generated energy in the EEG surcharge system. The regulation currently under discussion would result in substantial additional costs per year and be detrimental for our competitiveness at German production sites.
By contrast, we view Germany’s decision to phase out the use of nuclear power as well as worldwide support for the expansion of renewable energy and measures to increase energy efficiency as an opportunity for increased demand for our products. For example, we offer diverse solutions for wind turbines in addition to insulation foams for buildings. Our catalysts business benefits from the tightening of automobile 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 reduce the effects of unscheduled shutdowns through diversification within our global production Verbund.
We minimize procurement risks through our broad portfolio, 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. 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, for example, 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 position.
To minimize such risks, BASF has implemented application-specific 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 as to the probability of claims’ success, and to which extent. The actual costs can deviate from these estimates.
We use an internal control system to limit risks from potential infringements of rights or laws. For example, we try to avoid patent and licensing disputes whenever possible through extensive clearance research. As part of our Group-wide Compliance Program, our employees receive regular training.