Short-term opportunities and risks
Development of demand
- Development of our sales markets among greatest opportunity and risk factors
- Negative impact from economic slowdown in China and escalation of geopolitical conflicts possible
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 under 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. We see a significant macroeconomic risk in a sharper deceleration of China’s economic growth, which could result from an abatement in the Chinese real estate market. This would impact the construction industry and its suppliers, like the concrete, steel and chemical industries, in addition to real estate services and the finance sector. Such dampening effects would impair not only China’s domestic economy, but also chemical industry imports and customer industries. Furthermore, increasing economic uncertainty would lead to lower consumer and investor confidence. We also see risks to the global economy in the further escalation of geopolitical conflicts, especially in Ukraine.
In these risk scenarios, a demand-related decrease in the price of oil would be expected, in comparison with our baseline scenario. The euro would slightly depreciate relative to the dollar, since economic recovery in the eurozone is fragile and largely dependent on the development of export demand. This makes it especially sensitive to changes in the global economic environment.
Weather-related inﬂuences can result in positive or negative effects on our crop protection business.
- Oversupply with resulting lower margins possible in some value chains
- Lower raw material costs result in opportunities and risks
We mostly anticipate stable margins in 2015. For some products and value chains, it is possible that margin pressure could be increased by new capacities, for example. This would have a negative effect on our earnings.
The year’s average oil price for Brent crude was around $99 per barrel in 2014, lower than in the previous year. For 2015, we anticipate an average oil price of between $60 and $70 per barrel. We therefore expect a low price level for the raw materials and petrochemical basic products that are important to our business. This could positively affect our margins; however, it would also pose risks for our oil and gas business, whose earnings dip by approximately €20 million for every $1 decrease in the average annual barrel price of Brent crude.
Regulation and political risks
- Risks posed by factors such as regulation of chemicals use
- Intensiﬁcation of geopolitical tensions
- Opportunities for our catalysts business from tightening automobile emissions regulations
- Energy policy gives rise to both risks and opportunities
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 sanctions in Ukraine crisis or OPEC quotas for oil production. Moreover, we are closely observing the political situation in Argentina, where foreign exchange restrictions are making for an increasingly difficult business environment.
At the beginning of August 2014, the new law for promoting renewable energy sources (“EEG surcharge”) came into force in Germany. As a result, existing power plants for self-generated energy will not be subject to the EEG surcharge. For new power plants, 40% of the EEG surcharge must be paid. This means that there is currently no additional financial burden for the electricity BASF generates in its own power plants. By 2017, however, this different treatment for existing and new power plants will be checked for compliance with E.U. law. It is possible that the self-generated energy from existing power plants would then be partly included in the EEG surcharge system. That would mean that BASF would have to pay a proportion of the EEG surcharge, which would significantly impair our competitiveness at German production sites.
We view the 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.
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
- Global procedures and systems for IT security
- Regular training for employees
BASF relies on a number of IT systems. Their nonavailability, violation of confidentiality or the manipulation of data in critical IT systems and applications can all have a direct impact on production and logistics 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 liability consequences or jeopardize our competitive position, in addition to the loss of reputation associated with this.
To minimize such risks, BASF has global procedures and systems in place to ensure IT security. These include stable and redundantly designed IT systems, backup processes, virus and access protection, encryption systems, and 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 uniform regulations for organization and application, as well as an internal control system based on these regulations.
Litigation and claims
- Internal control system to limit risks
- Employee training as part of Group-wide Compliance Program
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 occurrence and the range of potential claims. 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.