Short-term opportunities and risks

audited

Development of demand

  • Development of our sales markets among greatest opportunities and risks
  • 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 scenario, we are planning to achieve volumes growth in all segments excluding the effects of acquisitions and divestitures.

In addition to this scenario, we also consider risks from deviations in assumptions. We continue to see a significant macroeconomic risk in an increased slowdown of the Chinese economy, which would have considerable impact on demand for intermediate goods for industrial production as well as investment goods. This would have an effect on emerging markets that export raw materials as well as on advanced economies that specialize in technological goods. Risks to the global economy would also be posed by the possible escalation of geopolitical conflicts.

Should the macroeconomic environment develop more weakly than we predict, a further drop in the price of oil can be expected. In this case, we would also expect the euro to depreciate relative to the U.S. dollar as compared with our planning assumptions, as the eurozone’s economy shows a high level of dependency on exports and, in times of global economic weakness, the U.S. dollar is preferred by portfolio investors as a safe haven.

Weather-related influences can result in positive or negative effects on our crop protection business.

Margin volatility

  • Possible oversupply could lead to lower margins in some value chains
  • Opportunities and risks from decreasing raw material costs

We generally anticipate stable margins in 2016. 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 EBIT.

The year’s average oil price for Brent crude was around $52 per barrel in 2015, substantially lower than in the previous year. For 2016, we anticipate an average oil price of $40 per barrel. We therefore expect the low price levels to continue for the raw materials and petrochemical basic products that are important to our business. Yet an oil price level below the expected average would pose risks for our oil and gas business, whose EBIT dips 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
  • 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 would arise from 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. Furthermore, we are closely observing the political situation in Argentina, where economic policy reforms could revitalize the business environment.

The German Renewable Energy Act (EEG) is poised for reform in 2016. This regulates the expansion of electricity generation from renewables and passing on costs to energy customers through the EEG surcharge. Currently, existing power plants for self-generated energy are not subject to the EEG surcharge. Consequently, there is currently no additional financial burden for the electricity BASF generates in its existing power plants. The upcoming EEG amendment, however, means that the German federal government needs to review, and possibly revise, this matter in accordance with the E.U. Commission’s mandate. It is possible that these plants would need to pay a portion of the EEG surcharge in the future, which would negatively affect the competitive ability of the affected production sites. A proportional EEG surcharge of 20% would translate into additional charges of €75 million per year (before taxes), and the complete EEG surcharge would lead to expenses of around €400 million each year. It is important that negotiations between the federal government and the E.U. Commission find a solution that avoids putting a considerable strain on the affected companies.

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.

Production and delivery bottlenecks

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 raw materials on spot markets, as well. 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 nondelivery. We continuously monitor the credit risk of important business partners.

Information technology risks

  • Global procedures and systems for IT security
  • Regular training for employees
  • Cyber Defense Center established

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. The threat environment has changed in recent years, as attackers have become better organized, use more sophisticated tools, and have far more resources available. 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. This would also be accompanied by the associated loss of reputation.

To minimize such risks, BASF has implemented globally applicable processes and systems to ensure IT security, 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 constantly tested, continuously updated, and expanded if necessary. 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.

BASF also established a Cyber Defense Center in 2015; is a member of the Cyber Security Sharing and Analytics e.V. (CSSA); and is a founding member of the German Cyber Security Organization (DCSO) together with Allianz SE, Bayer AG and Volkswagen AG.

Litigation and claims

  • Regular reporting on risks from litigation
  • Risk assessment based on probability of occurrence

We constantly monitor current and potential legal disputes and proceedings, and regularly report on these to the Board of Executive Directors and Supervisory Board. 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, if needed, independent legal opinions. Risk assessment is particularly based on estimates as to the probability of occurrence and the range of possible claims. These estimates are the result of close cooperation between the affected operating and functional units together with the Legal and Finance departments. If sufficient probability is identified, a provision is recognized accordingly for each dispute. Should a provision be unnecessary, general risk management continues to assess whether these litigations nevertheless present a risk for the EBIT of the BASF Group.

We use our 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.