Short-term opportunities and risks
Development of demand
The development of our sales markets is one of the strongest sources 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.
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 and an increased tendency toward protectionism.
Should the macroeconomic environment develop more weakly than we predict, we expect a lower oil price. 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
We anticipate generally stable margins for the BASF Group in 2017. For some products and value chains, it is possible that margin pressure could be increased by, for example, new capacities or increasing raw material costs. This would have a negative effect on our EBIT.
The year’s average oil price for Brent crude was around $44 per barrel in 2016, compared with $52 in the previous year. For 2017, we anticipate an average oil price of $55 per barrel. We therefore expect a moderate increase in price levels 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.
Competition
We continuously enhance our products and solutions in order to maintain competitive ability. We watch the market and the competition, and try to take targeted advantage of opportunities and counter emerging risks with fitting measures. Aside from innovation, a major component of competitiveness is a suitable cost structure in order to achieve good business performance on the market.
Regulation and political risks
Risks for us can arise from intensified geopolitical tensions, the destabilization of political systems or new trade sanctions. In addition, risks to the BASF Group can be posed by further regulations on the use or registration of agricultural and other chemicals.
The German federal government’s agreement with the E.U. Commission on the treatment of existing self-generated energy in the new Renewable Energy Act (Erneuerbare-Energien-Gesetz, or EEG) has removed the previously reported risk of sharply increased charges resulting from the EEG surcharge.
We view the worldwide expansion of renewable energy and measures to increase energy efficiency as an opportunity for increased demand for our products. For example, we offer solutions for wind turbines in addition to insulation foams for buildings. Our catalyst business benefits from the tightening of automobile emissions regulations.
Purchasing and supply chain
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.
Production and investments
We try to prevent unscheduled plant shutdowns by adhering to high technical standards and by continuously improving our plants. We reduce the effects of unscheduled shutdowns on the supply of intermediate and end products through diversification within our global production Verbund.
In the event of a production outage – caused by an accident, for example – our global, regional or local emergency response plans and crisis management structures are engaged, depending on the impact scope. Every region has crisis management teams on a local and regional level. They not only coordinate the necessary emergency response measures, they also initiate the immediate measures for damage control and resumption of normal operations as quickly as possible.
Short-term risks from investments can result from, for example, technical malfunctions or schedule and budget breaches. We counter these risks with highly experienced project management and controlling.
Acquisitions, divestitures and cooperations
We are constantly watching our environment in order to identify possible targets and develop our portfolio appropriately. In addition, we work together in collaborations with customers and partners to jointly develop new, competitive products and applications.
Personnel
Due to BASF’s worldwide compensation principles, the development of personnel expenses is partly dependent on the amount of variable compensation, which is linked to the company’s success, among other factors. The correlation between variable compensation and the success of the company has the effect of minimizing risk. Another factor is the development of interest rates for discounting pension obligations. Furthermore, changes to the legal environment of a particular country can have an impact on the development of personnel expenses for the BASF Group. For countries in which BASF is active, relevant developments are therefore constantly monitored in order to recognize risks at an early stage and enable BASF to carry out suitable measures.
Information technology risks
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 technology, 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 uses globally uniform 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.
Legal dispute and proceedings
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 units. 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.