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 in 2019.

We also consider risks from deviations in assumptions. We continue to see a significant macroeconomic risk in a further escalation of the trade conflicts between the United States and its trade partners and an increased slowdown of the Chinese economy, which would have considerable impact on demand for intermediate goods for indus- trial 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 slowly than we predict, we expect a lower oil price. In this case, we also expect the euro to weaken relative to the U.S. dollar in the medium term 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, especially on our crop protection business.

Margin volatility

Margin risks for the BASF Group result on the one hand from a further decline in margins in the Chemicals segment or the isocyanates business. New capacities or raw materials shortages could also increase margin pressure on a number of products and value chains. This would have a negative effect on our EBIT. In addition, the contribution attributable to BASF from the agreed combination of BASF’s and LetterOne’s oil and gas businesses will only be included in EBIT again on closing of the transaction. This would have a compensating effect on margin pressure in the chemicals business if oil and gas prices rise. The year’s average oil price for Brent crude was around $71 per barrel in 2018, compared with $54 per barrel in the previous year. For 2019, we anticipate an average oil price of $70 per barrel. We therefore expect price levels for the raw materials and petrochemical basic products that are important to our business to remain constant or decrease slightly.

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 suitable measures. Aside from innovation, key components of our competitiveness are our ongoing cost management and our continuous process optimization.

Regulation and political risks

Risks for us can arise from intensified geopolitical tensions, new trade sanctions, stricter emissions limits for plants or energy and climate laws. In addition, risks to the BASF Group can be posed by further regulations in key customer industries or on the use or registration of agricultural and other chemicals.

Economic and political uncertainties may arise as a result of Brexit. At this point in time, it is not yet clear what the future relationship between the European Union and the United Kingdom will look like post-Brexit and what specific consequences this will have for our sites, our supply chains and the regulatory environment. A cross-divisional Brexit team has been established to prepare the BASF organization for various exit scenarios and enable it to promptly react to political decisions. Together with our operating units, suppliers, customers and logistics partners, we have identified problems and steps to avoid supply chain disruptions, especially in the event of a no-deal hard Brexit with no transition phase. Alternative logistics concepts include, for example, leasing additional warehouse space, establishing consignment warehouses or technical expansions in our ERP systems to be able to react to additional customs requirements on the systems side as well.

Political measures could also give rise to opportunities. For example, we view the worldwide expansion of renewable energy and measures to increase energy efficiency as an opportunity for increased demand for our products, such as our insulation foams for buildings or our solutions for wind turbines. Our broad product portfolio enables us to offer alternatives if chemicals have to be substituted as a result of restrictions in connection with the REACH chemicals regulation or new standards in our customers’ industries.

Purchasing and supply chain

We minimize procurement risks through our broad portfolio, global purchasing activities and the purchase 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 nondelivery. We continuously monitor the credit risk of important business partners. We address the risk of supply interruptions on the procurement and sales side as a result of extreme weather conditions (such as high/low water levels on rivers, hurricanes) by switching to unaffected logistics carriers and the possibility of falling back on unaffected sites within our global Verbund.

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 emer- gency 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.

For more information on emergency response, see:
Safety in production
basf.com/emergency_response

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.

Opportunities and risks arise in connection with acquisitions and divestitures from the conclusion of a transaction, or it being completed earlier or later than expected. They relate to the regular earnings contributions gained or lost as well as the realization of gains or losses from divestitures if these deviate from our planning assumptions. In the case of transactions involving the contribution of businesses to an investment accounted for using the equity method, a risk of impairment of these investments can arise. The extent of this risk depends on factors such as the amount of hidden reserves uncovered within the scope of initial measurement of the investment accounted for using the equity method.

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

Legal disputes 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 analyses and assessments 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 relevant operating and functional units together with the Legal and Finance units. If sufficient probability of occurrence is identified, a provision is recognized accordingly for each proceeding. Should a provision be unnecessary, general risk management continues to assess whether these litigations nevertheless give rise to 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.