Operational Opportunities and Risks
The development of our sales markets is one of the strongest sources of opportunities and risks. For 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, see Economic Environment in 2022.
We also consider opportunities and risks caused by deviations in assumptions. Stronger demand resulting from faster eradication of the coronavirus pandemic, for example through sustained efficacy and growing acceptance of coronavirus vaccines and drugs, will give rise to macroeconomic opportunities. A significant macro-economic risk arises from the possibility that measures to contain the coronavirus are kept in place for a longer period of time or augmented, and, as a result, negatively affect global supply chains and slow global economic growth. Further increases in energy prices, caused, for example by an escalation of the conflict between Russia and Ukraine, and the resulting higher inflation rates for manufacturer and consumer prices also pose a risk to the economy. Additional macroeconomic risks result from the escalation of other geopolitical conflicts and a renewed intensification of the trade conflict between the United States and China. Both can have a considerable impact on global demand for intermediate goods for industrial production and demand for investment goods.
Weather-related influences can result in positive or negative effects on our business, particularly in the Agricultural Solutions segment.
Opportunities and risks for the BASF Group primarily result from higher or lower margins in the Chemicals and Materials segments. Opportunities arise here if the positive margin trend continues for longer than expected. However, further increases in energy and raw materials prices in particular, new capacities and raw materials shortages could increase margin pressure on a number of products and value chains. This would have a negative effect on our EBIT.
Moreover, if oil and gas prices rise, Wintershall Dea does not have a compensating effect on the BASF Group’s EBIT because this shareholding is no longer reported in EBIT, but in net income from shareholdings.
The year’s average oil price for Brent crude was $71 per barrel in 2021, compared with $42 per barrel in the previous year. For 2022, we anticipate an average oil price of $75 per barrel. We therefore expect price levels for the raw materials and petrochemical basic products that are important to our business to rise.
We continuously enhance our products and solutions in order to maintain competitive ability. We monitor 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 continuous process optimization.
Risks for us can arise from intensified geopolitical tensions, new trade sanctions, stricter emissions limits for plants, and energy and climate laws. In addition, changes in chemical regulations can affect both the BASF Group’s product portfolio and that of our customers, for example, on the use or registration of agrochemicals.
Political measures could also give rise to opportunities. For example, we view measures around the world to increase energy efficiency and reduce greenhouse gas emissions as an opportunity for increased demand for our products, such as our insulation foams for buildings, catalysts, battery materials for electromobility, or our solutions for wind turbines. Our broad product portfolio enables us to, in some cases, offer alternatives if new chemicals have to be developed as a result of restrictions in connection with the REACH chemicals regulation or new standards in our customers’ industries.
Procurement 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.
Around the world, the frequency and intensity of extreme weather conditions (such as high/low water levels on rivers, heat/cold waves and hurricanes) are increasing as a result of climate change. We address the risk of supply interruptions on the procurement and sales side caused by extreme weather conditions by switching to alternative logistics carriers and the possibility of falling back on unaffected sites within our global Verbund.
We implemented a package of climate resilience measures for our Verbund site in Ludwigshafen, Germany, to address low water levels on the Rhine River: We developed an early warning system for low water, created multimodal transportation concepts, chartered more ships that can navigate low water levels and, in cooperation with partners, developed a special type of ship designed for extreme low-water situations. These measures are already making longer periods of low water on the Rhine River more manageable.
Investments and production
We try to prevent unscheduled plant shutdowns by adhering to high technical standards and by continuously improving our plants. We reduce the effects of an unscheduled shutdown 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 immediate measures for damage control and resumption of normal operations as quickly as possible.
Crisis management also includes dealing with extreme weather conditions such as hurricanes (for example, at the sites on the Gulf of Mexico in Freeport, Texas, and Geismar, Louisiana) or significantly elevated water temperatures in rivers due to extended heat waves, which limit the available cooling capacity (for example, at the Ludwigshafen site in Germany). Appropriate precautions are taken at the sites in the case of a potential change in risk in connection with climate change. For example, over the past few years, the Verbund site in Ludwigshafen, Germany, has implemented several measures to increase cooling capacity, including expanding and optimizing the central recooling plants and optimizing cooling water flows. These are capable of preventing production outages due to extreme heatwaves.
Short-term risks from investments can result from, for example, technical malfunctions or schedule and budget overruns. We counter these risks with highly experienced project management and controlling.
Acquisitions, divestitures and cooperations
We constantly monitor the market in order to identify possible acquisition targets and develop our portfolio appropriately. In addition, we collaborate 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.
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 employs on a large number of IT systems. We use technologies such as big data and the Internet of Things to develop new business models, corporate concepts and strategies and to respond appropriately to changing customer behavior. IT system downtime, confidentiality breaches and the manipulation of data stored 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 plant availability, delivery quality or the accuracy of our financial reporting. Unauthorized access to sensitive data, such as personnel records or customer data, 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 availability and IT security. These include 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.
The Cyber Defense Center was established in 2015 and is continuously being expanded in line with the growth in current requirements. BASF is also 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. BASF has also established an information security management system and is internationally certified according to IDIN EN ISO/IEC 27001:2017.
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 service units together with Corporate Finance and Corporate Legal. 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 represent a risk for the BASF Group’s EBIT.
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.
The recognized tax-related opportunities and risks only concern taxes that impact the BASF Group’s EBIT in the short term. These arise when BASF has taken a position that differs from the opinion of a competent administrative authority. If a tax payment has already been made and could be reclaimed, this is presented as an opportunity. If, on the other hand, a potential payment is outstanding in accordance with the administrative opinion, this is a risk. We primarily evaluate opportunities and risks with regard to their probability of occurrence and, if necessary, set up a provision for the relevant risk. If a provision is not necessary, this is taken into account in determining EBIT-relevant risks of the BASF Group.