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 2023.
We also consider opportunities and risks caused by deviations in assumptions. Macroeconomic opportunities arise from an easing of geopolitical conflicts and the resulting reduction in bottlenecks in the supply of energy, industrial raw materials and other intermediate goods. The complete reversal of restrictions to contain the coronavirus pandemic in China and the rapid opening up of the country may also boost global demand more than assumed in our baseline forecast.
Conversely, a significant macroeconomic risk arises from prolonged lockdowns again being imposed to contain the coronavirus, impacting global supply chains and supply and demand. Further increases in energy prices caused, for example, by the war in Ukraine, and the even higher inflation rates resulting from this for manufacturer and consumer prices also pose a risk to the economy. Additional macroeconomic risks result from the escalation of geopolitical conflicts and a further intensification of the trade conflict between the United States and China.
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 in particular. Further increases in energy and raw materials prices and raw materials shortages for a number of products and value chains, mainly due to the war in Ukraine, could further increase pressure on margins. This would have a negative effect on our EBIT.
The year’s average oil price for Brent crude was $101 per barrel in 2022, compared with $71 per barrel in the previous year. For 2023, we anticipate an average oil price of $90 per barrel.
There is high uncertainty, especially surrounding the development of gas prices and the availability of natural gas in Europe in particular. The overall assessment therefore does not include any opportunities and risks that could arise from the volatility of European gas prices (see “Overall assessment”).
We continuously enhance our products and solutions in order to remain competitive. 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 stricter energy and chemicals legislation in the E.U.
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 a strategic opportunity for increased demand for products such as our insulation foams for buildings, catalysts, battery materials for electromobility, or our solutions for wind turbines.
We minimize procurement risks through our broad portfolio, global purchasing activities and the purchase of raw materials on spot markets. We avoid sourcing raw materials from a single supplier wherever possible by creating and leveraging competition. We continually monitor all risks on the procurement markets, for example, the risk of default by important business partners. We take measures to avoid risks or minimize their effects.
We address the risk of supply interruptions on the procurement and sales side caused, for example, by extreme weather conditions (such as high/low water levels on rivers, heat/cold waves and hurricanes), the frequency and intensity of which are increasing as a result of climate change, by switching to alternative transportation solutions and the possibility of falling back on other sites within our global Verbund.
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 scope of impact. 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. Appropriate precautions are taken at the sites in the case of a potential change in risk associated with climate change. For example, due to an increase in heat waves, we have implemented several measures at the Verbund site in Ludwigshafen, Germany, and at the Geismar site in Louisiana in recent years to increase cooling capacity, such as expanding and optimizing the central recooling plants and optimizing cooling water flows. These optimization measures are designed to prevent production outages due to extreme heat waves.
Short-term risks from investments can result from, for example, technical malfunctions or schedule and budget overruns. We counter these risks with stringent project management and controlling.
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.
Acquisitions and divestments entail both opportunities and risks. These arise in connection with 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, we therefore constantly monitor the relevant developments in order to identify potential risks at an early stage and enable suitable measures to be taken.
BASF employs 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. The global cyber security team is tasked with protecting these IT systems and the data and business processes they handle. In a connected, ever-evolving world, the challenge of protecting BASF against attackers is becoming ever greater and more complex.
The threat environment has changed in recent years, as attackers have become better organized, use more sophisticated technology and have far more resources available. This development reflects the fact that internet-based cyberattacks are extremely lucrative: A variety of vulnerabilities in software and hardware products constantly provide new incentives to develop malware, and anonymization technologies make it almost impossible to trace and punish attacks.
A successful attack 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 could also cause monetary losses, a potential loss of reputation and even a loss of customers’ and partners’ confidence in the security of our products and services.
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, and integrated and 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.
We employ modern security concepts to keep pace with advanced attackers. These range from efficient detection and professional response to defense against attacks and minimizing their potential impact. Strong cyber security alliances are also crucial here. BASF works closely with security authorities and security associations, for example as a founding member of the German Cyber Security Organization (DCSO) and the Cyber Security Sharing and Analytics (CSSA) platform in Berlin, Germany.
BASF has also established an information security management system and is internationally certified according to DIN EN ISO/IEC 27001:2017.
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 Legal and Corporate Finance. If sufficient probability of occurrence is identified, we recognize a provision for the proceeding concerned. Should a provision be unnecessary, we continue to assess whether these litigations nevertheless represent a risk for the BASF Group’s EBIT as part of general risk management.
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, we present this 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, we take this into account in determining EBIT-relevant risks for the BASF Group.