Financial Opportunities and Risks
Detailed guidelines and procedures exist for dealing with financial risks. Among other things, they provide for the segregation of financial instrument trading and back-office functions.
We continuously monitor activities in countries with transfer restrictions as a part of risk management. This includes, for example, regular analysis of the macroeconomic and legal environment, shareholders’ equity and the business models of the operating units. The chief aim is the management of counterparty, transfer and currency risks for the BASF Group.
Exchange rate volatility
Our competitiveness on global markets is influenced by fluctuations in exchange rates. For BASF’s sales, opportunities and risks arise in particular when the U.S. dollar exchange rate fluctuates. A full-year appreciation of the U.S. dollar against the euro by $0.01 would increase the BASF Group’s EBITDA by around €40 million, assuming other conditions remain the same. On the production side, we counter exchange rate risks by producing in the respective currency zones.
Financial currency risks result from the translation of receivables, liabilities and other monetary items in accordance with IAS 21 at the closing rate into the functional currency of the respective Group company. In addition, we incorporate planned purchase and sales transactions in foreign currencies into our financial foreign currency risk management. If necessary, we hedge these risks using derivative instruments.
Financing costs
Financing costs are determined in particular by net debt and interest rates. Interest rate risks result from possible changes in the relevant market interest rates and credit risk premiums. These can cause a change in the fair value of fixed interest rates and fluctuations in the interest payments for variable-rate financial instruments, which would positively or negatively affect earnings. We use interest rate swaps and, in individual cases, combined interest and currency derivatives to hedge market interest rate risks. The credit risk premiums are mainly influenced by our credit rating and the market conditions at the time of issue. In the short to medium term, BASF is largely protected from the possible effects on its interest result thanks to the balanced maturity profile of its financial indebtedness.
Risks from metal and raw materials trading
Some of BASF’s divisions are exposed to strong fluctuations in raw materials prices. BASF uses commodity derivatives to hedge these market price risks. In addition, BASF holds limited unhedged precious metal and oil product positions for trading on its own account. The value of these positions is exposed to market price volatility. Adverse changes in market prices negatively affect the earnings and equity of BASF. These risks are continuously monitored by a central risk management system and limited by strict guidelines.
Liquidity risks
Risks from fluctuating cash flows are recognized in a timely manner as part of our liquidity planning. We have access to extensive liquidity at any time thanks to our good ratings, our unrestricted access to the commercial paper market and committed bank credit lines.
In the short to medium term, BASF is largely protected against potential refinancing risks by the balanced maturity profile of its financial indebtedness as well as through diversification in various financial markets.
Risk of asset losses
We limit country-specific risks with measures based on country ratings, which are continuously updated to reflect changing environment conditions. We selectively use investment guarantees to limit specific country-related risks. We lower credit risks for our financial investments by engaging in transactions only with banks with good credit ratings and by adhering to fixed limits. We continuously monitor creditworthiness and adjust limits accordingly. We reduce the risk of default on receivables by continuously monitoring the creditworthiness and payment behavior of our customers and by setting appropriate credit limits. Risks are also limited through the use of individual hedging strategies, such as guarantees. Due to the global activities and diversified customer structure of the BASF Group, there are no major concentrations of credit default risk.
Risks from pension obligations
BASF grants most employees company pension benefits from either defined contribution or defined benefit plans. We predominantly finance company pension obligations externally through separate plan assets. This particularly includes BASF Pensionskasse VVaG and BASF Pensionstreuhand e.V. in Germany, in addition to the large pension plans of our Group companies in North America, the United Kingdom and Switzerland. To address the risk of underfunding due to market-related fluctuations in plan assets, we have investment strategies that align return and risk optimization to the structure of the pension obligations. Stress scenarios are also simulated regularly by means of portfolio analyses. Adjustments to the interest rates used in discounting pension obligations lead immediately to changes in equity. To limit the risks of changing financial market conditions as well as demographic developments, BASF has, for a number of years now, offered its employees almost exclusively defined contribution plans for future years of service. Some of these contribution plans include minimum interest guarantees. If the pension fund cannot generate this, it must be provided by the employer. A sustained low interest rate environment could make it necessary to recognize pension obligations and plan assets for these plans as well.