Strategic Opportunities and Risks

Long-term demand development

We assume that growth in chemical production (excluding pharmaceuticals) will be roughly keep pace with gross domestic product in the coming years. Should global economic growth see unexpected, considerable deceleration, for example, because of an ongoing weak period in individual emerging markets, increasingly protectionist tendencies or bottlenecks in the energy markets, the expected growth rates could prove too ambitious.

Additional risks arise from geopolitical tensions and military conflicts, which could impact supply chains and reduce efficiency in the international allocation of resources. Moreover, the ambitions of global climate policy and its implementation will significantly impact demand from our customer industries. This is shown by a comparison of climate policy scenarios that envisage limiting global warming to below two degrees Celsius with alternative scenarios that assume more warming. In ambitious climate policy scenarios, the structure of demand changes due to the use of alternative energy sources and raw materials, high investment in resource-conserving technologies, and changing customer preferences and macroeconomic growth rates may be lower.

Market opportunities in ambitious climate policy scenarios include, for example, feedstocks that make plastics easier to recycle, stronger demand for insulation materials for buildings, increased electromobility with changed demand for plastics, insulation materials, coolants and battery materials, and more alternative proteins in agriculture. By contrast, fossil feedstocks and the production technologies and product segments based on fossil feedstocks will become less important. This requires further decarbonization of production processes and alternative raw materials, as well as a corresponding willingness to pay on the part of customer industries, in order to remain competitive (for more information on the corporate strategy, see Our Strategy.

Development of competitive and customer landscape

We expect competitors from Asia, North America and the Middle East in particular will also gain increasing significance in the years ahead as a result of advantageous raw materials and energy prices and trade policy measures. Furthermore, we predict that many producers in countries rich in raw materials will expand their value chains in specialty chemicals. In addition, the proliferation of large-scale digital marketplaces for chemicals could impact existing customer and supplier relationships.

In the medium to long term, we expect increasing demand from our customers for more sustainable solutions, such as products with a lower carbon footprint and solutions for the circular economy. These products can be made from recycled or renewable raw materials, for example, or have other measurable sustainability benefits. However, an increase in customer demand for more sustainable solutions is also highly dependent on regulation that leads to a growing willingness to pay for low-emission and recyclable products. Companies with a proven track record of providing more sustainable solutions will then be able to achieve stronger growth and higher profitability. We are therefore addressing these topics in research and investment programs for the sustainable transformation of BASF.

To strengthen our competitiveness, we have initiated cost savings programs, we are continuously improving our production processes, streamlining our structures, simplifying procedures and optimizing our business portfolio. In this regard, our focus is on attractive businesses and differentiation through sustainability advantages, among other things, to make our customers and BASF more successful.

Regulation, policy and society

We expect continued regulatory and societal pressure to achieve emission-free energy use, a climate-neutral resource and raw material base, and far-reaching environmental targets. This also includes regulations relating to environmental protection, water, biodiversity and the circular economy, which are outlined in the E2 Pollution Prevention, E3 Water, E4 Biodiversity and Ecosystems, E5 Resource Use and Circular Economy and S3 Affected Communities chapters in this report. Political solutions and their social acceptance for them will vary from region to region. However, particularly in Europe, we expect measures with a continuously high level of detailed and complex regulation, including changes to chemical and industry-related regulations that have the potential to significantly impact the competitiveness of BASF’s operations and product portfolio as well as those of our customers. Another overarching risk is that political decision-makers may not act quickly and decisively enough to create the necessary framework conditions for a competitive location for industry.

We see the risk of the current geopolitical shifts potentially leading to the establishment of uncoordinated or divergent global legislative standards and regulatory systems, not just in relation to chemicals or the regulatory framework for digitalization, but also to climate, environmental, social and corporate governance criteria. In addition, we observe a tendency towards increasing state interventionism and protectionism. Such measures can distort competitive conditions and pose risks to global value chains or security of supply. At the same time, the efforts of states to strengthen their own ability to act and achieve greater independence from global interdependencies can also give rise to opportunities. We see risks but also opportunities in the setting of international standards for specific product categories or technologies.

In the event of negative impacts from our production or products along our value chains, societal acceptance of our business activities could suffer in the short to long term, trust in BASF could decline, and the risk of litigation could increase.

We explain our strategy in meetings with political decision-makers and social stakeholders. In doing so, we also inform ourselves of the changes we must undergo and advocate for a favorable and stable regulatory framework at both a national and international level. BASF is in a position to make significant contributions toward achieving the U.N. Sustainable Development Goals, particularly regarding climate neutrality, through new technologies, innovative products and processes and a broad product portfolio.

Innovations

We expect the trend toward increased sustainability requirements in our customer industries to continue. Our aim is to leverage the resulting opportunities in a growing market with more sustainable innovations. The key areas are products with a lower or even net-zero carbon footprint, circular economy solutions, and safe and more sustainable products. To be successful in these fields, we have launched specific research and investment programs for the sustainable transformation of BASF. Furthermore, in order to steer our innovation portfolio toward increased sustainability, we have integrated our TripleS methodology into our research and development processes.

There are technical and commercial risks associated with every single research and development project. We address this by maintaining a balanced and comprehensive project portfolio as well as through professional, milestone-based project management.

Further risks may arise from increasing state protectionism and demands for localization of intellectual property in order to achieve technological independence. Through our global Know-How Verbund in research and development, we ensure that intellectual property is generated and protected in countries with high intellectual property standards. We expect that the digital disruption of established processes will lead to a considerable increase in efficiency and effectiveness in some fields through the use of artificial intelligence, among other things, will lead to a considerable increase in efficiency and effectiveness in some fields. BASF is committed to taking a leading role in the digital transformation of the chemical industry. Possible applications of digital technologies and solutions are evaluated along the entire value chain and implemented throughout the company, for example, in production, logistics, research and development, business models and corporate governance (for more information, see Innovation).

Procurement and supply chain

Strategic risks in procurement are of great importance to BASF, as they can impact the company’s long-term competitiveness and positioning. Strategic risks include structural changes on the global markets, climate change and political developments. Supply security for raw materials, energy and services is increasingly affected by trade disputes, protectionism, sanctions and geopolitical conflicts. To counter these risks, BASF relies on comprehensive risk assessment, a diversified supplier base, close cooperation with various strategic suppliers, including in the area of reducing Scope 3 emissions, and continuous analysis of markets and trends.

We are also seeing an expansion of the regulatory framework affecting us and our suppliers (for example, the German Supply Chain Due Diligence Act, the EU Corporate Sustainability Due Diligence Directive and the EU Regulation on Deforestation-Free Products or the Regulation Establishing a Carbon Border Adjustment Mechanism (CBAM)). Potential noncompliance by our suppliers may lead to a reduced supplier base. All risks are continuously analyzed and appropriate strategies and measures developed to avert risks or minimize their impact on BASF (for more information see S2 Workers in the Value Chain). We integrate sustainability and compliance criteria into the procurement strategy in order to minimize regulatory risks.

Investments

We expect growth in chemical production in emerging markets to remain above the global average in the years to come. This will create opportunities that we want to exploit by focusing our investments more closely on growth markets and expanding our local presence. In addition, regional value chains help mitigate risks from trade conflicts and barriers that pose a challenge to global markets and supply chains.

Decisions on the type, scope and location of our investment projects are made on the basis of established comprehensive assessment processes. They take into account long-term forecasts for the market, margin and cost development, and raw materials availability, as well as country, currency, sustainability and technology risks. Opportunities and risks arise from potential deviations in actual developments from our assumptions. Mitigation plans are in place where risks are substantial.

Investments in more sustainable technologies, switching our production to renewable energy sources and harnessing potential energy savings represent a long-term opportunity, even though they may not yet be profitable in the short term, depending on the market and the prevailing regulatory framework (for more on our investment projects, see Capital expenditures). The transformation of our company toward low-emission chemistry is presented in detail in the E1 Climate Change chapter.

Acquisitions/divestitures

Our aim is to strengthen our portfolio through value-enhancing acquisitions, among other things, and to realize the value of the standalone businesses. In doing so, we focus on high-growth markets.

The evaluation of opportunities and risks plays a significant role during the assessment of acquisition targets. A detailed analysis and quantification is conducted as part of due diligence. Examples of risks include increased staff turnover, delayed realization of synergies, or the assumption of obligations that were not precisely quantifiable in advance. Opportunities could also arise, for example, from additional synergies. We are also continuing to develop our portfolio through carve-outs and divestitures. In this context, risks could arise as a result of potential warranty claims or other contractual obligations, such as long-term supply agreements (for more information, see Material Investments and Portfolio Measures.

Personnel

The current economic situation and any resulting structural adjustments at BASF can lead to uncertainty among employees. This poses challenges for the company, for example in terms of maintaining employee commitment. Any supposed decline in the attractiveness of BASF as an employer can make it more difficult to recruit appropriately qualified specialists and managers in global competition. Demographic and technological change, as well as changing competence profiles can also lead to a loss of skills and knowledge in key roles within our workforce or affect our ability to adequately and quickly develop them.

We promote excellent leadership through targeted development opportunities for leaders at all levels. Leaders can positively influence the commitment of their employees and, together with their teams, contribute productively and efficiently to the implementation of our strategic corporate targets.

Further information on how to handle opportunities and risks can also be found in chapter S1 Own Workforce of the company in this report.

Climate

As BASF is an energy-intensive company, climate-related risks arise in a physical sense and from regulatory changes, such as in CO₂ prices through emissions trading systems, taxes or energy legislation. In addition, BASF’s emissions footprint and intensity could lead to a negative perception and reduced appeal among external stakeholders such as customers, investors and skilled workers. We counter these risks with our carbon management measures and by transparently disclosing our positions on climate protection and progress in the implementation of our climate strategy, in publicly accessible sources such as this annual report or on the BASF website, and in direct dialog with political decision-makers and external stakeholders (for more information, see Regulation/policy.

In order to ensure a well-founded assessment of the changing physical risks of climate change for our sites, BASF conducts comprehensive analyses based on climatic data and modeling from an external partner. The underlying climate scenarios are based on the latest estimates of the Intergovernmental Panel on Climate Change (IPCC). The description of the methodology and the results of these analyses can be found in chapter E1 Climate Change of this report.

Alongside climate-related risks, opportunities also arise for our more sustainable products for climate protection. Our broad product portfolio includes, among other things, solutions for the circular economy and climate protection, such as insulation materials for buildings, materials for electromobility and renewable products. Increased societal demands and the resulting regulations offer additional market opportunities for these products. We are working with numerous scientific and public organizations and initiatives on further solutions for more sustainable agriculture that meet economic, environmental and social demands over the long term (for more information, see General Disclosures).

• More information on our positions on and contributions to climate protection