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Last Update: 03/12/2009
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Part of the audited Consolidated Financial Statements and Management´s Analysis

Business-related risks

Development of sales markets: Because BASF is an important partner in many industries, shifts in demand naturally bring with them opportunities and risks.

For 2009, we expect a weaker economic climate as a result of the worldwide financial crisis. Several divisions are directly affected by weaker demand in important customer industries, such as the construction and automotive industries, and stronger competition in sales markets. Other divisions are indirectly affected by a decline in the growth of demand for basic chemical products.

The margins for commodities, such as those in the plastics business, are particularly exposed to product-specific supply and demand cycles.

As a result of a price advantage in raw materials in the Middle East, there is currently a significant increase in the capacity for basic chemicals, such as ethylene and propylene. There is also the risk that demand in target markets will grow more slowly, thus resulting in a decline in margins.

We reduce these risks in the BASF Verbund through diversification. We manage the construction and expansion of facilities for each product according to the expected demand and we schedule maintenance turnarounds accordingly. We divest businesses in which we do not see satisfactory opportunities to distinguish ourselves from our competitors in the long term.

Financial difficulties arising from the financial crisis and customer bankruptcies could contribute to a downturn in customer demand.
More information on the identification and assessment of such risks can be found in the section “Default risks”

Our planning takes the economic downturn into consideration. Opportunities and risks from market developments above or below our expectations are evaluated quantitatively. The possible spectrum of positive and negative plan deviations is captured in a probability distribution on division and group levels. The possible deviation from the plan may be significant. From a BASF Group perspective, this is limited by our high degree of diversification.

Where possible, these risks are countered using operating measures: For example, through close cooperation with customers and the optimal management of our production. We limit the effects of the risks stemming from the current overall economic situation by means of a crisis management system focused on the short-term. In this way, we react to the declining global demand by adjusting capacity utilization and by bringing forward maintenance turnarounds. A further aspect of balanced opportunity and risk management is to ensure that we are prepared for a possible recovery in order to optimally serve the needs of our customers.

Additionally, there are long-term strategic measures, such as our international orientation, the continuous development of innovative products and systems, and active portfolio management. Constant research and development takes center stage in this. Furthermore, we shape our portfolio through internal optimization measures, and not least through acquisitions, through which we expand our position in various specialty segments.

DEVELOPMENT OF SALES MARKETS


  • Risks for 2009 from the recession in the wake of the financial crisis
  • Potential deviations from plans are reduced through a high degree of diversification
  • Operating measures include close cooperation with the customers and optimal planning of our production

Raw material availability and price volatility: The availability and price volatility of feedstock, especially of crude-oil-based chemicals and precious metals, pose opportunities and risks for BASF. Currently, we do not see risks arising from raw material availability. Given the current economic environment, however, the risk of failure of individual suppliers has increased. We minimize these risks through our wide portfolio, our global purchasing activities and optimized procedures for the purchase of additional quantities of raw materials on spot markets. When possible, we avoid procuring particular raw materials from a single supplier. Where this is not possible, we try to foster competition, or if this could not be done, we knowingly enter into these relationships and assess the effects of possible availability problems. We continually monitor the credit risk of important business partners, customers as well as suppliers. We adopt a similar approach regarding the purchasing of services in the field of logistics and technology.
More information on the identification and assessment of such risks can be found in the section “Default risks”

We assume that the volatility of raw material prices in the future will be above the historical level. In order to take appropriate action, the effects of raw material price volatility and changing price expectations are mapped, taking the value-adding chains of the BASF Verbund into account. Our dependence on the oil price is reduced through the contribution of our oil and gas business. Furthermore, we minimize cost risks by using commodity derivatives. These measures help to secure margins when strongly rising raw material prices are expected, which can not be, or only to a limited extent, passed on via product prices. This could lead to costs if prices do not move as expected.

Technical risks: Guaranteeing the quality and availability of our products can require unforeseen technical measures. Moreover, there is the risk that for safety reasons or due to technical problems, unscheduled plant shutdowns are required. We minimize these risks through the continuous improvement of facilities and processes and our global production Verbund.

RAW MATERIAL AVAILABILITY AND PRICE VOLATILITY


  • Our activities in the exploration and production of oil and gas provide a partial offset for the impact on earnings of fluctuations in raw material prices
  • Use of commodity derivatives to hedge against rising raw material costs
  • Risk reduction through diversification in our portfolio

RISKS FROM THE OPERATING BUSINESS


  • Development of sales markets
  • Availability and price volatility of raw materials
  • Technical risks

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