As filed with the Securities and Exchange Commission on March 14, 2007

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

FORM 20-F

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2006

 

OR

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 1-15050


BASF AKTIENGESELLSCHAFT

(Exact Name of Registrant as Specified in Its Charter)

BASF CORPORATION*

(Translation of Registrant’s name into English)

 

Carl Bosch Strasse 38

Federal Republic of Germany

 

Ludwigshafen, GERMANY 67056

(Jurisdiction of incorporation or organization)

 

(Address of principal executive offices)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

American Depositary Shares representing BASF

 

New York Stock Exchange

ordinary shares of no par value

 

 

 

 

 

BASF ordinary shares of no par value

 

New York Stock Exchange**

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of December 31, 2006, there were 499,680,000 BASF ordinary shares of no par value outstanding.


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No o

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

Note—checking the box above will not relive any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

   Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

 

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17 o Item 18 x

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x


*   BASF Corporation is also the name of a wholly owned subsidiary of the Registrant in the United States.

** Not for trading, but only in connection with the registration of American Depositary Shares

 




BASF Aktiengesellschaft is incorporated as a stock corporation organized under the laws of the Federal Republic of Germany. As used in this Annual Report, “BASF Aktiengesellschaft” refers solely to the ultimate parent company of the BASF Group. “BASF” refers to BASF Aktiengesellschaft and its consolidated subsidiaries.

The Consolidated Financial Statements of BASF are based on the International Financial Reporting Standards (IFRS) and its interpretations issued by the International Accounting Standards Board (IASB).

The reconciliation of significant deviations to U.S. generally accepted accounting principles (U.S. GAAP) is described in Note 31 to the Consolidated Financial Statements included in Item 18.

Forward-Looking Information May Prove Inaccurate

This Annual Report contains certain forward-looking statements and information relating to BASF that are based on the current expectations, estimates and projections of its management and information currently available to BASF. These statements include, but are not limited to, statements about BASF’s strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements contained in this Annual Report that are not historical facts. When used in this document, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and “project” and other similar expressions are generally intended to identify forward-looking statements.

These statements reflect the current views of BASF with respect to future events. They are not guarantees of future performance and involve certain risks and uncertainties that are difficult to predict. In addition, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

Many factors could cause the actual results, performance or achievements of BASF to be materially different from any future results, performance or achievements that may be expressed or implied by such forward-looking statements. These factors include, among others:

·                  changes in general political, economic and business conditions in the countries or regions in which BASF operates;

·                  changes in the laws or policies of governments or other governmental or quasi-governmental activities in the countries in which BASF operates;

·                  changes in the composition of BASF Group companies, joint venture activities, divestitures and the successful integration of acquisitions;

·                  increased price competition and the introduction of competing products by other companies;

·                  the ability to develop, introduce and market innovative products and applications;

·                  the length and depth of product and industry business cycles, particularly in the automotive, construction, electrical and textile industries;

·                  changes in the demand for, supply of, and market prices of crude oil, refined products, natural gas and petrochemicals, including changes in production quotas in OPEC countries and the deregulation of the natural gas transmission industry in Europe;

·                  the cost and availability of feedstock and other raw materials, including naphtha and precious metals and the price of steam cracker products;

·                  the ability to pass increases in raw material costs on to customers;

·                  changes in the degree of patent and other legal protection afforded to BASF’s products;

·                  regulatory approval, particularly in the areas of fine chemicals, agricultural products and plant biotechnology and market acceptance of new products including genetically modified competitive products;

2




·                  unexpected negative results from research and development and testing of current product candidates;

·                  the ability to maintain plant utilization rates and to implement planned capacity additions and expansions;

·                  the ability to reduce production costs by implementing technological improvements to existing plants;

·                  the existence of temporary industry surplus production capacity resulting from the integration and start-up of new world-scale plants;

·                  potential liability resulting from pending or future litigation;

·                  potential liability for remedial actions under existing or future environmental regulations;

·                  changes in currency exchange rates, interest rates and inflation rates; and

·                  changes in business strategy and various other factors referenced in this Annual Report.

Many of these factors are macroeconomic in nature and are, therefore, beyond the control of BASF’s management. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described herein as anticipated, believed, estimated, expected, intended, planned or projected. BASF does not intend, and does not assume any obligation, to update the forward-looking statements contained in this Annual Report.

3




 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

 

Page

Item 1.

 

Identity of Directors, Senior Management and Advisers

 

5

Item 2.

 

Offer Statistics and Expected Timetable

 

5

Item 3.

 

Key Information

 

6

Item 4.

 

Information on the Company

 

15

 

 

History and Development of the Company

 

15

 

 

Business Overview

 

17

 

 

Organizational Structure

 

51

 

 

Description of Property

 

51

 

 

A Unresolved Staff Comments

 

53

Item 5.

 

Operating and Financial Review and Prospects

 

54

 

 

Basis of Presentation

 

54

 

 

Results of Operations

 

58

 

 

Liquidity and Capital Resources

 

80

 

 

Exchange Rate Exposure and Risk Management

 

86

 

 

Research and Development

 

87

Item 6.

 

Directors, Senior Management and Employees

 

89

Item 7.

 

Major Shareholders and Related Party Transactions

 

104

Item 8.

 

Financial Information

 

105

Item 9.

 

The Offer and Listing

 

108

Item 10.

 

Additional Information

 

110

Item 11.

 

Quantitative and Qualitative Disclosures About Market Risk

 

115

Item 12.

 

Description of Securities Other than Equity Securities

 

124

 

 

 

 

 

 

 

PART II

 

125

Item 13.

 

Defaults, Dividend Arrearages and Delinquencies

 

125

Item 14.

 

Material Modifications to the Rights of Security Holders and Use of Proceeds

 

125

Item 15.

 

Controls and Procedures

 

126

Item 16.

 

A Audit Committee Financial Expert

 

129

 

 

B Code of Ethics

 

129

 

 

C Principal Accountant Fees and Services

 

129

 

 

D Exemptions from the Listing Standards for Audit Committees

 

130

 

 

E Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

130

 

 

 

 

 

 

 

PART III

 

F-1

Item 17.

 

Financial Statements

 

F-1

Item 18.

 

Financial Statements

 

F-1

Item 19.

 

Exhibits

 

E-1

 

4




PART I

Item 1.             Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2.             Offer Statistics and Expected Timetable

Not applicable.

5




Item 3.             Key Information

SELECTED FINANCIAL DATA

The following selected financial data for the years 2006, 2005 and 2004 are excerpted from the Consolidated Financial Statements of BASF, which have been audited by Deloitte & Touche GmbH in 2004 and 2005, independent accountants during this period. In 2006, KPMG Deutsche Treuhand-Gesellschaft Aktiengesellschaft Wirtschaftsprüfungsgesellschaft was the independent registered public accounting firm for BASF. Starting from January 1, 2004, the accounting and reporting of the BASF Group is performed according to International Financial Reporting Standards (IFRS). Selected data are also provided in accordance with U.S. GAAP for the years 2006 through 2002.

The selected financial data presented below in accordance with U.S. GAAP for the years 2006, 2005 and 2004 have been derived from the Consolidated Financial Statements included in Item 18. Data for 2003 and 2002 have been derived from prior years’ statements. The reconciliation of the differences between IFRS and U.S. GAAP is described in Note 31 to the Consolidated Financial Statements included in Item 18.

6




 

Million €, except per share data and certain other data

 

 

2006

 

2005

 

2004

 

Income Statement Data

 

 

 

 

 

 

 

IFRS

 

 

 

 

 

 

 

Sales

 

52,610

 

42,745

 

37,537

 

Gross profit on sales

 

14,912

 

13,178

 

11,815

 

Income from operations

 

6,750

 

5,830

 

5,193

 

Financial result

 

(223

)

96

 

(846

)

Income before taxes

 

6,527

 

5,926

 

4,347

 

Net income

 

3,466

 

3,168

 

2,133

 

Net income after minority interests

 

3,215

 

3,007

 

2,004

 

Basic earnings per share

 

6.37

 

5.73

 

3.65

 

Balance Sheet Data

 

 

 

 

 

 

 

IFRS

 

 

 

 

 

 

 

Long-term assets

 

26,899

 

20,543

 

20,518

 

Short-term assets

 

18,392

 

15,127

 

14,930

 

Total assets

 

45,291

 

35,670

 

35,448

 

Stockholders’ equity

 

18,578

 

17,523

 

16,602

 

Thereof subscribed capital

 

1,279

 

1,317

 

1,383

 

Long-term liabilities

 

12,733

 

9,762

 

10,372

 

Short-term liabilities

 

13,980

 

8,385

 

8,474

 

Total stockholders’ equity and liabilities

 

45,291

 

35,670

 

35,448

 

Capital Expenditures and Depreciation

 

 

 

 

 

 

 

Additions to intangible assets and property, plant and equipment (1)

 

10,039

 

2,523

 

2,163

 

Amortization of intangible assets and depreciation of property, plant and equipment, including impairments

 

2,973

 

2,403

 

2,492

 

Key Ratios

 

 

 

 

 

 

 

Return on sales (%) (2)

 

12.8

 

13.6

 

13.8

 

Return on assets (%) (3)

 

17.5

 

17.7

 

13.2

 

Return on equity after taxes (%) (4)

 

19.2

 

18.6

 

12.9

 

 


(1) Additions to intangible assets and property, plant and equipment includes acquisitions.

(2) Return on sales (%) is calculated by dividing income from operations by sales.

(3) Return on assets (%) is calculated by dividing income before taxes plus interest expenses by the average amount of total assets.

(4) Return on equity after taxes (%) is calculated by dividing net income by the average amount of stockholders’ equity.

7




 

Million €, except per share data and certain other data

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

U.S. GAAP

 

 

 

 

 

 

 

 

 

 

 

Net income

 

3,094

 

3,061

 

1,863

 

1,320

 

1,716

 

Basic earnings per share

 

6.13

 

5.83

 

3.39

 

2.35

 

2.96

 

Diluted earnings per share

 

6.13

 

5.83

 

3.39

 

2.35

 

2.96

 

Stockholders’ equity

 

18,394

 

17,945

 

17,159

 

17,324

 

18,040

 

 

Weighted average of shares outstanding used in determining earnings per share:

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Weighted average of shares outstanding

 

504,479,083

 

525,124,659

 

548,714,243

 

561,886,993

 

579,118,368

 

 

For each year in the period 2002-2006, there was no dilutive effect on earnings per share and therefore the weighted average of shares outstanding used in determining diluted earnings per share is not reported.

8




 

Reportable operating segment data

Million €

 

 

2006

 

2005

 

2004

 

Chemicals

 

 

 

 

 

 

 

Sales

 

11,572

 

8,103

 

7,020

 

Income from operations

 

1,380

 

1,326

 

1,284

 

Assets

 

10,473

 

6,146

 

5,219

 

Plastics

 

 

 

 

 

 

 

Sales

 

12,775

 

11,718

 

10,532

 

Income from operations

 

1,192

 

1,015

 

694

 

Assets

 

6,911

 

6,639

 

6,187

 

Performance Products

 

 

 

 

 

 

 

Sales

 

10,133

 

8,267

 

8,005

 

Income from operations

 

669

 

863

 

1,128

 

Assets

 

9,727

 

4,863

 

4,538

 

Agricultural Products & Nutrition

 

 

 

 

 

 

 

Thereof Agricultural Products

 

 

 

 

 

 

 

Sales

 

3,079

 

3,298

 

3,354

 

Income from operations

 

447

 

681

 

602

 

Assets

 

4,458

 

5,156

 

4,985

 

Thereof Fine Chemicals

 

 

 

 

 

 

 

Sales

 

1,855

 

1,732

 

1,793

 

Income from operations

 

(66

)

(58

)

56

 

Assets

 

1,596

 

1,481

 

1,308

 

Oil & Gas

 

 

 

 

 

 

 

Sales

 

10,687

 

7,656

 

5,263

 

Income from operations

 

3,250

 

2,410

 

1,643

 

Assets

 

5,434

 

4,895

 

4,063

 

Others

 

 

 

 

 

 

 

Sales

 

2,509

 

1,971

 

1,570

 

Income from operations

 

(122

)

(407

)

(214

)

Assets

 

6,692

 

6,490

 

9,148

 

BASF Group

 

 

 

 

 

 

 

Sales

 

52,610

 

42,745

 

37,537

 

Income from operations

 

6,750

 

5,830

 

5,193

 

Assets

 

45,291

 

35,670

 

35,448

 

 

9




Dividends

The following table lists the annual dividends payable per BASF Share in euros and the U.S. dollar equivalent for each of the years indicated. The table also discloses the dividend amount per BASF Share for 2006 proposed by the Supervisory Board and the Board of Executive Directors for approval at the Annual Meeting to be held on April 26, 2007. The table does not reflect the related tax credits available to eligible taxpayers. See “Item 10. Additional Information — Taxation of Dividends” and “Item 8. Financial Information — Dividend Policy” for further information.

 

 

Dividend Paid for Each

 

 

 

BASF share

 

Year Ended December 31,

 

Euro

 

Dollar

 

2006

 

3.00

 

3.96

 

2005

 

2.00

 

2.37

 

2004

 

1.70

 

2.30

 

2003

 

1.40

 

1.76

 

2002

 

1.40

 

1.47

 

 

The euro dividend amounts are translated solely for the convenience of the reader into U.S. dollars (rounded to the nearest cent) at the Noon Buying Rate on the dividend payment date. For the dividend proposed to be paid in 2007 for the year ended December 31, 2006, the euro amount is translated into U.S. dollars (rounded to the nearest cent) on the basis of the Noon Buying Rate on December 31, 2006 of $1.3197 = €1.00.

Exchange Rate Information

On January 1, 2002, the euro became the sole legal tender for business transactions in Germany and the other eleven countries participating in the European Monetary Union at that time.

10




The table below sets forth, for the periods and dates indicated, the high, low, period-average and period-end Noon Buying Rates for euros expressed in U.S. dollars for one euro. No representation is made that the euro or U.S. dollar amounts referred to herein could have been or could be converted into U.S. dollars or euros, as the case may be, at any particular rate.

U.S. Dollar for One Euro

 

 

 

 

 

 

Period

 

Period

 

Year

 

High

 

Low

 

Average(1)

 

End

 

2006

 

1.3327

 

1.1860

 

1.2661

 

1.3197

 

2005

 

1.3476

 

1.1667

 

1.2400

 

1.1842

 

2004

 

1.3625

 

1.1801

 

1.2478

 

1.3538

 

2003

 

1.2597

 

1.0361

 

1.1411

 

1.2597

 

2002

 

1.0485

 

0.8594

 

0.9495

 

1.0485

 


(1) The average of the Noon Buying Rates on the last business day of each full month during the relevant period.

The high and low exchange rates for the euro for each month during the previous six months is set forth below:

U.S. Dollar for One Euro

Month

 

High

 

Low

 

February, 2007

 

1.3246

 

1.2933

 

January, 2007

 

1.3286

 

1.2904

 

December, 2006

 

1.3327

 

1.3073

 

November, 2006

 

1.3261

 

1.2705

 

October, 2006

 

1.2773

 

1.2516

 

September, 2006

 

1.2833

 

1.2648

 

 

The Noon Buying Rate for the euro on March 1, 2007 was quoted by the Federal Reserve Bank of New York at 1.3173 U.S. dollars for one euro.

Because a substantial portion of the BASF Group’s revenues and expenses are denominated in currencies other than the euro, results of operations and cash flows may be materially affected by movements in the exchange rate between the euro and the respective currencies to which the Group is exposed. For a discussion of the effect exchange rate fluctuations have on the BASF Group’s business and operations and also the hedging techniques used to manage the Group’s exposure to such fluctuations, see “Item 5. Operating and Financial Review and Prospects — Exchange Rate Exposure and Risk Management” and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.”

Risk Factors

BASF’s business, financial condition or results of operations could suffer adverse material effects due to any of the following risks. While all the risks considered material are described below, these are not the only risks BASF faces. Additional risks not known by BASF or not presently considered material might also impair BASF’s business operations.

Certain developments in the global economy generally may adversely affect BASF’s sales and earnings.

Four major economic factors may pose risks affecting BASF’s sales and earnings: 1. The oil price development could differ from the expected levels, 2. The U.S. dollar may further devaluate against the euro and Asian currencies, 3. China’s economy might experience a significantly reduced growth rate compared with expectations; and 4. The U.S. economy might experience a greater or longer slowdown in growth than economic forecasters currently anticipate. While currently not expected, a possible risk is a hard landing of the U.S. economy.

11




 

Decreasing demand for chemical products in Europe, the United States and Asia could consequently have an adverse effect on both sales and earnings. Those areas that are subject to commoditization, such as BASF’s basic inorganic chemicals, petrochemicals, intermediates and plastic operations are particularly vulnerable, whereas BASF’s agricultural, nutrition, cosmetics and natural gas operations as well as the recently acquired businesses catalysts and construction chemicals are less likely to be impacted. BASF is also regionally diversified and therefore less likely to be impacted from weakness in a specific region.

Changes in regulation could impact BASF’s business and operating results.

BASF must comply with a broad range of regulatory controls on the testing, manufacturing and marketing of many of its products. BASF expects that regulatory controls worldwide, and especially in the European Union (E.U.), will become increasingly more demanding. The European Union has passed new legislation on chemicals (REACH) to govern the registration, evaluation and authorization of chemicals. The new legislation will come into force in the relevant E.U. member states on June 1, 2007. We have been actively involved in numerous E.U. projects to support the efficient and economically practicable implementation of REACH and are now making detailed preparations for its introduction. We expect implementation to be associated with expenses of approximately €50 million per year in the period up to 2018.

Within the framework of E.U. emissions trading, the BASF Group was allocated allowances (EUA) for approximately 7 million metric tons of carbon dioxide (CO2) per year for the affected plants at our European sites for 2006. For the second trading period (2008 to 2012), a number of chemical plants will also be included in the Europe-wide trading system.

As a globally operating organization, we also conduct business with customers in Iran. A range of our products, particularly Plastics and Performance Products, is delivered mostly to private companies. These sales are insignificant in comparison to the consolidated sales of BASF (less than 0.2% in 2004, 2005 and 2006) and in our opinion are not otherwise significant to BASF’s consolidated operations. Sales to customers in Iran of dual-use products, which are products that can be used for both civil and military purposes and could be used as precursors for agents in chemical weapons, represented less than 0.01% of BASF’s consolidated sales in each of 2004, 2005 and 2006. The customers of these dual-use products are state-owned companies. BASF employs procedures for compliance with applicable export control legislation, including those of the European Union and Germany, which incorporate international export control arrangements also agreed to by the United States and incorporated to the Export Administration Regulations (EAR) of the U.S. Department of Commerce. These transactions may lead some potential customers and investors to avoid doing business with us or investing in our shares.

BASF is exposed to foreign currency and interest rate risks.

BASF conducts a significant portion of its operations outside of Europe and is therefore exposed to risks associated with the fluctuations of foreign currencies. BASF is subject to interest rate risks in the ordinary course of its business.

Risk management is centralized at BASF Aktiengesellschaft and BASF Group companies designated for that purpose. BASF hedges against financial risks through derivative instruments such as forward exchange contracts, currency options, interest rate and currency swaps, and combined instruments. There can be no assurance, however, that BASF’s hedging strategy will be effective and that foreign currency and interest rate fluctuations will not adversely affect BASF’s results of operations. See “Item 11. Quantitative and Qualitative Disclosures About Market Risk” for additional information about the nominal value and market value of BASF’s financial instruments.

BASF is also subject to credit risks to the extent that counterparties to transactions may not be able to perform their contractual obligations. Although BASF aims to limit the risk of default by entering into transactions only with top-rated financial institutions and by adhering to fixed limits, defaults with respect to significant contracts may adversely affect BASF’s operating results.

12




 

Significant variations in the cost and availability of raw materials, energy, precursors and intermediates may adversely affect BASF’s operating results.

BASF uses significant amounts of raw materials and energy in manufacturing a wide variety of products. Significant variations in the cost and availability of raw materials, energy, precursors and intermediates may adversely affect BASF’s operating results. To control these costs and supply risks, BASF purchases raw materials through negotiated long-term contracts with prices that periodically float. Additionally required purchases on spot markets are made using optimized procedures. Supply contracts for the most strategically important raw materials are negotiated and concluded centrally for the BASF Group. For more information, see “Item 4. Information on the Company — Supplies and Raw Materials.”

BASF’s individual business units constantly monitor changes in their relevant supply markets and take action to minimize their risks accordingly.

Cyclicality may adversely affect BASF’s operating margins.

The results of BASF’s Chemicals, Plastics and Performance Products segments are affected by cyclicality and migration of various industries in which they operate, including the automotive, construction, electrical and electronics, as well as the textile industries. BASF’s strategy to deal with these risks is its diversity and the constant expansion of the cyclically resilient businesses, such as agrochemicals, active ingredients for pharmaceuticals and nutrition, as well as trading and transmission of natural gas. The recent acquisitions of Engelhard Corp. and the construction chemicals business from Degussa AG further reduce BASF’s cyclicality. In cyclical businesses, BASF seeks to maintain cost leadership. BASF strives to anticipate customer migration tendencies and adjusts to customer industries by continued investment activities in emerging growth markets.

The results of BASF’s crop-protection business are dependent on weather conditions and can be affected by local and regional economic circumstances.

Sales volumes of BASF’s crop protection products are subject to the agricultural sector’s dependency on weather conditions. Adverse weather conditions in a particular growing region could materially negatively affect the results of operations of BASF’s crop protection business. Demand for crop protection products is further influenced by the agricultural policies of governments and multinational organizations. In addition, BASF’s crop-protection products are typically sold pursuant to contracts with long payment terms. These extended payment periods make BASF’s crop-protection business susceptible to losses on receivables during local or regional economic crises and may adversely affect BASF’s operating results. An appreciation of the Brazilian real could negatively influence the agricultural business in Brazil and consequently decrease BASF’s result.

Exploration risk may adversely affect the business of BASF’s Oil & Gas segment.

The future growth of the exploration and production unit of our Oil & Gas segment is dependent on successful findings. The search for new oil and natural gas reserves involves certain geological risks that relate to the availability of hydrocarbon products and the quality thereof. The exploration and production industries are experienced in diligently managing these risks. We diversify our risks through a balanced exploration portfolio.

13




Failure to develop new products and production technologies may harm BASF’s competitive position and operating results.

BASF’s operating results depend on the development of commercially viable new products and production technologies. BASF devotes substantial resources to research and development. Because of the lengthy development process, technological challenges and intense competition, there can be no assurance that any of the products BASF is currently developing, or may begin to develop in the future, will become market-ready and achieve substantial commercial success.

Negative developments in equity and bond markets may make extraordinary contributions to pension funds necessary.

The fund assets required to cover future pension obligations are actuarially determined using assumptions concerning the expected return on plan assets. The plan assets are partially comprised of equity investments. Declining returns on equity and bond markets could trigger an additional contribution to the pension plan to cover future pension obligations. Amortizing additional contributions that are deferred as a prepaid pension expense increases future pension expenses.

BASF is dependent upon hiring and retaining highly qualified management and technical personnel.

Competition for highly qualified management and technical personnel is intense in the industries in which BASF operates. BASF’s future success depends in part on its continued ability to hire, integrate and retain highly skilled employees.

BASF is subject to the risks associated with the use of information technology.

BASF is dependent upon technology for the distribution of information within the BASF Group and to customers and suppliers. This information technology is subject to risks associated with defects, errors, failures and computer viruses. To control potential risks relating to information technology, BASF uses the latest hardware and software and has integrated uniform information technology infrastructures, backup systems, replicated databases, virus and access protection, encoding systems and a high degree of internal networking. There can be no assurance, however, that BASF’s information technology systems will not fail and cause material disruptions to BASF’s business.

BASF is subject to security risks.

Assessing security risks on a worldwide basis and determining their potential impact on BASF has become an extremely difficult undertaking since the terrorist attacks in the United States. BASF’s corporate security is in close contact with local security offices through its Group-wide network, and takes controlled precautionary steps with the help of constantly updated security measures and recommendations (e. g., travel restrictions, tighter access controls for production plants, updating of rescue and evacuation plans, emergency services, etc.) to protect the company and its employees.

BASF is subject to risks arising from acquisitions and investment decisions.

The implementation of decisions related to acquisitions and investments is associated with complex risks due to the high level of capital involved and the long-term capital commitment. To reduce the risks in view of the recent acquisitions, BASF integrated the evaluation of risks related to the precious metal trading into its Group-wide risk management system. Also, programs have been established to retain key personnel.

Litigation could harm BASF’s operating results and cash flows.

For further information see “Item 8. Financial Information — Legal Proceedings” and Note 24 to the Consolidated Financial Statements.

14




 

Item 4.

 

Information on the Company

 

HISTORY AND DEVELOPMENT OF THE COMPANY

BASF Aktiengesellschaft was incorporated as a stock corporation under the laws of the Federal Republic of Germany on January 30, 1952 under the name “Badische Anilin- und Soda-Fabrik AG.” In 1973, the company changed its name to BASF Aktiengesellschaft. BASF Aktiengesellschaft’s headquarters are located in Ludwigshafen, Germany; its registered office is located at Carl Bosch Strasse 38, 67056 Ludwigshafen, Federal Republic of Germany, telephone 011-49-621-60-0. The company’s agent for U.S. federal securities law purposes is BASF Corporation, located at 100 Campus Drive, Florham Park, NJ 07932, telephone (973) 245-6000.

We continually review our businesses and align them to achieve profitable and sustainable growth. Our significant acquisitions and divestitures between 2004 and 2006 are listed below:

Acquisitions

·                  BASF acquired PEMEAS GmbH, a supplier of fuel cell components, on December 13, 2006. The company operates manufacturing and R&D facilities in Germany and in the United States. In 2007, PEMEAS GmbH will be officially renamed to BASF Fuel Cell GmbH.

·                  On February 28, 2006, BASF reached an agreement with Degussa AG, Germany, to acquire the company’s global construction chemicals business. The transaction was concluded on July 1, 2006 with a purchase price for equity of €2.2 billion. The business will be fully integrated into the Performance Products segment. Approximately 7,400 employees were transferred to BASF in July 2006.

·                  The acquisition of Johnson Polymer, a producer of water-based resins for the coatings and printing inks industry, was completed on July 1, 2006 and involves one production site each in the United States and in the Netherlands, as well as technical centers and offices in Asia Pacific. The purchase price was $482 million or €379 million.

·                  The Belgian biotechnology company CropDesign N.V. was acquired by BASF on June 26, 2006 and has been integrated into BASF Plant Science Group as an affiliate to BASF Plant Science GmbH.

·                  BASF concluded its acquisition of Engelhard Corp. on June 6, 2006, having spent $4.8 billion or approximately €3.8 billion for 100% of the shares of the company. The acquisition involves 50 production sites and 22 R&D centers in more than 20 countries. We are in the process of integrating both Engelhard’s domestic U.S. operations and its international operations into our global business. Approximately 7,300 Engelhard employees were transferred to BASF as a result of the acquisition.

·                  On October 1, 2005, BASF purchased the Swiss fine chemicals firm Orgamol S.A.

·                  BASF acquired the global electronic chemicals business from Merck KGaA on April 15, 2005.

Divestitures

·                  BASF divested its global terbufos insecticide business to AMVAC Chemical Corporation on November 27, 2006.

·                  BASF sold major parts of its Micro Flo generic agrochemical business in the United States to Arysta LifeScience on March 31, 2006.

·                  On August 1, 2005, BASF, along with Shell Chemicals, our 50% joint venture partner, sold Basell, a polyolefin joint venture, to Nell Acquisition S.a.r.l., a subsidiary of Access Industries.

·                  BASF divested its printing systems business to CVC Capital Partners on November 30, 2004.

·                  On July 20, 2004, BASF divested its 30% share in DyStar to Platinum Equity.

15




Planned Transactions

·                  On April 27, 2006, BASF and Gazprom signed an additional framework agreement that demonstrates the intention of the two companies to extend their cooperation. The agreement foresees an exchange of assets in the production and marketing of natural gas. BASF subsidiary Wintershall Holding AG will receive an interest of 25% less one share in the company Severneftegazprom (SNGP), which holds the license in the Yuzhno Russkoye gas field in Siberia. Additionally, Wintershall Holding AG will receive a further 10% in the form of non-voting preferred shares. In return, Gazprom will participate with 49% in a BASF Group company with interest in onshore exploration and production activities in Libya and will increase its share in WINGAS GmbH from 35% to 50% minus one share. The contracts to legally finalize this agreement are expected to be signed in the first half of 2007.

For further information see also “Item 8. Financial Information” and Note 2 of “Item 18. Financial Statements.”

Major capital expenditures between 2004 and 2006 and those currently in progress include:

 

 

 

 

 

 

Projected Annual

 

Start-up/

 

 

 

 

 

 

 

Capacity at Completion

 

Projected Start-up

 

Segment

 

Location

 

Project

 

of Project (metric tons)

 

of Operations

 

Chemicals

 

Antwerp, Belgium

 

Expansion steam cracker

 

 

 

2007

 

 

 

 

 

·      ethylene

 

1,080,000

 

 

 

 

 

 

 

·      propylene

 

650,000

 

 

 

 

 

 

 

·      benzene

 

280,000

 

 

 

 

 

Caojing, China

 

Polytetrahydrofuran

 

60,000

 

2005

 

 

 

Geismar, Louisiana

 

Alkylethanolamines

 

28,000

 

2007

 

 

 

Nanjing, China

 

Integrated production site major products include:

 

 

(1)

2005

 

 

 

 

 

·      ethylene

 

600,000

 

 

 

 

 

 

 

·      propylene

 

300,000

 

 

 

 

 

 

 

·      ethylene glycols

 

350,000

 

 

 

 

 

 

 

·      aromatics

 

300,000

 

 

 

 

 

 

 

·      oxo alcohols

 

250,000

(2)

 

 

 

 

 

 

·      organic acids

 

80,000

 

 

 

 

 

Port Arthur, Texas

 

Butadiene

 

410,000

(3)

2004

 

Plastics

 

Altamira, Mexico

 

EPS expansion

 

150,000

(4)

2005

 

 

 

Antwerp, Belgium

 

Teluran (ABS)

 

200,000

 

2004

 

 

 

 

 

Propylene oxide

 

300,000

(5)

2008

 

 

 

 

 

Hydrogen peroxide

 

230,000

(6)

2008

 

 

 

 

 

MDI (diphenylmethane diisocyanate) expansion

 

560,000

 

2007

 

 

 

Caojing, China

 

MDI (diphenylmethane diisocyanate)

 

240,000

(7)

2006

 

 

 

 

 

TDI (toluene diisocyanate)

 

160,000

(8)

2006

 

 

 

Geismar, Louisiana

 

Polyols expansion

 

350,000

 

2008

 

 

 

Kuantan, Malaysia

 

Ultradur (PBT)

 

60,000

(9)

2006

 

 

 

Ludwigshafen, Germany

 

Ultrason (PES/PSU) expansion

 

12,000

 

2007

 

 

 

Shanghai, China

 

Compounding engineering plastics

 

45,000

 

2006

 

 

 

 

 

Polyurethanes specialties

 

 

 

2007

 

 

 

Schwarzheide, Germany

 

Ecoflex

 

6,000

 

2006

 

Performance Products

 

Antwerp, Belgium

 

Acrylic acid

 

320,000

 

2008

 

 

 

 

 

Superabsorbents

 

175,000

 

2007

 

 

 

Caojing, China

 

Isocyanate Oligomers

 

8,000

 

2007

 

 

 

Freeport, Texas

 

Superabsorbents

 

(10)

2007

 

 

 

Ludwigshafen, Germay

 

Butyl acrylate

 

 

2008

 

 

 

Nanjing, China

 

Acrylic monomers

 

160,000

(1)

2005

 

 

 

 

 

Acrylic esters

 

215,000

 

2005

 

 

16




 

Oil & Gas

 

Urengoy, Russia

 

Achimgaz

 

42,000,000

(11)

2007

 

 

 

Haidach, Austria

 

Haidach

 

2,400,000,000

(12)

2011

 

 

 

Lippe, Germany

 

WEDAL

 

300,000

(13)

2006

 

 


(1)             Conducted through a joint venture between Sinopec Corp., China (50%) and BASF (50%) (capacity reflects total joint venture capacity).

(2)             Calculated as butyraldehyde.

(3)             Conducted through a joint venture between Shell Chemical Company, Texas (60%), BASF (24%) and Total Petrochemicals USA, Inc., Texas (16%) (capacity reflects total joint venture capacity).

(4)             Conducted through the joint venture Polioles S.A. de C.V., Mexico (capacity reflects total joint venture capacity of which BASF has a 50% share).

(5)             Conducted through a joint venture with Dow Chemical, Michigan (capacity reflects total joint venture capacity).

(6)             Conducted through a joint venture with Solvay S.A., Belgium and Dow Chemical, Michigan (capacity reflects total joint venture capacity).

(7)             Conducted through a joint venture with Sinopec Shanghai Gao Qiao Petrochemical Corporation, China; Shanghai Chlor-Alkali Chemical Co. Ltd., China; and the Shanghai Hua Yi (Group) Company, China as well as Huntsman China Investments B.V., the Netherlands (capacity reflects total joint venture capacity of which BASF has a 35% share).

(8)             Conducted through a joint venture with Sinopec Shanghai Gao Qiao Petrochemical Corporation, China and the Shanghai Hua Yi (Group) Company, China (capacity reflects total joint venture capacity of which BASF has a 70% share).

(9)             Conducted through a joint venture with Toray Industries Inc., Japan (capacity reflects total joint venture capacity of which BASF has a 50% share).

(10)       Superabsorbant plant in Freeport will replace capacities in Aberdeen, Mississippi, and Portsmouth, Virginia that account for 160,000 metric tons in total.

(11)       Conducted through a joint venture with Urengoygazprom, Russia, of which Wintershall has a 50% share (capacity reflects annual plateau production to boe (barrel oil equivalent, Wintershall share) from the Achimov formation of the Urengoy field in Siberia, Russia).

(12)       Haidach storage in which WINGAS participates with a share of 33% together with partners Rohöl-Aufsuchungs AG (RAG), Austria, and Gazprom export, Russia (capacity reflects total available natural gas volume in cubic meters.

(13)       Compression station Lippe as part of the WEDAL pipeline fully owned by WINGAS (capacity reflects the extension of the hourly compression in cubic meters).

 

BUSINESS OVERVIEW

Introduction

BASF is a transnational chemical company that comprises the parent company, BASF Aktiengesellschaft of Ludwigshafen, Germany, and 327 consolidated subsidiaries. The company operates more than 150 production sites.

For the year ended December 31, 2006, BASF reported sales of €52,610 million, income from operations of €6,750 million, and net income after minority interests of €3,215 million. Based on customer location, BASF’s activities in Europe accounted for 56.1% of BASF’s total sales in 2006; North America (which includes the United States, Mexico and Canada) accounted for 21.9% of sales; the Asia Pacific region accounted for 15.4% of sales; and the South America, Africa, Middle East region accounted for 6.6% of sales.

Structure

BASF has five business segments: Chemicals, Plastics, Performance Products, Agricultural Products & Nutrition and Oil & Gas. These business segments encompass BASF’s 14 operating divisions. For financial reporting purposes, the two operating divisions of BASF’s Agricultural Products & Nutrition business segment are separate reportable operating segments: Agricultural Products and Fine Chemicals.

BASF’s operations are linked with what is referred to as the “Verbund” structure. Verbund loosely translates as “integration,” but the meaning encompasses far more than what is traditionally associated with backward or forward integration. In production processes, BASF does not simply look forward and backward to find potential efficiencies, but rather examines every input and every output of these processes. At Verbund sites, BASF uses byproducts of chemical reactions, which might otherwise have to be disposed of, as raw materials for other processes. In addition, many chemical processes release heat energy, which BASF converts into steam and then uses to drive other processes within a Verbund site. This allows our Verbund sites to consume less fossil fuel than would otherwise be required. The close proximity of plants to each other at a Verbund site also allows the use of pipelines to transport intermediate products, instead of railcars, barges or trucks, thus resulting in further savings. By reusing byproducts and residual materials, using energy and other raw materials efficiently and keeping the distances that substances need to be transported to a minimum, BASF reduces the impact on the environment and saves money. This concept of benefiting from interconnectivity is applied to other areas as well, such as R&D, purchasing and managing customer relationships, where globally interactive teams maximize BASF’s productivity.

17




Group Strategy

Chemistry stands for the future that we are helping to shape as the world’s leading chemical company. We are developing our strengths through innovations and acquisitions. Sustainability guides our actions in pursuing this goal.

Growth through acquisition

In 2006, we continued on our profitable growth path with the acquisitions of Engelhard Corp., the construction chemicals business of Degussa AG, Johnson Polymer, CropDesign N.V. and PEMEAS GmbH. We have clear criteria for making acquisitions: We focus on innovative business areas that grow faster than the market as a whole and that make our portfolio more resilient to cyclicality. The contribution to sales and operating income from the new businesses shows that we are on the right path. The synergies are higher than expected.

To further improve our market position, we will continue in our efforts to optimize our portfolio and implement measures to restructure our businesses and reduce costs. Our global Verbund enables us to operate competitively in all regions.

As the world’s leading chemical company, we will continue to concentrate on the organic growth of our core activities: chemistry, agricultural products and nutrition as well as oil and gas.

Growth through innovation

We continue to purposely strengthen our research and development. In the process we focus on market-driven innovations, new business models and technology areas of the future. We create new business opportunities with a global network that includes centers of excellence and interdisciplinary cooperation. We have combined the important technology-driven issues of the future into five growth clusters:

·      Energy management

·      Raw material change

·      Nanotechnology

·      Plant biotechnology

·      White (industrial) biotechnology

Our four strategic guidelines

Four strategic guidelines describe our path to the future, with which we align our activities:

·      Earn a premium on our cost of capital

·      Help our customers to be more successful

·      Form the best team in industry

·      Ensure sustainable development

The combination of these four guidelines makes us successful.

18




Earn a premium on our cost of capital

We raise the value of BASF by earning a premium on our cost of capital. To achieve this goal, we have been expanding on our value-based management strategy. Earnings before interest and taxes (EBIT) after cost of capital is the key performance and management indicator for our operating divisions and business units. We measure our business decisions and performance on the basis of how it influences earnings after cost of capital. Every employee endeavors to improve cost structures and use capital more efficiently in order to grow profitably.

The BASF Group must achieve an EBIT of 10% on its operating assets to meet the interest rate payments to providers of debt, to satisfy the returns expected by providers of equity and to cover tax expenses. The cost of capital percentage before interest and taxes of 10 percent corresponds to a weighted average cost of capital (WACC) of approximately 6 percent after taxes. The cost of capital percentage depends primarily on three factors: the capital structure of the BASF Group, the level of interest rates on debt and the return expected by shareholders. We calculate our cost of equity on the basis of the market value of BASF shares. The cost of capital percentage is reviewed annually in the light of current data. EBIT after cost of capital is calculated by subtracting income taxes for oil production that are noncompensable with German taxes (see Note 8 of Item 18) and the cost of capital from the BASF Group’s EBIT. Finally, EBIT for activities not assigned to the segments is subtracted since this is already provided for in the cost of capital percentage.

For 2007, the cost of capital percentage has been reduced from 10 percent to 9 percent. This change was due to the increase in debt capital on BASF’s balance sheet as a result of the financing of acquisitions. Debt capital bears fewer risks and hence costs are lower than for equity. The average cost of capital percentage for the BASF Group for 2007 is therefore reduced accordingly.

Help our customers to be more successful

We are there wherever our customers are. We invested timely in growth markets and are now active in all important markets worldwide.

In order to grow profitably, we need to understand our customers’ businesses as if they were our own. We work closely with our customers to identify their needs and develop the right solutions. We then select the best business models suited to our customers’ needs. This ensures the success of our customers and, thereby, our own.

Form the best team in industry

As the best team in industry, we secure our company’s long-term success. We rely on the strength of each team member. This diverse range of competencies helps us to better understand our customers and develop the products and solutions they need to become more successful.

We offer attractive development opportunities as well as pay linked to individual and company performance to attract and retain the best specialists and managers worldwide. We greatly value personnel development and managers who act as role models. Our dialogue-oriented management culture plays an important role in this regard. It is shaped by our Values and Principles and by BASF’s Leadership Compass.

Ensure sustainable development

For BASF, sustainable development means integrating environmental protection and social responsibility in our business processes so that they contribute to our long-term economic success. BASF’s Sustainability Council develops and monitors the necessary strategies, which are implemented with the support of regional networks. We systematically identify sustainability issues that are relevant to BASF and evaluate them in terms of their opportunities and risks. Our sustainability strategy has the goal of avoiding risks, promoting our existing business and creating new business opportunities. This is why we are placing more emphasis on integrating sustainability into our customer relations from 2007 onward.

19




CHEMICALS

Segment Overview

The Chemicals segment produces a wide range of products, from standard chemicals, such as petrochemical commodities and inorganic chemicals, to higher-value intermediates, inorganic specialties and catalysts, allowing BASF to fully exploit the benefits of its Verbund. The segment is organized into four divisions: Inorganics, Catalysts, Petrochemicals and Intermediates. Key information is provided in the following table:

Million €

 

 

2006

 

2005

 

2004

 

Sales to third parties

 

11,572

 

8,103

 

7,020

 

Percentage of total BASF sales

 

22

%

19

%

19

%

Intersegmental transfers

 

4,483

 

3,826

 

3,395

 

Income from operations

 

1,380

 

1,326

 

1,284

 

Additions to property, plant and equipment and intangible assets

 

3,539

 

639

 

601

 

 

The products are sold to a multitude of industries including the chemical, construction, automotive, electrical, electronics, detergents, colorants, coatings, health and nutrition industries. Although most of the segment’s sales are to external customers, 27.9% of the segment’s total sales are intersegmental transfers to other BASF operations for the manufacture of higher-value products. The products manufactured for captive use include many basic and intermediate chemicals.

The Chemicals segment forms the basis of BASF’s Verbund because its divisions both intensively consume and manufacture products along the company’s core value-adding chains. Most of the commodity products are produced at our major Verbund sites in Ludwigshafen, Germany; Antwerp, Belgium; Geismar, Louisiana and Freeport, Texas; Kuantan, Malaysia; and Nanjing, China. In addition, we have dedicated chemical operations near our customers: for example, our plasticizer production and our catalysts production.

The principal raw materials used in the Chemicals segment are naphtha, natural gas, butane, propane, sulfur, salt and precious metals. The segment purchases less than 5% of its raw materials from other BASF operations. Natural gas, a key raw material for the Chemicals segment, is acquired both through BASF’s joint venture WINGAS GmbH and from external sources. All other principal raw materials are purchased from external sources. BASF does not rely on a dominant supplier for the raw materials of its Chemicals segment.

Segment Strategy

The Chemicals segment focuses on the supply of standard chemicals for internal demand and on offering a broad range of intermediate and higher value-added products, such as catalysts, to external customers. The high and steady internal demand for chemical building blocks produced by the Chemicals segment ensures a high capacity utilization of BASF’s plants. BASF’s capital expenditures and research and development efforts are focused on building world-scale plants as well as on developing new technologies, improved processes and new products. Key strategies of the Chemicals segment include the following:

·                  Optimize the costs of production for our standard chemicals: BASF continuously optimizes its chemical operations through economies of scale, cost- and technology-leadership and process integration at the Verbund sites;

·                  Increase sales of higher value-adding products: BASF aims to increase sales of higher value-adding products, such as catalysts, intermediates and chemical specialties through product and process innovation in collaboration with customers;

·                  Adapt product portfolios to market demand in the regions: BASF continuously optimizes its regional production structures in Europe, North America (NAFTA) and Asia.

20




Research and Development

In 2006, the Chemicals segment spent €178 million in research activities. Research activities are focused on the development of improved or new production processes as well as on the development of innovative products to extend our product portfolio.

We continuously improve our manufacturing processes to maintain cost-competitiveness and develop new cost-effective production technologies. In Ludwigshafen, Germany, we are building a plant for cyclododecanone, a key intermediate to produce the high-performance plastic polyamide 12 and aroma chemicals. Based on butadiene and nitrous oxide as raw materials, both available in our Verbund, our plant will use an innovative three-stage process, whereas conventional processes require five steps.

Together with customers, we improve existing products and develop innovative new applications. For example, BASF, the world’s largest producer of formic acid, and Tekion, a North American developer of micro fuel cells for portable electronic products, are jointly developing a formic acid fuel for Tekion’s fuel cell technology. With this technology, portable electronic devices can be safely operated over a longer time period; these devices are refueled by simply swapping a cartridge containing formic acid.

Cooperations with leading institutes and universities provide valuable technological impulses for our research and development. For example, in our portfolio of ionic liquids with the brand name Basionics™, BASF has set up a research partnership with the University of Alabama to study the dissolution and processing of cellulose with ionic liquids for fiber manufacturing. For that partnership, the University of Alabama and BASF have been jointly awarded the 2006 Deals of Distinction Award for the Chemical, Energy and Materials Industry Sector by the renowned “Licensing Executive Society Inc.” This was the third international award for Basionics™.

Products

The Chemicals segment has the following major product lines:

Inorganics division

Inorganic Specialties

BASF offers a wide range of inorganic specialties which includes carbonyl iron powder, hydroxylamine free base, hydroxylammonium sulfate, boron specialties and BASF’s innovative Catamold® line of products for powder injection molding of metal and ceramic components. The Catamold® line is especially suited for manufacturing tiny, intricate devices such as watch casings and orthodontic appliances. BASF sells these products globally to manufacturers in the automotive, construction and medical sectors, among other industries.

Electronic Materials

BASF produces inorganic specialties in electronic grade, such as hydroxylamine free base for use in manufacturing semiconductors, light-emitting diodes, and flat and plasma screen displays.

Inorganic Chemicals

BASF produces inorganic chemicals, which are the starting materials for fertilizers, plastics, amines and other high-value chemicals. The products range from basic chemicals such as chlorine, sodium hydroxide, nitric acid and sulfuric acid to inorganic salts such as sodium and potassium alcoholates to ammonium salts. More than half of these products are for captive use within BASF’s Verbund. The remaining products are sold primarily to other chemical companies.

Glues and Impregnating Resins

BASF offers a wide variety of tailor-made adhesives for the wood products industry. These adhesives are used to bind together the particles, fibers and strands found in all types of particleboards. In addition, BASF produces impregnating resins, which are used to manufacture decorative paper and laminated flooring. BASF is also a producer of glues and impregnating resin raw materials such as ammonia, formaldehyde, methanol, urea and melamine. Europe is the primary market for this group of products.

21




Catalysts division

Environmental Catalysts

Environmental Catalysts enable regulatory compliance by providing technologies that control emissions from mobile sources, including gasoline- and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and motorcycles. The division also supplies a variety of industrial markets, including aerospace, power generation, process industries, temperature sensing and utility engines with emission-control technologies, material products made primarily from platinum group metals, and thermal spray and coating technologies.

Process Catalysts

Process Catalysts include chemical-process catalysts and additives for chemical, petrochemical and petroleum refining customers, as well as aluminas and adsorbents. The product offering also includes custom process catalysts, such as those that enable conversion of gas-to-liquid and syngas production, and petroleum refining catalysts. In addition, additives based on the division’s unique Distributed Matrix Structure (DMS) technology platform are offered. It includes the NaphthaMax II and Flextec refining catalysts. The division also serves markets for polyolefin catalysts with catalysts, such as Lynx 1000.

Materials Services

Materials Services supports the catalysts business and BASF’s customers with precious and base metals and related services. This is a distribution and materials services business that purchases and sells precious metals, base metals, other commodities, and related products and services. It uses a variety of pricing and delivery arrangements structured to meet the logistical, financial and price risk management requirements of BASF, its customers and suppliers. Additionally, Materials Services offers the related services of precious metal refining and storage, and produces precious-metal salts and solutions.

Petrochemicals division

Cracker Products

BASF produces the entire range of cracker products from ethylene and propylene to benzene and C4 cuts. Of these, propylene is the most important starting product for BASF’s value-adding chains. Benzene is used captively, while the residues from benzene extraction are sold as gasoline components. Butadiene is used captively to produce dispersions and ABS (acrylonitrile-butadiene-styrene) and is also sold in the merchant market. Isobutene (a C4 hydrocarbon) serves as the starting material for the polyisobutene value-adding chain of gasoline additives and as the basic building block in vitamin synthesis. In Europe, all n-butenes are used in the synthesis of plasticizers and detergent alcohols. Higher olefins are marketed to the adhesives industry.

Alkylene Oxides and Glycols

Ethylene oxide derived from ethylene is used mainly to produce surfactants, ethanolamines, glycols and glycol ethers. Ethylene glycol is a product used in antifreeze by the automotive industry and for the production of fibers, films and PET (polyethylene terephthalate) plastic bottles by polyester manufacturers. Propylene oxide is synthesized from propylene and serves as a base for a wide variety of products, including hydraulic fluids, solvents and propylene glycol.

22




Solvents

BASF offers a wide range of oxygenated, halogen-free solvents that are used to dissolve other chemicals and facilitate chemical reactions. BASF is the world’s largest producer of oxo alcohols and is also a major producer of acetates, glycol ethers, glycol ether acetates and specialty solvents such as cyclohexanone. BASF sells most of these products globally, primarily to the coatings, pharmaceuticals and cosmetics industries.

Plasticizers and Plasticizer Raw Materials

BASF manufactures standard and specialty plasticizers, which are used in chemical processes to make rigid plastics flexible. BASF also sells the plasticizer precursor phthalic anhydride for use in dyestuffs and unsaturated polyester resins, and markets plasticizers based on higher alcohols. Our newest specialty product is the plasticizer Hexamoll® DINCH, used for sensitive applications.

Intermediates division

Amines

BASF is among the world’s top three producers of amines, which are principally used to make detergents and cleaning products, process chemicals, agricultural products and pharmaceuticals. BASF offers approximately 140 different amines worldwide. Key products include ethanolamines, ethyleneamines, alkylamines, alkylalkanolamines and various specialty and aromatic amines. Several chiral intermediates are of increasing importance for pharmaceuticals and agricultural products. As gas treatment technology we offer aMDEA®, short for activated methyldiethanolamine, for the removal of acid gases like hydrogen sulphide and carbon dioxide.

Butanediol and its derivatives

BASF is the world’s largest manufacturer of 1,4-butanediol, which is a chemical building block for products such as polyesters and polyurethanes. Its derivatives are used to manufacture products ranging from fibers to paints and include tetrahydrofurane, PolyTHF®, gamma-butyrolactone and N-methylpyrrolidone.

Polyalcohols and Specialties

Our polyalcohols such as 1,6-hexanediol (HDO®) and neopentylglycol (Neol®) are mainly used to produce a wide range of coatings. In addition, BASF offers specialties like carbonates and various special acetylenics, such as vinylmonomers and higher alkylpyrrolidones.

Acids and Specialty Intermediates

This product group comprises both commodity acid products and specialty intermediate products. Carbon acids such as formic acid, propionic acid and 2-ethylhexanoic acid can be used to manufacture preservatives for the feed and food industries as well as auxiliaries for textile and leather applications. Specialty intermediates, such as derivatives of phosgene including acid chlorides and chloroformates, glyoxal and its derivatives, glutaraldehyde and various other chemicals, such as formamide and triphenylphosphine, are often used in the manufacture of paper, polymers, textiles and leather products.

23




Division Information

Inorganics

BASF’s Inorganics division manufactures about 550 products of which approximately 50% are used captively. The remainder is sold to external customers worldwide in a broad range of industries.

In 2006 the Inorganics division’s sales to third parties were €1,134 million. Thereof, Europe accounted for 66%; Asia Pacific for 22%; North America (NAFTA) for 8%, and South America, Africa, Middle East for 4%. The catalysts business unit, which was previously part of the Inorganics division, was assigned to the new Catalysts division effective January 1, 2006. Inorganics division’s sales have been adjusted accordingly.

BASF is one of the largest manufacturers of electronic chemicals for use in the production of semiconductors. In 2006, BASF began construction of a new integrated production plant for these process chemicals in Ludwigshafen, Germany. The new production facility will serve European customers in the semiconductor industry. It is scheduled to open at the end of 2007. Additionally, BASF established a clean-room laboratory and a technical application center in Ludwigshafen in the fall of 2006.

The Inorganics division competes on the basis of strong customer relationships, comprehensive product services and price. In the market for specialty products, the division also competes with innovative products, such as electronic grade chemicals and specialties like inorganic powders for injection molding. The Inorganics division sells its products primarily through BASF’s own sales force as well as through distributors.

BASF’s Inorganics division faces a variety of competitors. BASF considers Arkema, Yara, DSM, Degussa and Gentek to be the main competitors of the Inorganics division. In the market for glues and impregnating resins, Nordkemi and Arkema are among BASF’s competitors.

Catalysts

The new Catalysts division is comprised of the catalysts businesses and precious metal operations of Engelhard Corp., acquired in June 2006, as well as of BASF’s previously existing catalyst business. The division develops, manufactures and markets environmental and process catalysts and related technologies to a wide range of markets and customers globally and also actively trades precious and base metals to meet the logistical, financial and price risk requirements of BASF, its customers and suppliers.

In 2006, Catalysts division sales to third parties were €2,411 million. Thereof, Europe accounted for 39%; North America (NAFTA) for 36%; Asia Pacific for 15%; South America, Africa, and the Middle East for 10%.

Key success factors for the Catalysts division are achieving technological and cost leadership by continuous process and product innovation and exploiting the growth potential for our environmental technologies, especially in Asia. Customer demand for environmental technologies is driven by increasingly stringent environmental regulations being adopted worldwide. There is no significant seasonal impact on the division’s businesses. The main raw materials are precious metals and natural gas. BASF has maintained strong, long-standing relationships with many of the primary suppliers of platinum group metals around the world, ensuring availability of precious metals, such as platinum, palladium and rhodium for its customers and for its own manufacturing. Precious metal prices can be affected by high volatility, however most of the precious metals are provided in advance by the customers. The customers often purchase these metals from our Materials Services business, but they may also be supplied by other sources.

The Catalysts division markets its technologies through its own sales force as well as through distributors. BASF is among the top three providers worldwide of the main products and services of the Catalysts division’s businesses. BASF considers Johnson Matthey, Umicore, and Delphi to be the main competitors in the environmental and emissions control markets. In the chemical and process catalysts market, we consider WR Grace, Süd-Chemie, Albemarle, Johnson Matthey and Dow Chemical to be the key competitors.

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Petrochemicals

The Petrochemicals division sells more than 200 products and represents the first step in BASF’s Verbund approach to integration for the company’s petrochemical-based, high-value products.

In 2006, the Petrochemicals division’s sales to third parties amounted to €5,754 million. Thereof, North America (NAFTA) accounted for 49%; Europe for 36%; Asia Pacific for 13%; and South America, Africa, Middle East for 2%.

The Petrochemicals division sells products through BASF’s own sales force as well as through wholesalers. Specialty chemical and other chemical companies are the primary external customers of this division, some of which are also competitors of BASF. Our steam crackers, the core of the petrochemicals division, mainly supply products for captive use within the company, although BASF does maintain positions in the merchant markets for olefins to ensure high capacity utilization. Approximately 40% of the division’s total sales are to other BASF divisions.

The Petrochemicals division produces commodities that are subject to cyclicality in pricing. Changes in raw materials prices have an almost immediate effect on the division’s financial performance. Competition in the market is based on strong customer relationships, comprehensive product services and price.

BASF considers Celanese, Degussa, Dow Chemical, Eastman Chemicals, ExxonMobil Chemical, Formosa Plastics Corporation, INEOS, SABIC, Sasol, Shell Chemicals and SINOPEC to be the main competitors of its Petrochemicals division.

Intermediates

The Intermediates division manufactures approximately 600 products that are sold worldwide. The customers typically purchase the division’s chemical products as precursors for their higher-value chemicals such as plastics, polyurethanes, textile fibers, resins, paints, surfactants, colorants, coatings, pharmaceuticals and agricultural products.

In 2006, the Intermediates division’s sales to third parties were €2,273 million. Thereof, Europe accounted for 51%; Asia Pacific for 27%; North America (NAFTA) for 17%; and South America, Africa, Middle East for 5%.

The majority of the Intermediates division’s products are sold externally. They are generally quite resilient to economic cycles and are often the result of multi-step production processes within BASF. The division additionally sells many of its products within BASF, with internal transfers accounting for approximately 25% of the division’s total sales.

In addition to our ‘value over volume’ strategy, the key to the Intermediates division’s success lies in achieving technological and cost leadership, offering customized products and increasingly, developing a global production presence.

BASF sells this division’s products through its own sales force as well as through distributors. BASF is among the top three producers worldwide of the main products of its four strategic intermediates’ business units. BASF considers Taminco, Dow and Huntsman to be the main competitors in the amines markets. In the butanediol and derivatives market, the company’s main competitors are ISP, Invista, Lyondell, Dairen, Mitsubishi Chemicals and new entrants, especially from China. Eastman Chemical and Ube Industries are considered to be the main competitors in the areas of polyalcohols and specialties. Finally, the main competitors for BASF’s acids and specialty intermediates business are Kemira and Perstorp.

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PLASTICS

Segment Overview

BASF is one of the world’s leading plastics manufacturers and offers one of the industry’s most comprehensive product ranges. The segment is organized into three divisions: Styrenics, Performance Polymers, and Polyurethanes. Key information is provided in the following table:

Million €

 

 

2006

 

2005

 

2004

 

Sales to third parties

 

12,775

 

11,718

 

10,532

 

Percentage of total BASF sales

 

24

%

27

%

28

%

Intersegmental transfers

 

526

 

471

 

677

 

Income from operations

 

1,192

 

1,015

 

694

 

Additions to property, plant and equipment and intangible assets

 

631

 

490

 

473

 

 

The Plastics segment purchases over two-thirds of its raw materials from external suppliers. The principal raw materials are benzene, toluene, ethylene, propylene, butadiene, acrylonitrile, cyclohexane and ammonia. BASF has a policy of maintaining multiple suppliers for raw materials of its Plastics segment in order to remain independent from any dominant supplier.

For products such as styrene and isocyanates, where economies of scale are most important, plants tend to be located at our Verbund sites. For higher margin products such as polyurethane systems, plants tend to be regionally located to foster closer relations with our customers.

Segment Strategy

BASF’s Plastics segment seeks to strengthen its position in the styrenics, nylon and polyurethane value-adding chains of chemistry through the following strategies:

·                  Marketing and selling products more efficiently than competitors in key regional markets: To support this strategic goal, BASF is realigning its businesses with standard products, specialties and systems solutions to meet the changing market and customer demands and is introducing new business models for the respective products.

·                  Establishing efficient business processes for standard products: In the standard products business, BASF is streamlining its portfolio to include only a limited number of product lines combined with appropriate marketing processes to consistently deliver high-quality products at minimum costs with optimum reliability.

·                  Increasing sales of selected specialty products: BASF is expanding its position in the market for specialty products that can be easily derived from the company’s value-adding chains of chemistry. These have the potential to generate competitive advantages for our customers and BASF.

·                  Boosting the efficiency of the company’s global production activities: BASF is shifting production from older or smaller plants to more efficient world-scale plants that rely on new technologies and offer substantial economies of scale. In Asia, the company is continuing to expand its production capacities and is building on its well-established base in the region.

·                  Optimizing the regional portfolios: To increase efficiency significantly, BASF is improving processes and cost structures in Europe and consolidating businesses in North America. In Asia, BASF continues to strengthen its position as one of the leading manufacturers of plastics.

·                  Working closely with customers in developing new specialties and systems solutions: For specialties as well as systems solutions, BASF is cooperating with customers in the early development phases of new applications, which is a significant factor for the long-term success of our business.

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·                  Using e-commerce more extensively as a distribution channel: BASF’s sales through e-commerce channels, such as our proprietary PlasticsPortal, increased by more than 30 percent to over €4 billion in 2006. BASF expects that sales via these distribution channels will continue to increase in the future.

Research and Development

In 2006, the Plastics segment spent €145 million on research activities. We consider research and development to be a key element in ensuring the long-term success of our Plastics segment. Our research and development activities are focused on manufacturing processes and product development, including systems solutions for customers.

We seek to improve existing manufacturing processes and also to develop new cost-effective manufacturing alternatives. A good example of this is the new hydrogen peroxide to propylene oxide (HPPO) technology. Together with Dow, we developed this innovative process, which generates only the end-product propylene oxide (PO) and avoids co-products. This process is a highly cost-effective method to produce PO, and plants using this technology require a significantly lower investment compared to those based on conventional PO production processes. The construction of a world-scale plant using this process at our Antwerp Verbund site began in 2006.

In product development, we work together with customers in order to develop innovative new products and improvements to our existing products. For example, our Ultradur® High Speed has been well received by the market as it allows our customers in the automotive and electronics industry to reduce their manufacturing costs by reducing production times.

Products

The Plastics segment contains the following significant product lines:

Styrenics division

PS (Polystyrene)

BASF’s polystyrene products range from rigid and transparent general-purpose plastics to high impact-resistant grades that customers shape using injection molding, extrusion and blow molding. Primary applications include packaging and household appliances.

EPS (Expandable Polystyrene)

BASF sells expandable polystyrene under the brand names Styropor® and Neopor®. The advantages of expandable polystyrene include heat insulation, high compressive strength, shock absorption, low weight and moisture resistance. Primary applications include building insulation and packaging.

XPS (Extruded Polystyrene)

BASF sells extruded polystyrene under the brand name Styrodur®. It is a green, extruded, rigid polystyrene foam that is made using carbon dioxide as a blowing agent. Styrodur® offers heat insulation, low water absorption and compressive strength. The primary application is building insulation.

SAN (Styrene-Acrylonitrile Copolymers)

Luran® is BASF’s trade name for SAN plastic. It is transparent, chemical and dishwasher resistant and offers a high degree of stiffness and resistance to temperature change. Primary applications include household and toiletry items and packaging.

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ABS (Acrylonitrile-Butadiene-Styrene Copolymers)

Terluran® is the trade name for BASF’s top styrene copolymer plastic. It offers superior surface quality, mechanical properties and chemical resistance. Primary applications include electrical and electronic equipment and automotive components.

ASA (Acrylonitrile-Styrene-Acrylate Copolymers)

Luran® S is the trade name for BASF’s styrene copolymer plastic modified with rubber to make it resistant to weathering, aging and chemicals. Primary applications include exterior automotive components, electrical and electronic equipment.

MABS (Methacrylate-Acrylonitrile-Butadiene-Styrene Copolymer)

Terlux® is the trade name for BASF’s MABS plastic. It offers transparency, luster, toughness and resistance to chemicals. Primary applications include hygiene and cosmetic product containers as well as medical equipment housings.

MF (Melamine Resin Foam)

BASF sells melamine resin foam under the brand name Basotect®. It is a flexible foam material that absorbs sound and offers high heat resistance and good flame retardant attributes. Primary applications include automotive components and soundproofing materials.

Performance Polymers division

PA (Polyamide) and Intermediates

Ultramid® and Capron® are the trade names for BASF’s engineering plastics based on nylon 6, nylon 6,6 and other copolymers. They offer toughness and strength as well as both heat and chemical resistance. Primary applications include automotive engine intake manifolds and flame-retardant plastics for electrical components such as switches.

Ultramid® is also the trade name for BASF’s base resin of nylon 6 and 6,6 sold in the fibers and extrusion market. Primary applications include carpets and textiles as well as films for food packaging.

Intermediates include caprolactam for nylon 6 and adipic acid and hexamethylenediamin for nylon 6,6.

PBT (Polybutylene Terephthalate)

Ultradur® is the trade name for BASF’s engineering plastic based on PBT. It features high stiffness, strength, dimensional stability and heat and aging resistance. Primary applications include electrical connectors and automotive components.

POM (Polyoxymethylene)

Ultraform® is the trade name for BASF’s POM plastic. It offers high stiffness and strength, resilience and low wear. Primary applications include clips and fasteners as well as mechanical and precision engineering devices such as shafts and gears.

PES (Polyethersulfone) and PSU (Polysulfone)

Ultrason® S and E are the trade names for BASF’s PES and PSU plastics. The most important features of Ultrason are stiffness and resistance to water and oily substances even at high temperatures. Other important features include electrical insulation properties and dimensional stability. Primary applications include automobile oil circulation systems, headlight reflectors, microwave dishes and medical equipment.

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Polyurethanes division

MDI (Diphenylmethane Diisocyanate)

MDI is a versatile isocyanate that can be used to make flexible foams as well as semi-rigid and rigid polyurethane plastics. Primary applications include furniture interiors, automotive components and shoe soles.

TDI (Toluene Diisocyanate)

TDI is an isocyanate used primarily in the manufacture of flexible foams. Primary applications include foam cushions for furniture and automotive components.

Polyether Polyols

Polyether polyols are combined with isocyanates to make virtually all polyurethane products, other than those made with polyester polyols. Primary applications include rigid and flexible foams.

Polyester Polyols

Polyester polyols are combined with isocyanates to make primarily semi-rigid polyurethane plastics. Primary applications include cable sheathing and shoe soles.

Polyurethane Systems

BASF’s worldwide polyurethane systems group offers tailor-made polyurethane products for a wide variety of applications. BASF develops ready-to-use, tailor-made polyurethane systems for customers. Automotive OEM (original equipment manufacturer) suppliers comprise a significant customer group for polyurethane systems. OEM suppliers make seats, steering wheels, fenders and dashboards using BASF’s polyurethane systems.

TPU (Thermoplastic Polyurethane Elastomers)

TPU is sold under the trade name Elastollan® and is based on both polyether polyols and polyester polyols. It is supplied in granular form to customers who use it primarily to make flexible plastic cable coverings. Customers for these products are primarily in the automotive and cable and wire industries.

Cellular Elastomers

Cellular elastomers are sold under the names Cellasto®, Elastocell® and Emdicell® and are shock-absorbing, rigid plastics. Microcellular polyurethane parts for antivibration applications are sold, for example, as molded end-products for use as shock absorbers and buffers in the automotive industry.

Division Information

Styrenics

BASF is one of a few global producers among a multitude of regional and local suppliers. Besides the major market in Europe, the focus of the styrene polymer business remains on the emerging markets in Asia.

In 2006, the Styrenics division’s sales to third parties were €4,994 million. Thereof, Europe accounted for 47%; Asia Pacific for 27%; North America (NAFTA) for 19%; and South America, Africa, Middle East for 7%.

Overall demand for styrenics continues to rise due to economic growth in both industrialized countries and emerging markets. BASF believes that cost-efficient business processes along with an appropriate number of products manufactured in highly competitive world-scale plants are crucial to ensuring the continued competitiveness of its styrenics products. As a consequence, and in response to polystyrene overcapacities in Western Europe, the production plant of polystyrene in Tarragona, Spain was shut down permanently at the end of the year. With the acquisitions of the styrene copolymer business of Lanxess in Europe as well as in South America and of Repsol in Europe, BASF will strengthen its market position in these regions and also improve the utilization of the respective production capacities.

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Volatility of raw material prices and increasing pricing pressure from low-cost producers, especially in Asia, are reducing margins. Thus, cost leadership in production and efficient business processes are important for BASF to meet the demands of our customers for consistent quality, reliable supply and competitive prices.

In specialties, BASF seeks profitable growth by focusing on specific market needs as well as by increasing application development and worldwide sales. The global business unit for specialties, which was established at the beginning of 2005, continues to develop innovative service offerings.

The Styrenics division sells products primarily through its own regional sales force, supported by BASF technical and marketing experts. The Styrenics division is increasingly relying on e-commerce (e.g. BASF’s PlasticsPortal) for distributing its products. In some areas, such as Europe and South America, nearly all orders are received through electronic channels.

BASF considers Dow and Total to be the main competitors of the Styrenics division. The division also competes in North America with Nova and in Europe with Enichem. In Asia, BASF competes with other regional competitors, such as Chi Mei, Loyal and LG Chem.

Performance Polymers

BASF is one of the world’s leading producers of engineering plastics, extrusion products and fiber intermediates. BASF successfully integrated the engineering plastics businesses of Leuna-Miramid GmbH in Europe and Lati USA Inc. in North America, which were both acquired in 2005. Furthermore, the 50:50 joint venture with Toray Industries Inc. for PBT in Kuantan, Malaysia successfully started its operations in 2006. BASF’s engineering plastics business also expanded its North American manufacturing operations with the installation of a compounding capacity at the Altamira site in Mexico.

To further support the profitable growth of our activities, a new compounding plant in Shanghai, China will come on stream in 2007, accompanied by a technical development center. Additionally, BASF will increase its capacities for the engineering plastic Ultrason® in Ludwigshafen. In NAFTA, the Polyamide production will be consolidated through the start-up of a new world-scale plant in Freeport, Texas.

In 2006, the Performance Polymers division’s sales to third parties were €2,932 million. Thereof, Europe accounted for 47%; North America (NAFTA) for 29%; Asia Pacific for 22%; and South America, Africa, Middle East for 2%.

Performance Polymers products are sold worldwide, and more than two-thirds of the customers are engineering plastics customers. This customer base consists largely of high-performance plastic molder and plastics component manufacturers in the automotive, consumer electronics, electrical equipment and packaging industries. These customers often rate product performance and customer support as important, but prices are becoming increasingly critical to customers in choosing a supplier.

To compete effectively in this market, the Performance Polymers division seeks to increase its preferred supplier status with global customers, many of whom demand collaboration in developing specific plastics applications. The division works with suppliers of automotive manufacturers to develop specific applications for parts, such as engine components, airbag housings and electronic connectors. For the electrical and electronic industries, new product grades have been especially developed to meet specific standards and offer improved processing properties.

The division’s customers for engineering plastics are primarily global companies that demand uniform worldwide standards for products and services in all major markets. BASF sells engineering plastics products primarily through its own regional sales force supported by BASF’s technical development centers in all regions. These centers not only help customers to develop applications but also independently research new markets and applications in which plastics can replace more conventional materials such as metal. In Asia, the division is expanding its sales force to build on its solid position in the market.

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The markets for caprolactam and other fiber intermediate products are characterized by their large volumes, cyclicality, price competition and commodity pricing. Growth rates are usually low compared to the engineering plastics and extrusion market. The markets for extrusion grades, particularly films for food packaging, are gaining importance as they are less cyclical and show high growth rates in Asia, particularly in China. Innovation and operational excellence are critical success factors for both the extrusion and fiber intermediate markets, and therefore BASF is focusing on production synergies in these areas.

The Performance Polymers division sells products primarily through its own regional sales force, supported by the division’s technical and marketing experts. The division is increasingly relying on e-commerce as a channel for distributing its products and operates its own portal, PlasticsPortal.com.

BASF considers Celanese, DSM, Dupont, General Electric, Lanxess, Rhodia, Solutia and UBE to be the main competitors of the Performance Polymers division.

Polyurethanes

BASF’s Polyurethanes division is one of the world’s three largest producers of polyurethanes: important specialty plastics used to produce a wide spectrum of rigid, flexible, foamed and compact components for consumer products.

In 2006, the Polyurethanes division’s sales to third parties were €4,849 million. Thereof, Europe accounted for 37%; North America (NAFTA) for 31%; Asia Pacific for 26%; and South America, Africa, Middle East for 6%.

BASF offers over 3,500 customized polyurethane solutions. These products, the vast majority of which are sold to external customers, are used to make a variety of automotive parts, including bumpers, steering wheels and instrument panels. BASF’s polyurethanes can also be found in household goods, such as mattresses and upholstery, and in sports equipment, such as in-line skates and athletic shoes. The fashion industry is increasingly using BASF’s polyurethanes, particularly to manufacture synthetic leathers.

To build on its strong relationships with customers, the Polyurethanes division is expanding its regional activities, focusing above all on the Asian market. In Caojing, China, BASF, together with local and international joint venture partners, successfully started up an integrated manufacturing facility for MDI and TDI in 2006. On September 27, 2006, BASF and Dow Chemical began construction of a production plant for propylene oxide (PO) based on the HPPO technology at BASF’s Verbund site in Antwerp, Belgium. This technology is a joint development of BASF and Dow. BASF has also partnered with Solvay S. A. in the production of hydrogen peroxide (HP) for the HPPO process. The HPPO plant will be the first of its kind worldwide.

In 2007 BASF will significantly expand its production capacities for MDI in Antwerp, Belgium to take advantage of the growing global demand for MDI. Together with Dow Chemical BASF is conducting a feasibility study for a world-scale TDI facility in Europe. The production plant is expected to start operations in 2011.

For polyurethane systems and special elastomers, strong relationships with leading industry customers are crucial because of the highly individualized nature of these products. To strengthen its relationships with customers, BASF has established a global network of system houses. System houses are production sites that work closely with customers to provide products specially formulated for individual needs. The Polyurethanes division currently has about 30 system houses around the world in locations near customers. BASF will continue to establish or acquire more.

Global demand for all polyurethane products is expected to continue to grow faster than the global economy as the economic expansion continues. The market for polyurethane basic materials is less cyclical than the market for most other standard plastics, primarily because polyurethane basic materials are relatively specialized. Competition in the market for basic materials is based primarily on price, although product quality and technical application assistance are also important to customers.

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The markets for polyurethane systems and special elastomers are even less cyclical than those for polyurethane basic materials. Competition in the market for polyurethane systems and special elastomers is based primarily on a supplier’s ability to satisfy customers’ technical application needs by providing tailormade formulations of isocyanates and polyols and also on a supplier’s ability to accommodate customers’ just-in-time manufacturing by delivering customized products quickly and at the appropriate time.

BASF considers Bayer Material Science, Dow, Huntsman, Lyondell and Shell Chemicals to be the main competitors of the Polyurethanes division.

PERFORMANCE PRODUCTS

Segment Overview

BASF is a leading global producer of construction chemicals, coatings, functional polymers and performance chemicals through its Performance Products segment. The segment’s products make essential contribution to the performance of many everyday items – from cars to houses and from detergents to diapers. The product portfolio covers a broad range of high-value chemicals, formulations and integrated chemical systems solutions for the automotive, coatings, construction, plastics, oil, paper, packaging, textile, leather, detergent, hygiene and chemical industries. The segment’s products enhance the functionality and performance of our customers’ products.

Million €

 

 

2006

 

2005

 

2004

 

Sales to third parties

 

10,133

 

8,267

 

8,005

 

Percentage of total BASF sales

 

19

%

19

%

21

%

Intersegmental transfers

 

390

 

352

 

291

 

Income from operations

 

669

 

863

 

1,128

 

Additions to property, plant and equipment and intangible assets

 

4,490

 

347

 

304

 

 

New products are key drivers of our segment’s successful growth. Products, chemical system solutions and application technologies are developed according to the specific requirements of our customers in order to meet their future challenges. The Performance Products segment focuses on partnering with customers in order to supply innovative, tailor-made solutions.

The Performance Products segment serves a broad range of customers – from multinational industrial clients and medium-sized businesses to craftsmen. We regard customers as the most important partners in making BASF’s chemical innovation happen. This partnership with our customers is built on trust and reliability. The recent acquisitions of the construction chemicals business from Degussa AG, Johnson Polymer as well as the pigment business of Engelhard Corp. have brought the Performance Products segment closer to the customer and opened up further opportunities for innovation.

The Performance Products segment purchases approximately 50% of its raw materials from other BASF operations and does not rely on a dominant external supplier. The segment’s principal raw materials are propylene, oxo alcohols, butadiene, styrene, ethylene oxide, propylene oxide, naphthalene, aliphatic alcohols, pigments, solvents and resins. The segment’s products often represent the final stages in many value-adding chains within BASF’s Verbund.

The bulk of the production for the Performance Products segment is located at our Verbund sites to take advantage of the efficiencies offered by these sites. However, in certain cases, plants are located near our customers to reduce transportation costs, such as for construction chemicals products, or in the case of automotive OEM coatings, to meet our customers’ just-in-time delivery needs.

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Segment Strategy

The segment’s strategy is to enhance the value of our business and the performance of our customers’ products by innovation, operational excellence and active portfolio management. Our target is to hold a strong position among the top three players in all markets we serve. The key elements of the segment’s success are therefore:

·                  To shape our business portfolio by actively managing our portfolio, as demonstrated by our recent acquisitions of the construction chemicals business from Degussa AG, Johnson Polymer and the pigments business of Engelhard Corp. We have added businesses in high-growth markets, which are innovation-driven, reduce our cyclicality and bring us closer to the customer.

·                  To further speed up the launch of new products, chemical system solutions and application technologies developed in research and development centers in close cooperation with our customers.

·                  To introduce new business models, such as the “system supplier for coating materials,” that integrate us into the processes of our customers.

·                  To expand our central and regional research and development centers in order to work closely with our customers to identify and develop product innovations and customer-specific system solutions.

·                  To optimize our production network at Verbund sites and at those sites that are located close to the customer across all regions, and adjust it as our customers’ industries relocate.

·                  To increase our operational excellence, especially within our standard product portfolio (e. g. acrylic monomers, standard dispersions, standard surfactants), based on maintaining best-in-class technology and setting benchmarks in total-cost-to-the-customer.

Research and Development

In 2006, the segment spent €288 million on research activities. The main focus of the segment’s research and development is on innovative and eco-efficient products and system solutions that are tailor-made for the processes and technologies of our customers. Close cooperation with customers holding leading market positions is of great importance in order to fully exploit research resources and reduce the time to market. In addition, state-of-the-art application centers and pilot plants, for instance for concrete admixtures, coatings, paper finishing or pressure-sensitive adhesives, are a key success factor. These plants and application centers allow us to deepen our understanding of the customers’ processes and to assess new chemical systems under real application conditions. In 2006, we established new technical application centers in Mangalore, India for OEM coatings and in Krieglach, Austria for concrete admixtures. We expanded our activities for textile and leather chemicals in Thane, India and for textile and leather chemicals, chemicals for detergents and formulators as well as polymer dispersions in Shanghai, China.

Recent examples of successful innovations and system solutions include the following:

·                  Expanding our Acronal® CR product portfolio for pressure-sensitive adhesives to support our customers with ready-to-use formulations compatible with the newest coatings technologies.

·                  Introducing our new OEM coating technology (Integrated Process II), which incorporates the functionality of the filler layer into the basecoat. This has led to the shortest coating process in the world, which is already used in the Mini production line in Oxford, UK (BMW Group).

·                  Launching our new functional pigment Lumogen® Black that absorbs less solar energy than conventional pigments and therefore keeps sun-exposed surfaces cooler.

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Products

The Performance Products segment contains the following significant product lines:

Construction Chemicals

Admixture Systems

BASF technologies for admixture systems optimize the properties of concrete especially if it is used in extreme environments or in complex constructions projects, such as bridges, skyscrapers and tunnels. Our well known brands include: Glenium®, Rheobuild®, Pozzolith® and Meyco®.

Construction Systems

In the construction systems business, BASF offers adhesives (PCI®, Chemrex®), repair mortars (Emaco®), sports and industrial flooring (Conipur®, Ucrete®, Mastertop®), sealants (Masterflex®, Sonoplastic®), waterproofing membranes (Masterseal®), and products for wall systems and facades (Heck®, Senergy®, Colfirmit®, Rajasil®).

Coatings

Automotive OEM (Original Equipment Manufacturer) Coatings Solutions

BASF offers complete automobile coatings solutions as well as extensive technical support to major vehicle manufacturers. Most of the world’s leading automobile manufacturers are long-standing customers of BASF.

Automotive Refinish / Commercial Transport Coatings Solutions

For the refinishing of cars and commercial vehicles, BASF offers topcoat and undercoat materials under the well-known brand names Glasurit®, R-M® and Salcomix®. Most of these systems, which are sold to paint distributors and automotive repair shops, increasingly use solvent-reducing waterborne coatings as well as high-solid systems.

Industrial Coatings Solutions

BASF offers environmentally efficient systems for coating industrial products. Application technologies include precoatings, powder, electro-deposition and liquid coatings that are used on household appliances, radiator components, industrial buildings and pipes. BASF is the second-largest coil-coatings producer.

Decorative Paints

BASF is the leading producer of decorative paints for interior and exterior use in the South American market. BASF’s dispersion and building paints are marketed under the Suvinil® trademark and enjoy a high level of customer recognition.

Functional Polymers

Acrylic Monomers

BASF is the world’s largest producer of acrylic monomers, which are sold directly to internal and external customers in the form of acrylic acid, acrylic esters and special acrylates. Acrylic monomers are used as precursors to manufacture polymer dispersions for various applications, superabsorbents, detergents, flocculants and fibers for a wide range of industries.

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Superabsorbents

BASF sells superabsorbents globally primarily to the personal hygiene industry, which uses these products to manufacture diapers and other sanitary care products. Superabsorbents are also marketed for industrial applications, such as packaging or agriculture.

Adhesive and Construction Polymers

BASF’s polymer products consist mainly of polymer dispersions for the production of adhesives, paints, non-woven materials and construction chemicals. BASF’s strength lies in its technical expertise and application know-how.

Paper Chemicals

BASF offers the paper industry a comprehensive range of chemical products for many aspects of the paper production process, including the manufacture of untreated paper and paper finishing. The Functional Polymers division’s product range of paper chemicals consists of paper-processing chemicals, paper dyes and polymer dispersions for coating.

Kaolin

Effective June 2006, the kaolin business became part of the Functional Polymers division through the acquisition of Engelhard Corp. Kaolin is extracted from mines and is primarily used as coating pigment in the paper industry.

Performance Chemicals

Pigments and Resins for Coatings and Plastics

The Performance Chemicals division offers organic and inorganic pigments, pigment preparations, functional colorants, light stabilizers and resins. Through the acquisition of Johnson Polymer and the pigment business of Engelhard, the product portfolio was broadened by including water-based resins as well as effect pigments and specialty minerals. Resins are film-forming components used in UV (ultraviolet) curing coatings, urethane systems, melamine-based coatings and water-based coatings and inks. Pigments are insoluble coloring and iridescent materials used in paints, plastics, inks and other special applications. BASF’s pigments and resins are used primarily in automotive, decorative and industrial paint applications, as well as in the plastics and graphic arts industries.

Isobutene Derivatives

Isobutene is the starting material for polyisobutene, the most important component for BASF’s branded fuel additives. Through its highly reactive polyisobutenes, BASF has established a new standard in the fuel and lubricant additives market. BASF is the only industry supplier with a product portfolio spanning low to ultra-high molecular polyisobutenes as well as polyisobutene derivatives.

Surfactants

BASF produces a wide range of nonionic surfactants based on aliphatic alcohols, ethylene oxide and propylene oxide. Such products are used in detergents and cleaners and textile and leather auxiliaries.

Hydrocyanic Acid Derivative

BASF produces several chelating agents based on hydrocyanic acid, which serve as process chemicals in various industries. Applications include pulp manufacturing, electroplating, laundry detergents, cleaners and photographic chemicals.

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Performance Chemicals for Textiles

BASF offers textile and dyeing auxiliaries, pigment preparations for textile printing and inks for ink-jet printing technology. BASF’s product range covers a wide spectrum of textile applications.

Leather Dyes and Chemicals

BASF is one of the world’s leading producers of leather chemicals and dyes, producing a full range of products for nearly every aspect of the leather production process.

Division Information

Construction Chemicals

The Construction Chemicals division comprises the construction chemicals business that was acquired from Degussa AG on July 01, 2006. The main rationale for this acquisition was to enter into a business that reduces the cyclicality of the BASF portfolio and to exploit the potential for profitable growth via innovations driven by research and development.

In 2006, the Construction Chemicals division’s sales to third parties were €1,120. Thereof, Europe accounted for 50%; North America (NAFTA) for 28%; South America, Asia Pacific for 14% and Africa, Middle East for 8%.

BASF Construction Chemicals serves the construction industry with innovative solutions and solution packages for construction projects. Our core competence lies in concrete technology, especially concrete admixtures, but also extends to concrete curing or repair systems (admixture systems). We are the global market leader with a number one position in Europe, NAFTA and Asia Pacific. In Admixture Systems, Sika and W.R. Grace are considered to be the main competitors.

The associated fields (construction systems), such as mortar, adhesives (for tiling etc.), sealants, expansion joints and flooring, wall and roofing systems, are another pillar of our business. In this fragmented market, we have a sizeable business in several segments in the developed regions of Europe and NAFTA (e.g. tile fixing systems in Europe, sealants in NAFTA). BASF considers RPM and Mapei to be the main competitors of its construction systems business.

Our main growth drivers will be the emerging markets in Asia (especially China), Eastern Europe and the Middle East, where we expect strong construction activities in housing, industry and infrastructure, including tunneling and mining. Key success factors are excellence in formulation, manufacturing and logistics, effective technical service, constant innovation in close cooperation with lead customers, effective utilization of different sales channels and strong brand recognition.

In the future we plan to accelerate our business growth even further by rolling out technologies used in one region to the others, by establishing a sizeable business in emerging markets, particularly China, and by expanding the business in mature markets by introducing innovative products and solutions.

Coatings

BASF offers innovative and environmentally friendly products for the automotive industry, including both finishes and refinishes, and for particular segments of the industrial coatings market. BASF also sells decorative paints in South America for interior and exterior use in residential and commercial buildings.

In 2006, the Coatings division’s sales to third parties were €2,337 million. Thereof, Europe accounted for 46%; North America (NAFTA) for 24%; South America, Africa, Middle East for 18%; and Asia Pacific for 12%.

BASF’s Coatings division provides customers with innovative high-solid, waterborne and powder coating systems that reduce or eliminate solvent emissions. BASF sees significant growth opportunities for its “Integrated Process II” for automotive OEM coatings, which is in the market rollout phase. This innovative system simplifies the conventional process by requiring fewer coating layers, thus offering substantial cost-saving potential while reducing the environmental impact of auto body painting.

36




The key to the division’s success is maintaining preferred supplier status with major customers by collaborating with them to develop system solutions. These system solutions help the division to differentiate its product offerings from those of its competitors and foster lasting relationships with customers.

BASF sells products of the Coatings division to customers, particularly those in the automotive industry, primarily through its own sales force. Third-party distributors also sell products of the automotive refinish coatings, industrial coatings and South American decorative paint businesses. The Coatings division sells virtually all of its products to external customers.

The Coatings division also uses e-commerce as an important distribution channel, in particular for its automotive refinish coatings. In North America, customers of BASF’s automotive refinish technologies business can order products online at bodyshopmall.com. For customers in Europe, the division has established similar e-commerce portals to sell its Glasurit® and R-M® brands.

BASF considers DuPont, PPG Industries and Akzo Nobel to be the main competitors of the Coatings division, while Nippon Paint Company and Kansai Paint Company are considered to be the division’s key competitors in Asia.

Functional Polymers

BASF’s Functional Polymers division is one of the largest producers worldwide of acrylic acid and its downstream products, which are mainly superabsorbents and dispersions. Polymer dispersions are used in a multitude of industries, including the manufacturing of paper, decorative paints, adhesives, construction chemicals, non-woven materials, carpets, fibers and plastics. The Functional Polymers division also manufactures wet-end chemicals for paper production. The most important customers of the Functional Polymers division are in the paper, construction chemistry, adhesive, hygiene, coatings, chemicals and packaging industries.

Effective June 2006, the kaolin business of former Engelhard became part of the Functional Polymers division. Kaolin is primarily used as coating pigment in the paper industry.

In 2006, the Functional Polymers division’s sales to third parties were €3,387 million. Thereof, Europe accounted for 48%; North America (NAFTA) for 29%; Asia Pacific for 15%; and South America, Africa and Middle East for 8%.

The Functional Polymers division’s strategic goal is to achieve long-term profitable growth in all regions and to increase market share in the rapidly growing markets in Asia.

The division sells approximately 90% of its products to external customers. The vast majority of the division’s products are primarily sold through BASF’s own regional sales network. Some smaller customers purchase products through distributors.

The Functional Polymers division also uses e-commerce as a distribution channel for its products. The division is increasingly selling its products through Elemica Holding Ltd., an independent business-tobusiness e-commerce company. The division’s participation in WorldAccount, BASF’s integrated global extranet platform, will benefit its customers for adhesive and construction polymers as well as paper chemicals.

Acrylic monomers are predominantly commodities and can therefore be affected by cyclicality. Other products, particularly polymer dispersions for adhesives, paints and non-wovens; superabsorbents; and paper process chemicals are relatively resilient to economic cycles and compete primarily on the basis of product innovation and service.

BASF considers Rohm & Haas to be the main competitor in acrylic monomers and polymer dispersions. Dow, Kemira, Ciba Specialty Chemicals and Akzo are BASF’s main competitors in paper chemicals. In the superabsorbents business, BASF’s main global competitors are Degussa and Nippon Shokubai.

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Performance Chemicals

BASF is one of the world’s largest manufacturers of high-value performance chemicals, which the company sells to a broad range of customers worldwide in a wide variety of industries including the plastics, coatings, construction, detergent, automotive, oil, leather and textile industries.

BASF’s strength is its Verbund approach: This gives the Performance Chemicals division an advantage over small and medium-sized companies that lack the cost advantages of integration.

In 2006, the Performance Chemicals division’s sales to third parties were €3,289 million. Thereof, Europe accounted for 53%; North America (NAFTA) for 21%; Asia Pacific for 18%; and South America, Africa, Middle East for 8%.

The Performance Chemicals division comprises five different businesses: Coatings, Plastics, and Specialties; Automotive and Oil Industry; Detergents and Formulators; Textiles; and Leather. Each business follows its own strategy, focusing on innovative products and systems solutions for growing markets.

In 2006 the Performance Chemicals division complemented its portfolio with the integration of two acquired businesses: Johnson Polymer, with its range of water-based resins, extends our resins portfolio and the pigment business of Engelhard, known for its high value pigments, strengthens our position in the pigments market.

The division sells its products globally, with roughly 90% of its products to external customers. BASF’s own regional sales network sells most of the Performance Chemicals division’s products. Distributors sell the remainder of the products, primarily to smaller customers. In the Asia Pacific region, we are increasing our sales activities to meet the needs of growing markets, especially in the textile and leather industries, which are continuing to relocate their activities from Europe and North America to Asia.

The Performance Chemicals division’s principal competitors vary according to industry. However, BASF considers Ciba, Clariant, Shell, Sasol, Dow and Bayer to be the main competitors of the division.

AGRICULTURAL PRODUCTS & NUTRITION

Segment Overview

This segment consists of the Agricultural Products and Fine Chemicals divisions, which are treated as separate reportable operating units. The segment offers opportunities for high returns and is typically more resilient to economic cycles. Key financial information is provided in the following table:

Million €

 

 

2006

 

2005

 

2004

 

Agricultural Products

 

 

 

 

 

 

 

Sales to third parties

 

3,079

 

3,298

 

3,354

 

Percentage of total BASF sales

 

6

%

8

%

9

%

Intersegmental transfers

 

25

 

29

 

26

 

Income from operations

 

447

 

681

 

602

 

Additions to property, plant and equipment and intangible assets

 

88

 

74

 

100

 

Fine Chemicals

 

 

 

 

 

 

 

Sales to third parties

 

1,855

 

1,732

 

1,793

 

Percentage of total BASF sales

 

4

%

4

%

5

%

Intersegmental transfers

 

17

 

28

 

30

 

Income from operations

 

(66

)

(58

)

56

 

Additions to property, plant and equipment and intangible assets

 

378

 

222

 

153

 

 

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Agricultural Products

Overview

The Agricultural Products division is a leading innovator and supplier of fungicides, insecticides and herbicides. The division’s products are used by farmers to improve crop yields and crop quality and by other customers for uses in non-crop areas such as in public health, structural/urban pest control, turf and ornamental plants, vegetation management and forestry.

Capital expenditures in the Agricultural Products division involved mainly optimization measures at several sites.

Strategy

The Agricultural Products division directs major resources at meeting the needs of the high-value agricultural markets in Western and Central Europe, North America, Brazil and Japan. The division aims to sustain its role as a leading innovator by continuing significant research and development activities focusing on fungicides, insecticides and selected herbicides, where it expects further market growth and high demand for innovations. Profitability of the Agricultural Products division is driven by:

·                  New products from its research pipeline or from acquisitions;

·                  Alignment of resources as well as product and service offering to customers’ needs; and

·                  Effective management of assets and costs.

The division is well positioned for continued profitable growth: We have a significant presence in core markets, a strong research and development pipeline, a high share of patent-protected products and high customer satisfaction.

BASF aims to grow profitably through innovation and acquisition, especially with new fungicides and insecticides and in specific applications such as seed treatment and plant health. Products recently launched from the research pipeline include the fungicides F 500® and boscalid.

The division continues to implement cost and asset optimization measures in mature or non-core segments. In 2006, it divested major parts of its Micro Flo generic agrochemical business in the United States and its global terbufos insecticide business.

Major Products

F 500® (pyraclostrobin)

F 500® (pyraclostrobin) is a major new fungicidal active ingredient of the strobilurin class of chemistry. It is highly effective, safe for crops and has a favorable toxicological and ecotoxicological profile. As of the end of 2006, F 500® had been approved in more than 60 countries for over 150 crops in over 100 indications. Products containing F 500® have been launched successfully in all regions.

Boscalid

Boscalid is one of the most recent active ingredients from our research and is highly effective for controlling fungal diseases, especially in fruits and vegetables. With its broad spectrum of activity and crop uses, boscalid is becoming the backbone of our specialty crop business, complementing our strobilurins and other molecules. Launched for the 2003 - 2004 season, it received registrations in over 50 countries for more than 200 crops in over 100 indications by the end of 2006.

Fipronil

Fipronil is an active ingredient of a new class of insecticide chemistry and was acquired from Bayer CropScience on March 21, 2003. It plays a strategic role in BASF’s insecticides portfolio. Fipronil puts the Agricultural Products division in a position to strongly participate in ongoing and future shifts in demand towards more modern insecticides. Furthermore, it strengthens BASF’s position in other attractive market segments, such as structural/urban pest control, turf and ornamental plants.

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The CLEARFIELD® Production System

The CLEARFIELD® Production System combines herbicide-resistant seeds developed by using enhanced plant breeding methods with custom-designed herbicide solutions. CLEARFIELD® crops currently being marketed include canola, sunflower, corn, rice and wheat.

Research and Development

BASF’s research and development activities in Agricultural Products cover all three areas of crop protection: fungicides, insecticides and herbicides. Agrochemical research activities are directed to the discovery of active ingredients with economic, biological and ecological advantages. Development activities are primarily focused on high-value segments in core markets and for core active ingredients.

In 2006, research spending in the Agricultural Products division was approximately 11% of the division’s sales to third parties.

BASF is currently working on developing seven new active ingredients and on one new herbicidetolerance project. These inventions are being prepared for market launch and have a peak sales potential of €800 million. Seven additional crop protection active ingredients with a peak sales potential of €1 billion are currently being introduced to the market. In 2006, BASF launched the corn herbicide topramezone to the market and advanced one new fungicide from its promising discovery pipeline to its development pipeline.

 

 

Uses

 

Total Peak Sales Potential

 

Projects in market launch

 

 

 

around €1,000 million

 

4 fungicides

 

Cereals, Soybeans, Specialty Crops

 

 

 

2 herbicides

 

Cereals, Corn

 

 

 

1 insecticide

 

Non-Crop

 

 

 

Projects in development

 

 

 

 

 

(launch targeted for 2007 and later)

 

 

 

around €800 million

 

4 fungicides

 

Cereals, Specialty Crops

 

 

 

1 herbicide

 

Corn, Non-crop

 

 

 

1 herbicide tolerance

 

Soybeans

 

 

 

2 insecticides

 

Specialty Crops, Non-crop

 

 

 

 

Total

 

 

 

 

around €1,800 million

 

 

Markets and Distribution

In 2006, the Agricultural Products division’s sales to third parties were €3,079 million. Thereof, Europe accounted for 45%; North America (NAFTA) for 29%; South America, Africa, Middle East for 17%; and Asia Pacific for 9%.

The Agricultural Products division markets its products globally, focusing on high-value markets. The following table shows sales by product group:

Million €

Product Group

 

2006 Sales

 

Herbicides

 

1,215

 

Fungicides

 

1,167

 

Insecticides and other agrochemical products

 

697

 

Agricultural Products

 

3,079

 

 

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The Agricultural Products division directs marketing and sales efforts through multi-staged marketing channels, which include wholesalers and commercial distributors.

The global market for agricultural products is seasonal, since the main markets for these products are in the Northern Hemisphere. Sales are higher in the first and second quarters of the year, when the growing season in North America and Europe is underway. Sales during the second half of the year, driven primarily by the main growing season in South America, are lower.

BASF considers the main competitors of the Agricultural Products division to be Bayer CropScience, Dow Chemical, DuPont, Monsanto and Syngenta.

Governmental Regulation

In most countries, crop protection products must obtain governmental regulatory approval prior to marketing. The regulatory framework for crop protection and environmental health products is directed at ensuring the protection of the consumer, the applicator and the environment. The strictest standards are applied in the United States, Japan and Western Europe.

It generally takes five to seven years from the discovery of a new active ingredient until the dossier is submitted to the appropriate regulatory agency for product approval. The standard time frame for registration of an agricultural product is typically 30 to 36 months.

Fine Chemicals

Overview

BASF’s Fine Chemicals division develops, manufactures and sells approximately 1,000 different products, which are sold to customers worldwide in the pharmaceutical, cosmetics and nutrition industries. In all of the division’s main product groups except amino acids, BASF is one of the top two suppliers. The recent acquisitions of the Effect Pigments and Personal Care Materials from Engelhard Corp. in 2006 and Orgamol’s Custom Synthesis business in 2005, the start-up of geraniol and linalool plants in the aromachemicals business as well as our own feed enzymes production, strengthened our ability to serve our customers in strategic high value markets.

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Strategy

The Fine Chemicals division aims to achieve superior growth and a leading position in the markets it serves by leveraging chemical expertise, global presence, reliability of its technical service and product quality. The Pharma Solutions and Cosmetic Solutions businesses focus on delivering innovative products and customized solutions to the markets they serve. The trend towards commoditization in the human and animal nutrition business requires the division to provide its customers with value-added products and reliable service. The division expects considerable growth in its custom synthesis business for the pharmaceuticals industry.

Products

Vitamins

BASF is the second largest vitamins producer worldwide, and vitamins account for approximately one-fourth of sales in the Fine Chemicals division. BASF markets all of the 13 naturally occurring vitamins. In six of these vitamins BASF has a production position. The Fine Chemicals division sells vitamins mainly to the human and animal nutrition industries, with a growing presence in the cosmetics industry.

Carotenoids

These are nature-identical products that provide health benefits and are also used to color food. This product line includes beta-carotene, canthaxanthine and astaxanthine.

Active Ingredients and Advanced Intermediates

The main products in this category are caffeine, pseudoephedrine, theophylline, ibuprofen, povidone iodine and isotretinoin. Beverage manufacturers account for approximately 80% of the caffeine demand, and pharmaceutical applications make up the remaining share.

Custom Synthesis

BASF offers a range of customized manufacturing and formulation capabilities to the worldwide pharmaceuticals industry. These activities are complemented by flexible, multi-product cGMP plants, in particular at the Orgamol sites in Evionnaz, Switzerland, and in St. Vulbas, France and BASF’s chemical and biotechnological research and development skills.

Polymers

The Fine Chemicals division sells highly functional polymers for diverse uses such as binders, disintegrants, coatings and solubilizers for the pharmaceutical industry, filtration aids for beverages, ingredients for hair care products such as hairsprays, styling mousses, gels and hair conditioners for the cosmetics industry.

Amino Acids

Amino acids, such as lysine, are feed additives that serve as an efficient protein source for animal nutrition.

Enzymes

Enzymes, which are proteins that function as biochemical catalysts, are used for animal nutrition to improve feed absorption. BASF’s enzyme product line includes Natuphos®, Natustarch®, and Natugrain®.

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Organic Acids

These are used as preservatives for grains and compound feeds and more recently as growth-enhancing agents. BASF offers a wide range of organic acid products that suppress the growth of molds and bacteria. BASF is the leading supplier of standard and tailor-made organic acids for the feed industry in Europe and Asia.

Cosmetics Ingredients

These are raw materials for personal care products with the major applications being hair, skin, sun and oral care, effect pigments and beauty care solutions. The Fine Chemicals division is the world market leader in UV absorbers for cosmetic applications and offers the full range of UVA and UVB absorbers.

Aroma Chemicals

These are raw materials for flavor and fragrance compounds that are used in many consumer products industries such as the food, personal care and the fabrics and home care industries.

Research and Development

The focus of the Fine Chemicals division’s research and development activities was changed in 2005 from process innovation to product innovation. The major product launches in 2006 comprise various new vitamin and carotenoid formulations; Luviset Shape, a new polymer for hair sprays; T-Lite® Max a new UV filter; and new formulation aids for pharma ingredients. In 2006; the Fine Chemicals division spent approximately 4% of its sales to third parties on research activities (2005: approximately 4%).

Process improvements — mainly for biotechnological production processes — are ongoing to further improve our cost position.

Markets and Distribution

In 2006, the Fine Chemicals division’s sales to third parties were €1,855 million. Thereof, Europe accounted for 46%; North America (NAFTA) for 26%; Asia Pacific for 19%; and South America, Africa, Middle East for 9%.

The main customers of the Fine Chemicals division are global players in the animal nutrition, human nutrition, pharmaceuticals, personal care and flavors and fragrances industries.

BASF sells the majority of its fine chemicals products through its own sales force. Through its sales and marketing departments, BASF works closely with customers to develop systems and solutions as well as new products.

BASF’s competitive position depends to a large extent on its ability to compete on price, product quality and customer service. BASF expects the trend towards globalization and consolidation for both manufacturing and the consumer industries to continue. The trend toward commoditization for human and animal nutrition business is also continuing. Due to the unsatisfactory earnings trend, we announced a restructuring program in October 2006, which includes the consolidation of these two businesses into one organization responsible for nutrition and the closure of our nutrition research station in Offenbach/Queich, Germany. Also affected by this restructuring program will be our Lysine production in Gunsan, Korea, as our Lysine business still suffers from high raw material prices and overcapacities.

BASF considers its main competitors in the animal nutrition area to be DSM, Archer Daniels Midland, Novo Nordisk, Adisseo Group, and new entrants from China. In the human nutrition area, BASF’s main competitors are DSM of the Netherlands and several Asian companies. In pharmaceutical active ingredients, BASF considers Albemarle Corporation, Shasun, Hubei Biocause, International Specialty Products Colorcon, Degussa/Rhoem, Dow Chemical and FMC Corporation to be its main competitors, as well as a number of other Chinese and Indian suppliers. In cosmetics and aroma chemicals, LC United, International Specialty Products, Millennium Specialty Chemicals, National Starch & Chemical, Givaudan, Symrise and Kuraray are BASF’s main competitors.

43




Governmental Regulation

BASF’s various Fine Chemicals products are subject to regulation by government agencies throughout the world. The primary emphasis of these requirements is to assure the safety and effectiveness of BASF’s products. Of particular importance in the United States is the Food and Drug Administration (FDA), which regulates many of BASF’s Fine Chemicals products. Animal health products are also regulated in the United States by the United States Department of Agriculture and the Environmental Protection Agency.

In the E. U., similar regulatory systems are established on the national level of different member states as well as on the pan-European government level. Positive lists and negative lists in Europe regulate the usage of various substances in order to ensure consumer safety.

Plant biotechnology

BASF has identified biotechnology and genetic engineering as key technologies of the 21st century. From 2006 to 2008, BASF has earmarked €330 million for research in plant biotechnology, one of our five growth clusters.

BASF Plant Science develops plants for more efficient agriculture, healthier nutrition and for use as renewable raw materials. For example, we have developed a potato with altered starch composition for use as a renewable raw material in the paper, textile and adhesives industry. Under the name Amflora, this product is presently undergoing approval in Europe; we aim to begin commercial cultivation in several countries in 2007.

BASF Plant Science operates in eight locations in Europe and North America with more than 600 employees. We are continuously strengthening our respective activities. In June 2006, we acquired the Belgian biotechnology CropDesign N.V. The acquisition complements BASF Plant Science’s existing gene discovery and extends its leading position in access to agronomically important genetic traits. CropDesign has specialized in traits that, for example, increase yields in crops, such as corn and soybeans, or make them more resistant to drought.

The CropDesign’s genetic traits strengthen the already existing pipeline of BASF Plant Science. One key technology of our research is the metabolic profiling of Metanomics, our subsidiary in Berlin, Germany. At Metanomics, scientists identify the metabolic function of plant genes, thus making it easier to develop plants with the desired characteristics. Our database contains over 1.5 million metabolic profiles. They represent more than 35,000 genes out of model crops, field crops and other sources. The knowledge gained by BASF in this field is unparalleled and opens up significant opportunities for the future. Since plant biotechnology is a corporate technology platform, expenses are reported under “other.”

OIL & GAS

Segment Overview

BASF conducts the activities of its Oil & Gas segment through Wintershall Group (“Wintershall”). Wintershall and its affiliated companies are active in two sectors: Oil and Natural Gas Exploration and Production and Natural Gas Distribution and Trading. Key information is provided in the table below:

Million €

 

 

 

2006

 

2005

 

2004

 

Sales to third parties, net of natural gas taxes

 

10,687

 

7,656

 

5,263

 

Percentage of total BASF sales

 

20

%

18

%

14

%

Intersegmental transfers

 

1,062

 

723

 

546

 

Sales including intersegmental transfers

 

11,749

 

8,379

 

5,809

 

Royalties

 

333

 

281

 

243

 

Sales including intersegmental transfers, less royalties

 

11,416

 

8,098

 

5,566

 

Income from operations(1)

 

3,250

 

2,410

 

1,643

 

Additions to property, plant and equipment and intangible assets

 

545

 

624

 

388

 

 


(1)             Income taxes on oil production in North Africa and the Middle East that are noncompensable with German corporate income tax in the amount of €1,282 million in 2006 (2005: €1,072 million; 2004: €668 million) are not deducted from income from operations but are reported as income taxes. Please see Note 8 to the Consolidated Financial Statements.

Segment Strategy

In Europe, the segment strategy is driven by the integration of the Exploration and Production business and the Natural Gas Distribution and Trading business. Our “Gas for Europe” concept is based on the increasing demand for natural gas imports into Western Europe. Thus, one of the key drivers of our upstream activities is exploration for, and development and production of, gas in and around Europe with our midstream business bringing the gas to market.

Wintershall focuses on building strong alliances with its business partners to develop new projects. The most prominent examples include our participation with Gazprom in the Nord Stream pipeline project, the development of the Achimov formation in the Urengoy field in Western Siberia, and the development of one of the largest undeveloped Russian gas fields, Yuzhno Russkoye, in Western Siberia.

In the Oil and Natural Gas Exploration and Production business, we have increased production by 40% since 1999. This is in line with our long-term objective to increase production during the current decade by 50%. BASF’s goal is to maintain a robust ratio of proved reserves to production and a balanced portfolio of assets operated both by Wintershall and by third parties. To ensure the company’s ongoing competitiveness and efficiency, Wintershall focuses geographically on a selected number of core regions. These are Europe, North Africa, South America (Southern Cone) as well as Russia and the Caspian Sea area.

44




The Natural Gas Distribution and Trading strategy is based on a strong infrastructure including pipeline and storage facilities that are strategically located for gas imports to, and distribution within, Germany as well as for transit to other European countries. Sales activities are conducted mainly via WINGAS, a joint venture between Wintershall and Gazprom, which is regionally focused on Germany, the countries bordering Germany and the UK. A key element of BASF’s asset-based growth strategy is the participation, together with Gazprom and E.ON, in the Nord Stream project, which will provide Europe with 55 billion cubic meters of Russian gas in two phases with a planned start up date of the first phase in 2010. Based on significant expansions of WINGAS’s pipeline infrastructure in Germany, the planned Nord Stream pipeline will be tied into WINGAS’s European infrastructure to transport the additional Nord Stream gas volumes to the targeted markets in Germany and Europe. To support the business expansion into other European countries, we have initiated projects to build additional storage capacities in Jemgum, Germany, in Haidach, Austria, and in Saltfleetby, UK.

Reserves

The Oil & Gas segment’s most significant oil reserves are in Libya and Germany. The most significant natural gas reserves are in Argentina, Germany and the Netherlands. The Oil & Gas segment’s proved oil and gas reserves and proved developed oil and gas reserves by geographic area were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rest of

 

 

 

 

 

 

 

 

 

The

 

Rest of

 

 

 

World

 

 

 

Germany

 

Libya

 

Argentina

 

Netherlands

 

World

 

Total

 

(at equity)

 

At December 31, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (millions of barrels)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

68

 

306

 

54

 

1

 

1

 

430

 

12

 

Proved developed reserves

 

42

 

303

 

45

 

1

 

1

 

392

 

12

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas (billions of cubic feet)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

376

 

232

 

1,408

 

200

 

14

 

2,230

 

 

Proved developed reserves

 

352

 

232

 

978

 

196

 

10

 

1,768

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (millions of barrels)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

79

 

329

 

57

 

2

 

2

 

469

 

11

 

Proved developed reserves

 

50

 

317

 

44

 

2

 

2

 

415

 

11

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas (billions of cubic feet)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

395

 

217

 

1,462

 

249

 

24

 

2,347

 

 

Proved developed reserves

 

346

 

209

 

1,000

 

187

 

21

 

1,763

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil (millions of barrels)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

82

 

362

 

48

 

1

 

8

 

501

 

13

 

Proved developed reserves

 

53

 

335

 

36

 

1

 

7

 

432

 

13

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas (billions of cubic feet)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Proved reserves

 

439

 

217

 

1,530

 

265

 

12

 

2,463

 

 

Proved developed reserves

 

389

 

201

 

954

 

189

 

12

 

1,745

 

 

 

At 2006 levels of production, proved oil reserves would last approximately seven years, and proved gas reserves would last approximately eight years. For additional information on reserves, please see “Supplementary information concerning oil and gas producing activities (unaudited)” included in Item 18.

45




Exploration and Production

The net quantities of oil and gas produced as well as the average sales price and production cost (lifting cost) per unit of oil and gas produced in each of the last three years were as follows:

 

 

2006

 

2005

 

2004

 

Oil

 

 

 

 

 

 

 

Net quantities produced (millions of barrels)

 

63

 

65

 

64

 

Average sales price less royalties (per barrel)

 

42.46

 

34.36

 

22.54

 

Average production cost (lifting cost) (per barrel)

 

3.85

 

3.42

 

3.06

 

 

 

 

 

 

 

 

 

Gas

 

 

 

 

 

 

 

Net quantities produced (billions of cubic feet)

 

278

 

272

 

258

 

Average sales price less royalties (per thousand cubic feet)

 

2.86

 

2.44

 

2.26

 

Average production cost (lifting cost) (per thousand cubic feet)

 

0.57

 

0.56

 

0.53

 

 

Wintershall’s total gross and net productive wells, total gross and net developed acres and total gross and net undeveloped acres (both leases and concessions) as of December 31, 2006, were as follows:

 

 

 

 

 

 

 

 

The

 

Rest of

 

 

 

Rest of World

 

 

 

Germany

 

Libya

 

Argentina

 

Netherlands

 

World (1)

 

Total

 

(at equity)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross productive wells

 

522

 

72

 

54

 

9

 

242

 

899

 

14

 

Total net productive wells

 

245

 

65

 

17

 

9

 

12

 

348

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross productive wells

 

146

 

 

211

 

132

 

8

 

497

 

 

Total net productive wells

 

56

 

 

52

 

22

 

3

 

133

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and Gas Acreages (thousand of acres)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gross developed acres

 

188.4

 

53.3

 

274.9

 

110.8

 

81.3

 

708.7

 

1.0

 

Total net developed acres

 

66.3

 

51.3

 

67.4

 

19.0

 

6.3

 

210.3

 

0.5

 

Total gross undeveloped acres

 

3,588.0

 

984.1

 

8,470.0

 

2,687.2

 

27,332.6

(2)

43,061.9

 

3,367.0

 

Total net undeveloped acres

 

1,996.9

 

395.7

 

3,731.5

 

680.7

 

21,168.3

(2)

27,973.1

 

1,683.5

 


(1)    Consolidated activities only

(2)    The majority relates to Mauritania

In 2006, Wintershall spent €523 million for exploration, acquisition and investment, compared with €492 million in 2005. Thereof, €221 million was spent in Europe (2005: €239 million), €138 million in North Africa/Middle East (2005: €89 million), €102 million in Russia/Caspian Sea (2005: €70 million) and €62 million in South America (2005: €94 million).

Either directly or through its subsidiaries, Wintershall was involved in the drilling and completion of 32 exploration and appraisal wells, which resulted in 14 successful wells. As of December 31, 2006, Wintershall had begun drilling 10 additional exploratory wells.

Europe

In Germany, the offshore field Mittelplate, with approximately 200 million barrels of proved initial reserves, is the country’s largest known oil reservoir. Wintershall is a 50% partner together with RWE DEA AG. On the offshore production platform, a new drilling rig with a higher capacity was installed in 2006.

In the Netherlands, the gas discovery L5-10 was taken into production from the refurbished and modernized platform L5-C (former K10-V). Wintershall is one of the largest gas producers in the Netherlands. In April, our Norwegian subsidiary Wintershall Norge A.S. was established and in July the license 273 was awarded. During the sixth license round in Denmark we acquired three exploration blocks. Exploration will be operated by Wintershall with a share of 35%.

46




North Africa/Middle East

In Libya, Wintershall operates eight onshore oil fields and produces associated natural gas for local consumption. In 2006, the development of existing fields and new fields continued. During the third EPSA-IV round we acquired blocks 1 – 4 in area 201 in the Kufra basin and will be the operator with a share of 65%. Offshore Libya, Wintershall holds a 12.5% interest in the Al Jurf oil field. As announced, Gazprom plans to take over 49% in a company holding onshore exploration and production rights in Libya.

In Mauritania, we are active in two onshore and one offshore exploration blocks. Offshore Qatar, the potential of an appraisal campaign is being evaluated.

South America/Southern Cone

Wintershall produces substantial volumes of its natural gas in Argentina. Off the coast of Tierra del Fuego, the Aries gas field began production in January 2006. Wintershall holds a share of 37.5% through its subsidiary Wintershall Energia. Furthermore, Wintershall continued its exploration efforts with both operated and non-operated licenses.

Russia and Caspian Sea area

BASF has a cooperation agreement with Gazprom that provides a legal and commercial framework for common field development projects. Wintershall and Gazprom are cooperating in the development of large gas/condensate fields in Western Siberia. In the first project, the development of the Achimov formation in a part of the Urengoy field, two of the six wells of the first project phase were completed successfully. Progress in construction of the surface facilities will lead to a production start-up in mid 2007.

Wintershall plans to be a partner with 25% minus one share in Severneftegazprom (SNG), which is the license owner of the Yuzhno Russkoye gas field in Western Siberia. Additionally, Wintershall plans to receive a further 10% in the company in the form of non-voting preferred shares resulting in an economic participation of 35% minus one share. The intended participation will significantly increase Wintershall’s natural gas reserve base.

In the Volga region, the joint venture company Wolgodeminoil, with its partners Wintershall and Lukoil, continued oil exploration and production activities.

Offshore Turkmenistan, the first exploration well was plugged and abandoned.

Risks and opportunities

In general, oil and gas exploration and production activities require high levels of investment and entail special economic risks and opportunities. These activities tend to be highly regulated and companies engaging in these activities generally may face intervention by governments in matters such as:

·                  The award of exploration and production licenses,

·                  The imposition of specific drilling and other work-related obligations,

·                  Environmental protection measures,

·                  Control over the development and abandonment of fields and installations,

·                  Restrictions on production and

·                  Imposition of special tax regimes on hydrocarbon production.

Crude oil prices are subject to international supply and demand and other factors that are beyond an oil company’s control. Such factors can also affect the price of natural gas sold under long-term contracts, because in Germany and in many other countries, natural gas pricing is typically tied to prices of refined products pursuant to a specified time lag. Crude oil prices are generally set in U.S. dollars, while costs may be incurred in a variety of currencies. Fluctuations in exchange rates can therefore give rise to foreign exchange exposures.

As with most international oil and gas companies, substantial portions of the oil and gas reserves of Wintershall are located in countries which can be considered politically and economically less stable than the OECD countries.  To date, political risks have not significantly affected the Oil & Gas segment or had a material adverse effect on BASF’s financial condition or results of operations.

47




Wherever possible, Wintershall arranges capital investment guarantees by the German government to protect its investments. German government guarantees currently cover a total investment volume by Wintershall of approximately €719 million, including inventory of raw materials and supplies.

General uncertainties are inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures. The accuracy of any reserve estimate is a function of the quality of available data, reservoir engineering and geological interpretation and judgment. Results of drilling, testing and production after the date of the estimate may require substantial upward or downward revisions. In addition, changes in oil and natural gas prices could have an effect on the economically recoverable reserves. Accordingly, reserve estimates could be materially different from the quantities of oil and natural gas that are ultimately recovered. To reduce uncertainties, Wintershall has used for some years independent, internationally recognized reserve auditors to perform reserves audits of its major oil and gas fields.

Natural Gas Distribution and Trading

BASF conducts its natural gas distribution and trading activities in two joint ventures with Gazprom export, a subsidiary of Gazprom.

·                  WINGAS, in which Wintershall currently has a 65% share and

·                  WIEH, in which Wintershall has a 50% share, although profit distributions are differentiated according to customers and sales countries.

In 2007, Gazprom plans to increase its share in WINGAS from 35 to 50% minus one share (see also Item 4. Information on the Company — History and Development of the Company).

WINGAS owns and operates a large pipeline system in Germany that is more than 2,000 kilometers in length and is currently the third largest German natural gas transmission and distribution company. The company also owns and operates the largest underground natural gas storage site in Western Europe with a working gas capacity of 157 billion cubic feet.

Capital expenditures of WINGAS and its subsidiaries in 2006 totaled €134 million. The main projects were the extension of pipelines and the construction of compressor stations to increase the capacities of STEGAL and WEDAL as well as the ongoing development of the gas storage facility in Haidach, Austria.

In 2006, the name of the North European Gas Pipeline Company (NEGP) was changed to Nord Stream AG. Nord Stream is a pipeline that will run from Vyborg in Russia through the Baltic Sea to Greifswald in Germany where it will be connected with the pipeline systems of WINGAS and E.ON Ruhrgas. Gazprom will participate with 51% and BASF and E.ON AG with 24.5% each. A potential participation of the Dutch company, Gasunie, would reduce our share to 20%.

Procurement of Russian gas is supplemented by purchases of West European gas. In 2006, WINGAS entered into several procurement contracts with a range of West European suppliers to diversify its procurement portfolio. Moreover, WINGAS used procurement opportunities at West European trading hubs, such as the National Balancing Point (NBP) in Great Britain and Zeebrugge in Belgium.

WIEH exclusively acts as a trading company, purchasing Russian natural gas and marketing it to WINGAS and VNG-Verbundnetz Gas AG, a transmission and distribution company in Eastern Germany in which Wintershall has a 15.8% share. WIEH also markets Russian natural gas in central Europe through its wholly owned Swiss subsidiary WIEE.

Due to new European and German legislation, the WINGAS gas transmission division was transferred into an independently operating wholly owned company on January 1, 2006.

The sales volume of WINGAS, WIEH and WIEE totaled 1,198 billion cubic feet compared with 1,127 billion cubic feet the year before. BASF’s consolidated sales volume in 2006 was 847 billion cubic feet, representing a 6% increase over the previous year’s sales volume of 797 billion cubic feet. WINGAS’s biggest customer is BASF’s own Verbund site in Ludwigshafen. In 2006, BASF purchased approximately 114 billion cubic feet for its Ludwigshafen site and other sites in Germany and Belgium. Approximately 37 billion cubic feet were sold to other BASF companies in Germany and Great Britain, and 11 billion cubic feet were sold to WIEH.

48




ENVIRONMENTAL MATTERS

BASF is subject to extensive, evolving and increasingly stringent international and local environmental laws and regulations concerning: the production, distribution, handling and storage of our products; the disposal of materials; the practices and procedures applicable to construction and operation of sites; the exploration and production of oil and gas; and the maintenance of safe conditions in the workplace.

Although BASF believes that its production sites and operations currently fully comply with all applicable laws and regulations, these laws and regulations have required, and in the future could require, BASF to take action to remediate the effects on the environment of the prior disposal or release of chemicals, petroleum substances or waste. Such laws and regulations have applied, and in the future could apply, to various sites, including BASF’s chemical plants, oil fields, waste disposal sites, chemical warehouses and natural gas storage sites. In addition, such laws and regulations have required, and in the future could require, BASF to install additional controls for certain emission sources, undertake changes in its operations in future years and remediate soil or groundwater contamination at current and/or former sites and facilities.

BASF’s operating costs for environmental protection totaled €657 million in 2006. These costs are recurring or one-time costs associated with sites or measures that are incurred in the avoidance, reduction or elimination of deleterious effects on the environment. They include the costs of disposal sites, such as wastewater treatment plants and residue incinerators. They also comprise different levies such as effluent levies and water levies, costs for disposal services by third parties, monitoring, analyses and surveillance carried out by mobile and stationary units as well as research and development costs for reducing the incidence of residues. BASF spent approximately €116 million in 2006 on capital expenditures for pollution control devices and equipment.

BASF also incurs costs to remediate the impact of the past disposal as well as the release of chemicals or petroleum substances or waste, both at its own sites and at third-party sites to which BASF sent waste for disposal. Worldwide, BASF had established provisions of €271 million for cleanup costs at such sites as of December 31, 2006, and €253 million as of December 31, 2005.

In the United States, liability for remediation of contamination is imposed generally pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act (Superfund) and analogous state laws. Although such U.S. laws generally allow the recovery of the total cost of cleanup from any single responsible party, cleanup costs typically are shared among several responsible parties at third-party sites where multiple parties sent waste to the site for disposal, and sometimes at owned or operated sites where a predecessor or other third-party disposed of waste on-site. BASF has been notified that it may be a potentially responsible party at such sites. The proceedings related to these sites are in various stages. The cleanup process has not been completed at most sites. The number, potential liability and financial viability of other parties are typically not fully resolved, and the status of the insurance coverage for most of these proceedings is uncertain. Consequently, BASF cannot accurately determine the ultimate liability for investigation or cleanup costs at these sites. As events progress at each site for which BASF has been named a potentially responsible party or is otherwise involved in remediation of contamination, BASF accrues, as appropriate, a liability for site cleanup.

For information on provisions for environmental protection and remediation costs, see Note 21 to the Consolidated Financial Statements included in Item 18.

BASF also establishes provisions for currently known potential soil contamination at BASF sites that are still in operation. In general, investigations into potential contamination and subsequent cleanups are only required when a site is closed and the existing production facilities dismantled. Taking into account BASF’s experience to date regarding environmental matters and currently known facts, BASF believes that capital expenditures and remedial actions necessary to comply with existing laws and conditions governing environmental protection, exceeding the existing provisions, will not have a material effect on BASF’s consolidated financial condition or results of operations.

49




In connection with the onshore and offshore oil and gas activities conducted by BASF’s subsidiary, Wintershall, BASF is subject to an increasing number of international and national laws, regulations and directives governing the protection of the environment.

Wintershall performs environmental impact studies where new oil and gas activities are planned and complies with all applicable environmental regulations during and after onshore and offshore exploration and production. It is impossible to accurately predict the effect of future developments in such laws and regulations on Wintershall’s future earnings and operations. BASF can make no assurance that Wintershall will not incur material costs and liabilities relating to environmental matters.

In recent years, the operations of all chemical companies have become subject to increasingly stringent legislation and regulations related to occupational safety and health, product registration and environmental protection. Such legislation and regulations are complex and constantly changing and there can be no assurance that future changes in laws or regulations would not require BASF to install additional controls for certain of its emission sources, to undertake changes in its manufacturing processes or to investigate possible soil or groundwater contamination and remediate proven contamination at sites where such cleanup is not currently required.

The European Union has passed new legislation on chemicals (REACH) to govern the registration, evaluation and authorization of chemicals. The new legislation will come into force in the relevant E.U. member states on June 1, 2007. We have been actively involved in numerous E.U. projects to support the efficient and economically practicable implementation of REACH and are now making detailed preparations for its introduction. We expect implementation to be associated with expenses of approximately €50 million per year in the period up to 2018.

Within the framework of E.U. emissions trading, the BASF Group was allocated allowances (EUA) for approximately 7 million metric tons of carbon dioxide (CO2) per year for the affected plants at our European sites for 2006. For the second trading period (2008 to 2012), a number of chemical plants will also be included in the Europe-wide trading system.

SUPPLIES AND RAW MATERIALS

Raw materials procurement

The major raw materials that feed BASF’s Verbund production sites are hydrocarbon-based raw materials such as naphtha and LPG (liquefied petroleum gas). These are feedstocks for the steam crackers that are operated in Ludwigshafen, Germany; Antwerp, Belgium; Port Arthur, Texas, United States and Nanjing, China. BASF monitors the market for naphtha and hedges its exposure by using swaps and options. Other important hydrocarbon-based raw materials are natural gas, benzene and propylene. For its German operations, BASF primarily sources its natural gas from Russia by means of long-term natural gas supply contracts. In the United States, BASF secures its natural gas requirements based on shorter-term supply contracts related to national sources with various suppliers. Other important raw materials for BASF include cyclohexane, ammonia, titanium dioxide and methanol.

BASF applies e-commerce as a tool to continuously improve the efficiency of its procurement processes. This has a positive impact on process times and process quality. BASF uses the electronic marketplace cc-hubwoo, in which we own a stake, for procuring technical goods and services. BASF has integrated the marketplace Elemica in the purchasing processes for raw materials. Elemica is used as trading platform for chemical products by more than 230 customers and suppliers.

BASF has a policy of maintaining, when possible, multiple sources of supply for its raw materials. BASF has not experienced any ongoing major difficulty in obtaining sufficient supplies of raw materials in recent years and believes it will generally be able to obtain them at competitive market prices in the future. However, BASF cannot guarantee that unforeseen developments will not adversely affect its ability to obtain sufficient, competitively priced raw materials in the future.

50




ORGANIZATIONAL STRUCTURE

BASF Aktiengesellschaft is the ultimate parent company of the BASF Group. The Group operates in five business segments that encompass BASF’s 14 operating divisions. The business segments are reportable segments except for the business segment Agricultural Products & Nutrition, which is treated as two reportable units, disclosing separately the Agricultural Products and Fine Chemicals divisions.

Business operations are run by 68 regional and global business units, organized along business or product lines. As profit centers, they are responsible for all business operations – from production to marketing and sales, with processes oriented to their customers.

In addition to its operating divisions and business units, BASF has three corporate divisions that support the Board of Executive Directors in directing the company’s activities, and 11 competence centers that oversee strategic activities and set global standards. The corporate divisions are Legal, Taxes & Insurance; Strategic Planning & Controlling; and Finance. The competence centers are Polymer Research; Chemicals Research & Engineering; Specialty Chemicals Research; Human Resources; Environment, Safety & Energy; Global Procurement and Logistics; Information Services; Corporate Engineering; Occupational Medicine & Health Protection; Science Relations & Innovation Management and BASF Plant Science.

The following table sets forth significant subsidiaries owned, directly or indirectly, by BASF Aktiengesellschaft:

Name of Company

 

Percentage owned (%)

 

BASF Coatings AG, Münster, Germany

 

100

 

BASF Schwarzheide GmbH, Schwarzheide, Germany

 

100

 

Elastogran GmbH, Lemförde, Germany

 

100

 

Wintershall Holding AG, Kassel, Germany

 

100

 

BASF Antwerpen N.V., Antwerp, Belgium

 

100

 

BASF Española S.L.,Tarragona, Spain

 

100

 

BASF Catalysts LLC., Iselin, New Jersey, United States

 

100

 

BASF Corporation, Florham Park, New Jersey, United States

 

100

 

BASF S.A., São Paulo,Brazil

 

100

 

BASF Company Ltd., Seoul, South Korea

 

100

 

WINGAS GmbH, Kassel, Germany

 

65

 

BASF Petronas Chemicals Sdn. Bhd., Petaling Jaya, Malaysia

 

60

 

 

DESCRIPTION OF PROPERTY

BASF owns and operates numerous production and manufacturing sites throughout the world. The principal offices of BASF Aktiengesellschaft are located in Ludwigshafen, Germany. In addition, BASF operates regional headquarters, sales offices, distribution centers and research and development facilities worldwide. We believe that our production sites are well aligned with both our present capacity requirements, and our future growth strategy. We are constantly evaluating the location, efficiency and capacity of our plants, and taking action where appropriate.

At the heart of BASF’s integration strategy are its Verbund production sites, which produce a wide range of products. These can vary significantly in quantity produced and sales price. The following is a description of our operational Verbund sites and production capacities of certain significant products. Capacities are listed in metric tons per year unless otherwise noted.

51




 

Segment

 

Product

 

Production Sites

 

 

 

 

 

 

 

 

 

 

 

Kuantan,

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Geismar,

 

Malaysia,

 

 

 

 

 

 

 

 

 

 

 

Ludwigs-

 

 

 

Louisiana

 

and

 

 

 

Total World

 

 

 

 

 

 

 

hafen,

 

Antwerp,

 

and Free-

 

Nanjing,

 

Other

 

Capacity /

 

 

 

 

 

 

 

Germany

 

Belgium

 

port, Texas

 

China

 

Sites

 

Notes

 

 

 

Acreage / number of plants:

 

1,760 / 250

 

1,470 / 54

 

2,800 / 32

 

370 / 22

 

 

 

 

 

 

 

Chemicals

 

Ammonia

 

x

 

x

 

 

 

 

 

 

 

1,525,000

 

 

 

 

Chlorine

 

x

 

 

 

 

 

 

 

 

 

360,000

 

 

 

 

 

Formaldehyde
condensation products

 

x

 

 

 

 

 

 

 

 

 

750,000

 

 

 

 

Ethylene

 

x

 

x

 

x

 

x

 

x

 

2,955,000

 

(1)(10)

 

 

 

Propylene

 

x

 

x

 

 

 

x

 

x

 

2,280,000

 

(1)(4)(10)

 

 

Benzene

 

x

 

x

 

 

 

x

 

x

 

790,000

 

(1)(10)

 

 

 

Butadiene

 

x

 

 

 

 

 

 

 

x

 

515,000

 

(2)

 

 

Oxo C4 alcohols
(calculated as
butyraldehyde)

 

x

 

 

 

x

 

x

 

x

 

1,360,000

 

(3)(10)

 

 

 

Plasticizers

 

x

 

 

 

 

 

x

 

x

 

395,000

 

(3)

 

 

Ethylene oxide

 

x

 

x

 

x

 

x

 

 

 

1,175,000

 

(10)

 

 

 

Ethanolamines
and erivatives

 

x

 

x