Explanation of relevant risks
The risks associated with our business are described in the following sections according to our risk clusters. Furthermore, the main measures and instruments we use to counter these risks are also outlined. We have separately indicated risks and risk-relevant issues that we currently classify as medium to high potential occurrence.
Supply and production
The ability to keep the production facilities supplied with raw materials, and the availability of these facilities, are of central importance for the Aurubis Group. We mitigate the related risks using the following measures:
To ensure the supply of copper concentrates for Business Unit Primary Copper, we have concluded long-term agreements with a number of concentrate suppliers from various countries. In this way, we are able to reduce the risk of production interruptions caused by possible delivery failures significantly. The risk of volatile treatment and refining charges on the spot markets is also limited by the long-term nature of the agreements.
The recycling facilities were sufficiently supplied overall during the fiscal year due to our extensive international supplier network, despite weak availability of copper scrap in some cases. From today’s standpoint, we expect the facilities to continue being supplied and utilized at the same level. Nevertheless, there are ongoing refining charge volatilities due to the general metal price trend, metal traders’ collecting activity and inventory management, the European economic situation and competition for the secondary raw materials relevant for Aurubis.
The material supply in the copper product fabrication facilities is mainly covered with the copper cathodes produced within the Group. In addition to higher added value, this allows for quality control for copper products during the entire process. We were able to meet most of the demand for copper cathodes for BU Copper Products internally during the fiscal year, therefore ensuring delivery reliability and the quality of our products. We also procured a sufficient volume of copper-bearing raw materials for the production plants of Business Line Flat Rolled Products. We expect a situation comparable to that of the past fiscal year in this area as well.
Plant availability was satisfactory overall, considering that it was reduced at times due to scheduled and unscheduled maintenance measures.
As a matter of principle, we undertake organizational measures (including alarm plans and employee drills) to handle potential incidents such as flooding or fire. We also address the risk of malfunctions by carrying out regular maintenance work and keeping critical replacement parts on hand.
From the current perspective, and taking the measures described above into consideration, we classify the risk of an insufficient supply as “medium” and the risk of significantly limited availability of our production facilities as “low”.
We deal with logistics risks by implementing a thorough, multi-step acceptance process for service providers, by avoiding single sourcing and by preventively developing back-up solutions. We have an international network of skilled service providers at our disposal and, for instance, can avoid weather-related risks in the transport chain by minimizing contingency risks through contractual arrangements regarding appropriate alternatives.
In addition to supply and production risks, the Aurubis Group also faces sales risks, which we classify as “medium”.
The delivery volumes of copper wire rod and shapes products increased slightly in fiscal year 2015/16 compared to the previous year. All relevant customer industries developed positively, and as the market leader in Europe, Aurubis benefited from this trend. We assume that the development will be stable in the next year. Because of the continued overcapacities on the market, the pressure on conditions in our long-term contracts is unlikely to subside.
For sulfuric acid sales, the fiscal year started at a weak level owing to seasonal factors. Due to a surplus from South America, the prices on the spot market were under pressure during the entire fiscal year.
Cathodes produced by Aurubis which were not processed internally were sold on the international copper cathode market.
Energy prices tended to decrease in the course of the fiscal year. We are safeguarded against unplanned cost fluctuations from unpredictable and volatile prices on the electricity exchange owing to our electricity contract which has been in effect since 2010. This safeguard corresponds to most of our electricity demand and covers the main German sites. We also address fundamental supply security, as well as the potential and limitations of more flexible energy sourcing that arise due to the increasing, volatile feed-in of renewable energies.
Burdens resulting from changes in potential cost drivers such as the German Renewable Energies Act (EEG), the emissions trade, grid charges and the eco-tax are generally difficult to quantify reliably because of the still-uncertain legal situation and changing political conditions. We expect the tax burden to remain at the current level in the medium term due to the 2016 amendment to the EEG. According to current information, there will be no significant additional charges from the state aid investigation regarding the network charge exemption in past periods.
The fundamental retention of the special carbon leakage status for certain sectors starting in 2021 with regards to the allocation of emission trading allowances and CO2 electricity price compensation is currently being discussed by policymakers. From today’s perspective, it is difficult to predict the result. We expect costs to increase in the medium term overall, which could lead to significant strains. The topic of energy and the associated risks, currently classified as “medium”, will remain important for Aurubis as an energy-intensive company in the future as well.
Finance and financing
Metal price and exchange rate fluctuations represent a potential risk in the buying and selling of metals. This risk is substantially reduced through foreign exchange and metal price hedging. Metal backlogs are hedged daily using financial instruments such as spot and forward contracts. The same effect occurs by using spot and forward exchange contracts to hedge foreign currencies. Foreign exchange risks from exchange rate fluctuations are also minimized on a daily basis in this way. We have only selected strong, credit-worthy firms as partners for hedging transactions to minimize the credit risk.
We hedge expected receipts from foreign currencies, especially the US dollar, with options and forward exchange transactions in some cases. We will continue this in the future as well, and expect that we can reduce the risks from metal price and exchange rate fluctuations to a reasonable level with these measures.
Credit risks from trade accounts receivable are largely hedged by commercial credit insurances. Internal risks were only permitted to a very limited extent and after review. The development of the outstanding receivables is monitored closely. During the reporting period there were no significant bad debts. We do not foresee any threatening trends in the future.
The liquidity supply is very important for the Aurubis Group and was secured during the past fiscal year. Credit lines at the banks were also sufficient. From the current perspective, we expect a corresponding trend for the new fiscal year as well. We currently classify risks that could result from the resurgence of the sovereign debt crisis in the eurozone as “medium”.
Environmental protection and other aspects
There is always a risk that environmental or regulatory provisions could become more stringent, leading to added costs or limitations in product fabrication and marketing. For example, there is a risk that increasingly strict environmental legislation will restrict the marketing of iron silicate. We have started the MSO project (Metallurgical Slag Optimization) in the Hamburg primary smelter to counter this development. One target is to reduce the unwanted elements in the iron silicate with an additional preparation stage. We also want to achieve greater flexibility on the sales market by expanding our granulation capacities.
In addition, environmental risks resulting from the possible failure to comply with limit values and violations of requirements can have legal consequences. We ensure the environmentally sound operation of our production facilities to counter this, among other things. We are an international leader in environmental protection, which is confirmed by annual certifications in accordance with ISO 14001 and EMAS, for example. We consider ourselves to be well positioned for the future in this regard. Nevertheless, operational incidents that could have an adverse impact on the environment cannot be completely ruled out. Overall, we classify the environmental risks as “medium”.
In a plant with complex processes, employees’ specialist knowledge is an important factor to ensure performance quality. Different measures are intertwined with each other so that Aurubis can continue to count on employees’ expertise. We build connections to skilled young people through our collaboration and contact with universities, and we foster development among professionals and managers through qualification processes.
Occupational safety and health protection take high priority for us. We focus on individual responsibility, detailed hazard assessments, training, and short-term and medium-term goals with the objective of Vision Zero, i. e. no accidents.
We counter legal, tax and compliance risks with organizational procedures and clear management structures. We are closely following political discussions about tax issues, for example the financial transaction and capital tax, and their possible effects. In the course of the antitrust proceedings that had been pending against us in Bulgaria, the authorities ruled in favor of Aurubis. However, a customer contacted the responsible court and objected to this decision. The Aurubis Group continues to consider the allegations unfounded.
Furthermore, Aurubis is subject to IT risks that can impact the supply, production and sales areas, for example, and these were considered accordingly in the risk assessment. From the current perspective, these risks are nevertheless insignificant due to the risk reduction measures in place that are described below:
We limit the risks of decreased IT system availability through continuous monitoring, technical precautions and implementing necessary adjustments. The redundant design of our IT infrastructure, as well as data recovery and continuity plans, counter the risks of possible incidents or disasters. In order to prevent the risks of unauthorized access to company data, we restrict the issuing of access rights, carry out security reviews and use modern security technologies.
Furthermore, selected risks are largely covered by insurance policies. We rely on the expertise of an external insurance broker for this purpose.