Impexmetal Group's activities are associated with exposure to market risk (including currency risk, interest rate risk and commodity risk) as well as credit risk and liquidity risk.
MARKET RISK - METAL PRICES AND EXCHANGE RATES
The main risks arising from the specificity of the Group's activities are risks associated with the price of metals on the London Metal Exchange (LME) and the change in exchange rates.
DESCRIPTION OF EXPOSURE
Due to the nature of activity - Impexmetal Group is exposed to risks associated with the price of metals on the LME and changes in exchange rates.
Metals which price changes affect the development of the Group's results are: copper, aluminium, lead, zinc, and to a lesser extent nickel as alloy additive.
The exposure, which has been identified so far in the Impexmetal Group defines essentially two types of risks:
- Risk of changes in commodity prices,
- Risk of changes in exchange rates
Both the first and the second exposure occurs at the strategic /basic/ level and at the operational level.
Strategic risk on the price of metals has been identified in Baterpol S.A., and is associated with future revenue and cash flows, which have not yet been contracted.
Operational risk on the price of metals has been identified in the following companies: Impexmetal S.A., Baterpol S.A., Hutmen S.A., Walcowania Metali Dziedzice S.A, Zakłady Metalurgiczne Silesia S.A., and is associated with future revenue and cash flows that have already been contracted, i.e. the hedge of the contract's fair value.
Regarding the strategic risk in terms of currency, it can be divided into two types of risks:
- Strategic risk associated with the currency of metal (generally USD/PLN)
- Strategic risk associated with the processing margin (USD/PLN and EUR/PLN)
The first type of risk occurs, as in the case of metal, in Baterpol S.A., and the other in the following Companies: Impexmetal S.A., Baterpol S.A., Hutmen S.A., Walcowania Metali Dziedzice S.A., Zakłady Metalurgiczne Silesia S.A. and FŁT Polska Sp. z o.o.
In the case of currency operational risk, it is mainly a derivative of metal operational risk, therefore in order to get the full hedging effect it is necessary to also protect the currency exposure. In addition, there is still operational risk from the time of determining a fixed sale or purchase price (e.g. issuance of a sale invoice) until the inflow of payment or the payment of obligations.
Strategic risk in individual companies is closely related to the specificity of their business activities. In the case of metal, the companies determine the so-called net exposure, i.e. cost items are deducted from sales based on the database of LME prices, whereas the cost items are also based on this database, the difference is the net exposure, which is hedged. In the case of strategic exposure on currencies associated with the processing margin achieved is calculated by multiplying the processing margin by the amount of sales of finished products.
In the case of operational risk, it arises mainly as a result of the mismatch of the databases for the purchase of raw materials and the sales of products.
Because of the interest debt with a variable coupon mainly used to fund the operations of the Impexmetal Group companies, companies are exposed to changes in interest rates. Interest rate risk profile of the Companies lies in the fact that the rise in interest rates has a negative effect. Due to the smaller impact of interest rates on the costs and revenues of the Companies, the risk of changes in interest rates is not the primary risk from the point of view of the size of the cash flows of companies. In addition, the Company holds financial assets based on a variable interest rate, which compensates for the cost of a potential rise in interest rates.
This risk, like the metals price risk and exchange rate risk, is constantly monitored.
OBJECTIVES, POLICIES AND PROCESSES FOR MANAGING THE RISK AND THE METHODS USED TO MEASURE RISK
Objectives, policies and processes for managing risks
The main objective of the risk management policy in the Impexmetal Group is to ensure the stability of cash flows and additionally securing the fair value of contracts.
Management of individual risks is delegated to the individual Companies of the Group. The Companies determine and implement the risk management policy, and it is there where the process of determining the exposure, preparation of strategies, entering into transactions, and checking and booking them takes place.
Risk measurement methods
Currently, in the Companies, risk measurement at the strategic level is based on data from the approved current business plan for the period and the updated current purchase and sale plans.
In case of operational hedging, risk measurement is based on the updated current purchase and sale plans, inventories, and realised sales.
Structure and organisation of risk management functions
The organisation of risk management functions in the Impexmetal Group takes place on two levels. At the level of individual Companies, risk management policy is created, methodology for calculating the exposure established, the exposure on both the currency and metal calculated, and hedging strategy determined, i.e. determining what quantities should be hedged in which instruments and for what periods. At the level of the Companies, negotiations of transaction terms are held, transactions are concluded, possibly confirmed by the institutions with which they are concluded, transactions are booked, closed and settled. In addition, the companies carry out hedge accounting.
The second level of the organisation of risk management takes place at the Impexmetal Group level and at the level of the Supervisory Boards of various Companies that present their policies and the approach to the policies in supervisory board meetings. In addition to the cell dealing with the matters of hedging at Impexmetal S.A. key documentation on risk management policies is provided on an ongoing basis in the individual Group companies.
The Group has a detailed system of reporting all derivative transactions concluded and held by the companies.
Scope and characteristics of reporting systems and risk monitoring
The reporting system in the Impexmetal Group has several steps. The first step is: reporting to the Management Boards of the individual companies. The order and frequency of these reports is determined by the individual Boards. In addition, the Boards present information about hedges - at meetings of supervisory boards, and the frequency and level of detail of this information depends on the individual supervisory boards. In addition, since 2007, a detailed weekly reporting system was introduced in the Impexmetal Group.
These reports are characterised by a high degree of detail and include, inter alia, the volume and currency of transactions, the level of hedging, the date of the conclusion and settlement of transactions, settlement formulas and institutions through which these transactions were made.
In addition, hedging transactions executed on the LME contracted to FLT & Metals Limited (Group Company), are subject to double confirmation immediately by fax, electronically by e-mail or phone by the other person authorised for this purpose. The maximum time for the confirmation of the order is 30 minutes, and the procedure in practice excludes a mistake when entering into the transaction.
The scope of detail the aforementioned report makes it possible to control current transaction.
Due to the nature of activity - risk monitoring takes place mainly at the level of individual Companies, additional risk analysis and control takes place at the level of the Group as part of the weekly and monthly reporting to Impexmetal S.A.
Description of risk hedging policies
The Boards of the individual companies are responsible for the implementation of risk hedging policies. Policies are designed to determine in detail the risks incurred by individual companies and to present to approach to these risks, and optionally include limits to which hedges can be implemented. Policies include objectives that the companies set for themselves, and the hedges implemented should help in achieving these objectives.
Processes for monitoring the effectiveness of hedging and other risk management tools
For transactions for which it is possible to use hedging relationships, Impexmetal Group companies have use hedge accounting. For each reporting period, the companies carry out an assessment of the effectiveness of hedging relationships held and effectiveness tests are performed in terms of maintaining these relationships in specific intervals. In addition, during the reporting periods, effectiveness is monitored by analysing deviations of the hedged item and the hedging item from standard items.
Additionally, the risk management process at the Impexmetal Group uses information systems: REUTERS, MetalPrice, which allow for ongoing monitoring of market data and valuation of item held.
Description of policies and procedures to avoid risk concentration
All Impexmetal Group companies as far as possible try to diversify all risks, both the risks associated with counterparties with regard to purchases of raw materials as well as finished goods sold, by concluding contracts with several entities, as in the case of financial institutions with which the companies have cooperation agreements. In the case of limits on hedging transactions, the companies try to have strong limits, relevant to the transactions concluded, so that in the event of a negative valuation of the fair value of the transactions held, they do not have to make margin deposits. A similar situation takes place in the case of credit lines, especially in the case revolving credit.
Regarding the concentration of the main market risks: for metal, currencies and interest rates, in relation to the wide range of activities of the entire Group, risks are distributed sufficiently evenly to the main metals, the production and processing of which is dealt with by individual companies, and which include: aluminium, lead, copper, zinc, and to a lesser extent silver. Regarding the concentration of currency risk, it focuses mainly on the risk of the USD/PLN and EUR/PLN exchange rate, and in minimum quantities on other exchange rates.
In the case of interest rate risk, it focuses mainly on the PLN, but also occurs on the EUR and to a lesser extent on the U.S. dollar.
MARKET RISK - INTEREST RATES
Because of the interest debt with a variable coupon mainly used to fund the operations of the Impexmetal Group companies, activity of the Group is exposed to changes in interest rates. Interest rate risk profile of the Companies lies in the fact that the rise in interest rates has a negative effect on the level of costs. Due to the lower importance of interest rates, the risk of their change is not the primary risk from the point of view of the size of the cash flows of companies.
This risk, like the metals price risk and exchange rate risk, is constantly monitored. If a persistent upward trend in interest rates is observed, the Group is ready to enter into hedging transactions for that risk.
Impexmetal Group's credit risk is related to market conditions leading to the need for deferred payments. Group Companies monitor the creditworthiness of counterparties to which goods are sold and use various types of collateral in the form of, e.g., guarantees, letters of credit or bills of exchange.
Most Impexmetal Group companies insure trade receivables, which greatly reduces credit risk.
Investments in debt instruments of other entities are also exposed to credit risk. Group companies are trying to assess the creditworthiness and prospects of entities which provide funding in the best possible way. Unusual events, such as turmoil in financial markets, may increase the risk of recoverability of these investments and significantly extend the time horizon for the release of funds. Group companies primarily invest in debt securities of affiliated entities.
In order to mitigate the liquidity risk of the Group, both actual and forecasted cash flows are monitored on an ongoing basis. By tracking the maturity of financial assets and liabilities, they are properly adjusted and thus appropriate cash balances are maintained. The Group uses the services of banks, which have open lines of credit. Demand for external financing is continuously monitored. The Group's objective is to provide a level of funding that is sufficient from the point of view of its activities.
Liquidity risk is also thoroughly analysed with respect to the hedging activities. In the case of limits on hedging transactions, the Group companies try to have strong limits, relevant to the transactions concluded, so that in the event of a negative valuation of the fair value of the transactions held, they do not have to make margin deposits.
According to the best judgement of the Board, the potential risk to maintaining the company's liquidity may be the situation on the financial markets. A sharp rise in metal prices on world markets, forcing greater involvement of working capital for the implementation of quantitative sales targets could also have a negative impact on liquidity.
The companies currently have sufficient potential to take out new loans. Despite the uncertainty of the market, the banking sector has increased its activity, particularly in regard to companies with a better, more stable financial condition.
Sensitivity of the Group's results on the risk of volatility of global metal prices and exchange rates