Explanation of relevant risks
In the following sections, the risks associated with our business are explained according to our risk clusters. The main measures and instruments we use to counter these risks are also described here. We have separately indicated risks and risk-relevant issues that we currently classify as potentially medium to high.
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 limit the associated risks by implementing a range of specific measures:
For example, to ensure the supply of copper concentrates for our facilities, we have entered into 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. The risk of volatile treatment and refining charges on the spot market is also limited by the long-term nature of the agreements.
Overall, the recycling facilities were well supplied during the past fiscal year, thanks to our extensive international supplier network. From today’s standpoint, we also expect a full supply situation and full utilization of the facilities for fiscal year 2018/19. There are ongoing refining charge volatilities due to the general metal price trend, the collecting behavior and inventory management of the metal trade, the international economic situation, and competition for the secondary raw materials relevant for Aurubis.
A key means of countering risks within the supply chain is Business Partner Screening. This instrument analyzes existing and potential business partners to assess their integrity in relation to social and ecological criteria, among other factors. The focus of our interest is on topics such as compliance, corruption, human rights violations, and environmental aspects. The decision to enter into a contract with business partners with increased risk is only made after extensive review, and in consultation with the Sustainability and Compliance departments.
The material for the facilities producing copper products mainly comes in the form of copper cathodes manufactured within the Group. This allows us to simultaneously generate higher added value and control the quality of copper products during the entire process. We also procured a sufficient volume of copper-bearing raw materials for the production plants belonging to Segment Flat Rolled Products. In this case, we also expect a similar situation for the coming fiscal year.
Overall, plant availability was satisfactory. There were smaller, unscheduled shutdowns in the course of the fiscal year.
We took organizational measures to handle potential incidents that could result from events such as flooding or fire. These included alarm plans and routine drills for the purpose of training our employees. We also addressed the risk of malfunctions with regular maintenance work and by keeping critical replacement parts on hand.
Taking into account the measures described above, we regard the risk of insufficient supply as “medium” and the risk of strongly limited availability of our production facilities as “low.”
We deal with logistics risks by implementing a thorough, multi-step selection and evaluation process for service providers, by avoiding single sourcing as far as possible, and by preventively developing back-up solutions. We also have an international network of qualified service providers at our disposal. This helps us to, for example, prevent weather-related risks in the transport chain by contractually arranging a selection of appropriate transport alternatives.
In addition to supply and production risks, the Aurubis Group also faces sales risks, which we classify as “medium.”
Generally speaking, risks can arise from negative deviations from our predictions of the markets’ economic development, which we have outlined in the Forecast Report. In particular, a weakening of the overall economy in Europe can negatively impact demand for our products. This applies to our sales of copper products such as wire rod, shapes, and the portfolio of Segment Flat Rolled Products, as well as sulfuric acid.
With economic analyses and estimates regarding economic trends, we are in a position to adjust our individual sales strategies to changing conditions as needed, thus countering any risks that arise.
Cathodes that Aurubis did not process further internally are sold on the international copper cathode market.
Business partners on the sales side are also assessed using Business Partner Screening. The statements made in the previous section “Supply and production” can be referenced in this regard.
Energy and climate
Energy prices increased in the past fiscal year. We have safeguarded electricity prices in the long term at an internationally competitive level through our electricity contract, which has been in effect since 2010. This covers most of our electricity demand across the most important German sites. We also deal with fundamental supply security, as well as the potential and limitations of more flexible energy sourcing, which is becoming increasingly necessary due to the rising, 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 difficult to quantify reliably because of the ongoing uncertainty of the legal situation and the changing political conditions. We expect the tax burden to increase in the medium term due to the amendments to the German Renewable Energies Act (EEG) and the Combined Heat and Power Generation Act (KWKG) in 2017, as well as the Grid Fee Modernization Act (NEMoG). The European Commission’s decision of May 28, 2018 in relation to the state aid investigation into network charge exemption in previous periods negatively affected Aurubis, entitling the German state to reclaim around € 3 million plus interest, which we recognized in the income statement in the fiscal year reported by setting up a provision.
Of particular political relevance is the copper-producing industry’s retention, as of 2021, of the special carbon leakage status with regard to the allocation of emission trading allowances. The completion of the decision-making process is still pending. The situation regarding the allocation rules that are to apply as of 2021 is currently difficult to predict. However, taking into account the political goals of the Paris Agreement, we expect a decline in the free allocation of allowances for companies at risk of carbon leakage. The CO2 price increased substantially in the past year. The supply of CO2 certificates is set to be significantly reduced in the coming trading period, which should raise prices considerably. The political decision-making process regarding the form and amount of compensation for indirect CO2 costs in electricity starting in 2021 will only start in the middle of the coming year. We also expect rules to tighten in this area, too, which could lead to a reduction in the compensation granted. On the whole, we expect considerable cost increases in the medium term as a result of the EU emissions trading system. These are likely to put significant strain on the company.
On the customer side, increasing demands for transparent goals and strategies related to effective production processes, energy, and CO2 efficiency could influence future copper product sales, particularly when it comes to customer acquisition and retention. We are countering this with steps such as annual climate reporting and evaluations of such reporting conducted by the CDP (formerly the Carbon Disclosure Project).
In the future, the topic of energy and the associated risks, currently classified as “medium,” will continue to be very important for Aurubis as an energy-intensive company.
Finance and financing
Metal price and exchange rate fluctuations represent a potential risk in the buying and selling of metals. Foreign exchange and metal price hedging substantially reduce this risk. Metal backlogs are hedged daily with financial instruments such as spot and forward contracts. Similarly, spot and forward exchange contracts are used to hedge foreign currencies and, on a daily basis, to minimize foreign exchange risks arising from exchange rate fluctuations affecting foreign currency metal transactions. We only select creditworthy firms as counterparties 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 are 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 also do not foresee any increased risks for the future.
The liquidity supply, which is very important for the Aurubis Group, was secured during the past fiscal year. The credit lines at the banks were also sufficient. The Aurubis Group has a stable financial situation in the new fiscal year as well and can finance possible fluctuations from operating business through its credit lines. Overall, we classify the finance and financing risks 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 want to achieve greater flexibility on the sales market by expanding our granulation capacities, among other things.
In addition, environmental risks resulting from the possible failure to comply with thresholds and from violations of requirements can have legal consequences. We ensure the environmentally sound operation of our production facilities, in part to prevent these situations. We are an international leader in environmental protection, which is confirmed by annual certifications in accordance with DIN EN 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 for ensuring performance quality. We have established different measures that are intertwined with each other so that Aurubis can continue to count on employees’ knowledge. Among these are partnerships with universities, through which we establish ties with qualified young people, and qualification measures, through which we foster the development of professionals and managers within the company.
Occupational safety and health protection are high-priority areas for us. We focus on individual responsibility, detailed hazard assessments, and training, as well as on short-term and medium-term goals with the objective of achieving our Vision Zero – that is, no accidents.
The violation of laws can have serious consequences for both Aurubis as a group and for its employees and business partners. We therefore consistently follow all legal requirements. Significant compliance risks are identified, analyzed, and addressed by Compliance Management. We counter legal and tax risks with organizational procedures and clear management structures. We closely follow political discussions on tax issues, for example on the financial transaction tax and capital tax, as well as their possible effects.
Aurubis is additionally subject to IT risks that can impact areas such as supply, production, and sales. These risks were taken into consideration in the company’s risk assessment. From the current perspective, however, these do not pose a significant threat due to the risk minimization measures described in the following.
We handle risks related to the availability of our IT systems with continuous monitoring, redundant infrastructure, and continuous adjustments to the state of the art in IT. We counter the risks of possible incidents or disasters with the redundant design of our IT infrastructure, as well as data recovery and continuity plans. We minimize the risks that can result from unauthorized access to company data, as well as cybercrime, by restricting access rights, carrying out security reviews, and using 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.
Non-financial risks within the scope of the Non-financial Report
Non-financial risks were assessed in accordance with the CSR Directive Implementation Act. In the process, no non-financial risks were identified that were very likely to cause serious negative impacts on employee and environmental matters, on respect for human rights, on the prevention of corruption and bribery, or on social matters within the meaning of Section 289c (3) of the German Commercial Code (HGB). Nevertheless, it is important to us to handle non-financial risks even if they are evaluated as non-material according to the strict definition of the CSR Directive Implementation Act. We have developed and implemented related management approaches to address these non-financial risks.