Explanation of relevant risks

The risks associated with our business are explained in the following sections 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 risks connected to this with the following measures:

To ensure the supply of copper concentrates for our facilities, we have concluded long-term agreements with a number of concentrate suppliers from various countries. In this way we are able to significantly 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 utilization of the facilities for fiscal year 2017/18. There are ongoing refining charge volatilities due to the general metal price trend, the foraging behavior and inventory management of the metal trade, the international economic situation and competition for the secondary raw materials relevant for Aurubis.

We also counter risks within the supply chain with our Business Partner Screening. Using this instrument, existing and potential business partners are analyzed 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 will only be made after extensive review, and in consultation with the Sustainability and Compliance departments.

The material supply for facilities producing copper products takes place mainly using copper cathodes manufactured within the Group. This allows us to generate higher added value and to simultaneously control the quality of copper products during the entire process. Copper cathode demand for the Segment Copper Products was mostly covered internally during the fiscal year. We were therefore additionally able to ensure our 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. In this case we also expect a similar situation for the coming fiscal year.

Plant availability was satisfactory overall. At times it was limited due to planned and unplanned maintenance operations.

We took organizational measures to handle potential incidents that could result from events such as flooding or fire. Among these were alarm plans or regular exercises 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 our described measures into consideration, from the current perspective 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 acceptance process for service providers, by avoiding single sourcing as far as possible, and by preventively developing back-up solutions. We have an international network of qualified service providers at our disposal and, for instance, prevent weather-related risks in the transport chain by minimizing contingency risks through contractual arrangements that provide for appropriate alternatives.

Sales

In addition to supply and production risks, the Aurubis Group also faces sales risks, which we classify as “medium.”

The yearly average for wire rod shipment volumes was slightly under that of the previous year. The main reason for this was a change in fire resistance standards for cables within the European Union, which led to uncertainty on the part of customers. However, this effect is temporary and we expect a stable market in the coming year.

For shapes, which are mainly used for flat products and pipes, demand was significantly higher than in the previous year. There is nothing that currently indicates a weakening of the very good level.

At the beginning of the fiscal year, prices for sulfuric acid came under pressure due to seasonal conditions. During the second quarter, a shortage occurred due to smelter shutdowns . Driven by strong demand, prices increasingly recovered in the further course of the fiscal year, particularly on the spot market.

Cathodes that Aurubis did not process further internally were sold on the international copper cathode market.

Business partners on the sales side are also assessed via the Business Partner Screening the statements made in the previous section “Supply and production” can be referenced regarding this.

Energy

Energy prices increased slightly in the past fiscal year. We are safeguarded in the long term by 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 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 ongoing uncertainty of the legal situation and the changing political conditions. We expect the tax burden to remain at the current level in the medium term due to the EEG and KWKG amendment (Combined Heat and Power Generation Act) 2017, as well as the Grid Fee Structure Modernization Act (NEMoG). According to present knowledge, there will be no significant additional charges from the state aid investigation regarding the network charge exemption in the past periods.

The fundamental retention of the special carbon leakage status for certain sectors starting in 2021 with regard to the allocation of emission trading allowances and CO2 electricity price compensation stands out politically. The completion of the decision-making process is still pending. However, we expect to see a rise in CO2 costs due to increases in CO2 prices resulting from the supply shortage of available CO2 certificates in the coming trading period (2021-2030). This circumstance was envisaged by politicians with the goal of complying with the Paris climate accord. In addition to the European regulations, an increase in the CO2 price is also being discussed in Germany. We expect costs to increase in the medium term overall, which could lead to significant strains.

On the customer side, increasing demands for transparent goals and strategies as relating to effective production processes, energy and CO2 efficiency could represent an influence on future copper product sales, particularly in terms of customer acquisition and retention. We are countering this with steps such as annual climate reporting and the evaluation of this reporting by means of the CDP.

In the future, the topic of energy and the associated risks, currently classified as “medium,” will also remain 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. This risk is substantially reduced with foreign exchange and metal price hedging. Metal backlogs are hedged daily with financial instruments such as spot and forward contracts. The same 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 this way. We have only selected good 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 were 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 was monitored closely. During the reporting period there were no significant bad debts. We also do not foresee any threatening trends for the future.

The liquidity supply is very important for the Aurubis Group and was secured during the past fiscal year. The credit lines at the banks were also sufficient. From the current perspective, we expect a corresponding trend for the new fiscal year as well. 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. This means that 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 others.

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 also to counter this. We are an international leader in environmental protection, which is confirmed by annual certifications in accordance with DIN 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 in terms of ensuring performance quality. We have established different measures that are intertwined with each other so that Aurubis can continue to count on employees’ know-how. 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 Aurubis as a Group and also for its employees and business partners. Therefore we consistently follow all legal requirements. Significant compliance risks are identified, analyzed and communicated by Compliance Management. We counter legal and tax risks with organizational procedures and clear management structures. We are closely following political discussions on tax issues, for example on financial transaction and capital tax, as well as their possible effects. In the anti-trust proceedings that were pending against Aurubis in Bulgaria, the ruling – positive for us – is now definitively legally binding.

Aurubis is additionally subject to IT risks that can impact the areas of supply, production and sales. These risks were taken into consideration in the company’s risk assessment. From the current perspective, these are of downstream importance due to the subsequently described risk-minimization measures employed.

We limit the risks of decreased IT system availability with continuous monitoring, technical precautions and necessary adjustments. We counter the risks of possible incidents or disasters with the redundant design of our IT infrastructure and with data recovery and continuity plans. We minimize the risks that can result from unauthorized access to company data and from cybercrime by restricting access rights, carrying out security reviews and using modern security technologies.

Furthermore, selected risks are largely covered by insurances. We rely on the expertise of an external insurance broker for this purpose.