Significant risks and uncertainty factors
The Group’s results and financial positions are affected by a large number of factors, several of which are beyond the Company’s control. These include, for example, the political and economic conditions that affect the markets for steel.
The dramatic events of recent years on the global financial markets have been accompanied by increased general uncertainty, which also results in risks and uncertainty in the business operations. The consequent main risks and uncertainty factors encountered by the Group relate to the impact of the macro-economy on demand, existing financing and possibilities for future financing, as well as changes in value of fixed assets and operating assets.
Weak demand leads to a low rate of inventory turnover, which increases the risk of physical obsolescence in inventories.
The work of identifying and analyzing the risks and deciding how, and to what extent, the risks shall be addressed is a prioritized area in the Group.
Risks and uncertainty in the Group’s operations
Steel production takes place in a chain of processes. Disruptions in any part of the chain can rapidly have serious repercussions on the entire process. Thus, a disruption in the operations due, for example, to transportation obstacles and damage to assets resulting from, for example fire, explosions and other types of accidents can be costly. The risk that disruptions in one part of the process will have repercussions on other parts of the process can be minimized by keeping stocks of raw materials, work in progress, inventories of finished goods, as well as other types of inventory on as optimal a level as possible. Both property insurance and business disruption insurance are held in order to minimize the costs resulting from this type of risk.
The possibility to attract and retain skilled personnel represents a key factor in being able to conduct the operations with good profitability in the long term. Thus, skills development and management development are prioritized areas. The niche strategy is contingent also on a continued strong process and product development, and skills development in these areas is of particular importance.
The Group’s reputation can be eroded quickly if safety, environmental responsibility and ethics are called into question, and priority is given to these issues in the day-to-day work as well as in long-term training and work on influencing attitudes.
In an international business such as SSAB’s, there are also a number of financial risks in the form of currency risks, financing risks, liquidity risks, interest rate risks and credit risks. The management of these risks is governed by the Group’s finance policy which is described in greater detail in Note 27.
Risks and uncertainty in the steel industry
The steel industry is strongly affected by the business cycle for steel and the most important raw materials. The high percentage of fixed costs due to the large capital expenditures that characterize the steel industry also increases sensitivity to business cycle fluctuations. It is difficult to protect against this, but a focus on niche products is an example of how SSAB has chosen to minimize the cyclical nature of its earning capacity.
The transition to shorter term contracts for purchases of raw materials entails increased volatility as regards costs. To minimize this increased risk, there is a transition to shorter term price agreements also in conjunction with sales.
It is through a continued focus on developing its niche products that SSAB can maintain and, preferably, strengthen its position against competitors.
The system of carbon dioxide emission rights has resulted in new rules for companies in the steel industry. As the system functions today, there is a risk of distortion of competition due to the fact that a large proportion of steel producing countries in the world are not covered by the system.
External risks and uncertainty
There are a large number of extraneous factors that impact the entire steel industry and, therefore, SSAB. Examples include the introduction of various obstacles to trade, energy price trends and increased environmental requirements.
The work of managing environmental risks and increased environmental requirements is addressed in greater detail under the section about SSAB’s environmental activities.
The approximate effect in 2010 on profit after financial items and earnings per share of changes in significant factors is shown in the sensitivity analysis below.
||Change, %||Effect on profit, SEK millions||Effect on earnings per share, SEK 2)|
|Steel prices - steel operations||10||3,150||7.15|
|Volumes - steel operations||10||320||0.75|
|Iron ore prices||10||520||1.20|
|Scrap metal prices||10||610||1.40|
|Interest rates||1 percentage point||160||0.35|
|Krona index 1)||5||240||0.55|
1) Calculated based on SSAB’s exposure without hedging. If the krona is weakened, this has a positive effect.
2) Calculated based on a tax rate of 26.3%.