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.
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. We were able to fully supply our primary smelters with concentrates during the past fiscal year. The risk of volatile treatment and refining charges on the spot market is also limited by the long-term nature of the agreements.
The recycling facilities were fully supplied during the past fiscal year, thanks to our extensive international supplier network. From today’s standpoint, we also expect a very good supply situation and full utilization of the facilities for fiscal year 2019/20. 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 supplier-specific 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 unsatisfactory. There were multiple unscheduled shutdowns in the course of the fiscal year, especially in Hamburg, Pirdop, and Lünen. We formed an interdepartmental team with the objective of developing a deeper understanding about why the leaks occurred and how we can avoid them in the future. During the reporting year, this team worked on identifying the reasons and developing solutions to significantly reduce the frequency of these leaks.
We also took organizational measures to handle potential incidents that could result from events such as flooding or fire. Among these were emergency plans or regular exercises for the purpose of training our employees. We also addressed the risk of malfunctions by carrying out 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.” We adjusted the risk of strongly limited availability of our production facilities from “low” to “medium” due to the unscheduled shutdowns.
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 backup solutions. We also have an international network of qualified service providers at our disposal. This helps us to prevent weather-related risks in the transport chain, for example, 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.
Thanks to 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 are not processed further internally by Aurubis are sold on the international copper cathode market.
We are closely monitoring the current discussions about the possibility of additional trade restrictions or tariffs resulting from the trade conflict between the US and China as well as between the US and Europe. The same is true for the Brexit talks, though the possible impacts of that particular issue on the Aurubis Group are of minor importance from the current perspective.
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. Through an energy supply contract that has been in place since 2010, we have secured most of the electricity our main German sites need at an internationally competitive price. We also deal with fundamental supply security, as well as the potential and limitations of more flexible energy sourcing (for instance, as part of the northern German joint project NEW 4.0), 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 Energy Sources 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 costs to rise in the medium term due to the German Energy Collection Act (December 2018) and the Energy Line Extension Act.
The copper production and processing industry is expected to continue receiving free allocations of emission trading allowances for direct CO2 emissions between 2021 and 2030 due to its carbon leakage status. However, taking into account the political goals of the Paris Agreement, we expect a decline in the free allocation of allowances. The CO2 price increased substantially again 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 as of 2021 has started. The copper sector needs to remain eligible for compensation as a matter of principle.
Currently (as of November 12, 2019), the European Commission’s Directorate-General for Competition is striving to reduce the number of sectors with carbon leakage status. We are monitoring the process of redefining the state aid guidelines and are advocating for the copper sector to continue receiving electricity price compensation. On the whole, we see a risk of cost increases as a result of the EU emissions trading system.
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).
Aurubis takes the protection of the climate seriously. The company highlights the significance of this issue by publishing Scope 1 and Scope 2 emissions (CO2) as part of the separate Non-Financial Report (see the Non-Financial Report). Aurubis counters the risks of climate change with an energy management system at all of the main sites, among other things. The different energy efficiency and CO2 reduction projects outlined in the Non-Financial Report have prevented about 74,000 t of CO2 per year since 2013, contributing to the achievement of climate protection goals, the general shift in heating methods, and the internal CO2 reduction target of the current Sustainability Strategy. As mentioned previously in the “Supply and production” section, Aurubis is also subject to risks in the transport chain due to extreme weather. The company counters these risks through geographic diversification in the supply chain, the storage of emergency reserves to maintain production, and the availability of alternative logistics service providers, among other things. Furthermore, water levels (flooding/low water) are observed in the key waterways to be able to initiate countermeasures in good time if needed.
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.”
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, the risks are classified as “low” 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 ongoing 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 limit 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.
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 stone in certain sales sectors. The German Substitute Building Materials Ordinance, which is intended to create uniform national regulations for the use of substitute building materials, is currently in the planning stage and has a strong influence on the future use of iron silicate in road construction. We want to achieve greater flexibility in marketing iron silicate 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. Ensuring the environmentally sound operation of our production facilities helps 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. Due to the higher level of uncertainty regarding the marketing of iron silicate, we are increasing the risk assessment for environmental protection from “medium" to "high."
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. Responsibility for these issues rests with the management, the supervisors, and each individual in the company. Detailed risk assessments, audits, cross-site checks, training, and campaigns to strengthen employees’ safety awareness support our Vision Zero goal, which means zero work-related accidents, injuries, and illnesses.
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.
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 separate 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) and Section 315c (2) 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.