At constant debt level and constant hedging, a 1% increase in the interest rate on the net debt at 31 December 2013 would result in an increase in the interest expense of €0.8 million per annum (before tax), net of the impact of hedging instruments. Inversely, on the same net position after management, a 1% reduction in the interest rate would reduce the interest expense by €0.2 million.
3.4
RISK OF FLUCTUATIONS
IN COMMODITY PRICES
Risk identification and measurement
The Group is mainly exposed to price changes in the raw materials used in its production processes, either through its purchases of manufactured products or more directly its purchases of primary or transformed raw materials. The prices of these materials fl uctuate with changes in supply and demand, and thus are beyond the Group’s control. Their fl uctuation could lead to an increase in the costs of production of some components. the inability to pass through this increase in the selling prices could aff ect negatively the Group’s profi tability.
The main raw material, excluding energy, used by the Group is nickel, the prices of which are negotiated on the London Metal Exchange (LME), an international commodities market. Its other purchases of non-ferrous metals, which are less signifi cant, concern cobalt, cadmium and lithium. Cobalt prices are negotiated over the counter based on the LME’s quotations. The price of cadmium is indexed to that published in the London Metal Bulletin. Lithium prices are negotiated directly with the suppliers.
The Group’s exposure to fl uctuations in the price of nickel aff ects the Industrial Battery Group division, whose annual consumption (net of recycling) is about 1,500 to 2,000 metric tons.
The average price of nickel on the LME dropped by 14% between 2012 and 2013, from an average price of US$17,536 per tonne in 2012 to an average price of US$15,020 per tonne in 2013.
Risk management
In order to protect itself against fl uctuations in the price of nickel, the Group‘s hedging policy consists mainly of a hedging pool covering all or part of estimated needs within the IBG division (excluding small nickel batteries activities). As of 31 December 2013, more than 60% of IBG’s forecasted total needs for the fi rst six months of 2014 were hedged (excluding small nickel batteries activity). This is done by purchasing forward contracts or other derivatives such as swaps and/or options denominated in US dollars, the currency used to buy nickel.
The hedging policy, and its implementation, must be approved by a special committee comprising the Group General Manager, Group Purchasing Director, IBG General Manager, and the Group Chief Financial Offi cer.
The general principles for the accounting treatment of derivatives used to hedge the risks of fl uctuations in commodities prices are explained above in note 2.29 to the consolidated fi nancial statements in the paragraph relating to cash fl ow hedges.
Gains and losses resulting from hedging contracts are recognised in cost of sales of the division whose future needs are hedged when these contracts satisfy the criteria for hedge accounting under IAS 39.
If these contracts are not eligible for hedge accounting under IAS 39, then the realised gains and losses are recorded in “Other operating income and expenses”.
2013 CONSOLIDATED FINANCIAL STATEMENTS
6
Notes to the consolidated fi nancial statementsAs at 31 December 2013, the Group purchased the following fi nancial derivatives to hedge the risk of changing commodities prices:
Contract market value at 31 December 2013
(in € million)
Nominal value
of contracts Future cash fl ow hedge value hedgeFair Non allocated (trading) Total
Silver swaps 0.0 0.0 - - 0.0
Nickel swaps 8.5 0.5 - - 0.5
TOTAL 8.5 0.5 - - 0.5
The impact from existing hedges on the Group’s consolidated fi nancial statements at fi nancial year end is shown below:
Amount in shareholders’ equity as at
31 December 2013 income statementImpact on 2013
Sensitivity of impact on shareholders’ equity to an increase of 10% in the nickel and silver prices
Sensitivity of impact on shareholders’ equity to a decrease
of 10% in the nickel and silver prices
Silver swaps 0.0 - 0.0 0.0
Nickel swaps (0.4) - 0.7 (1.0)
TOTAL (0.4) - 0.7 (1.0)
As indicated in the above table, the impact from existing nickel and silver hedging instruments on Group consolidated equity resulting from a 10% increase of nickel and silver market prices would be €0.7 million. A decrease by 10% of the nickel and silver prices would result in a symmetrical negative impact of €1.0 million.
3.5 CURRENCY RISK
Risk identification and measurement
Given the geographic diversity of its facilities and its activities, the Group is exposed to exchange rate fl uctuations, particularly in the euro-US dollar parity, but also in the euro- and US dollar- Swedish krona parities and in the US dollar-Israeli shekel parity. Changing parities can thus have a signifi cant impact on the Group’s fi nancial position and on the comparability of certain data from one year to the next. The impact may arise in two ways:
translation risk: the risk associated with movements in a
currency other than the euro in which a Group company maintains its fi nancial accounts; and
transaction risk (operational and fi nancial): the risk
associated with movements in a currency other than that in which a Group company maintains its fi nancial accounts. The Group‘s exposure to currency risk stemming from its companies’ purchases and sales in currencies other than their functional one (transaction risk) mainly aff ects those units engaged in both manufacturing and marketing, while the purely sales units mainly make their purchases and bill their clients in their functional currency.
The principal currency risk aff ecting manufacturing units with an extensive international activity concerns their local currency’s parity with the euro and the US dollar, a currency in which the Group earns an average of between 35% and 45% of its revenue.
The following table shows the respective weightings of the principal currencies in the Group’s revenue:
Euro USD GBP Other currencies
2013 fi nancial year 44% 47% 3% 6%
2012 fi nancial year 46% 44% 3% 7%
2013 CONSOLIDATED FINANCIAL STATEMENTS
6
Notes to the consolidated fi nancial statements
The identifi cation and measurement of transactional currency risks is carried out locally by each entity, and sent to the Group’s treasury offi ce on a quarterly basis. The treasury offi ce then consolidates the existing and forecast positions by currency pairs. The Finance Department uses these consolidated positions to make decisions relating to management of these risks and their potential hedging. These transactions may be implemented either centrally or locally under the supervision of the Group’s treasury offi ce.