improved processing of the market through the combination of the purchase and sales activities and cost reductions in pro- duction and logistics. Higher risks result from hedging and accounts receivable management on account of the increased volume of business. Cumerio’s overall risk profi le is very similar to that of NA. The ongoing integration of Cumerio has not therefore caused any structural changes in NA’s risk and oppor- tunity management system.
Risks and risk management in relation to fi nancial instruments
NA’s business model includes the buying and selling of metals and has been infl uenced by exchange rate fl uctuations. Fluc- tuating metal prices and exchange rates represent a potential risk. The resultant tasks for hedging foreign exchange and metal price exposure were performed intensively. Our aim was to eliminate risks from under-hedging or over-hedging as far as possible. The fi nancial instruments employed therefore focus especially on the hedging of foreign exchange and metal prices. NA’s liquidity was assured at all times. The fi nancial instru- ments were suited to the fulfi lment of additional demands on future liquidity in the face of market-related fl uctuations in raw material prices as well as NA’s expansive business policy, which will also be pursued in future.
Credit risks on trade accounts receivable are primarily hedged by commercial credit insurances. In addition, we use other instruments such as letters of credit and guarantees to hedge receivables. The development of liquidity and trade account receivables and receivables from the pending price-fi xed sales agreements at the German companies is monitored at a weekly management meeting, attended by a member of the Executive Board, business unit managers and the risk mana ge- ment offi cer. We work exclusively with fi rst-class partners in all metal and foreign currency hedging transactions in order to limit the default risk.
We cover risks from metal price fl uctuations and foreign curren- cies as far as possible on a daily basis by means of hedging transactions with various fi nancial instruments. We offset incoming and outgoing metal quantities from underlying trans- actions against one another each day. Open positions are secured by hedging transactions on a daily basis, using spot and forward contracts to hedge metal and foreign exchange exposures.
We hedge expected receipts from foreign currencies as far as possible by forward contracts and options. This covers in particular the hedging of U.S. dollar receipts. Despite constant hedging, the feasibility of economically justifi able foreign exchange hedging over longer periods is limited.
Trends on the metal and foreign exchange markets as well as NA’s price position are also reviewed weekly at a management meeting attended by a member of the Executive Board, busi- ness unit managers and the risk management offi cer. Possible margin calls due to exchange transactions are taken into account. The open nominal volumes of our derivative fi nancial contracts and the fair value of all open contracts are disclosed in the notes to the fi nancial statements. NA offers its custo- mers the opportunity of price-fi xing limited metal quantities. If the metal prices change, default risks are possible if the price-fi xed volume is not taken up. These risks are not insurable and therefore represented a risk for NA on account of the signifi cantly lower copper price.
No going concern risks were discernible in the metal trading sector and the foreign exchange positions.
m a n a g e m e n t group management report c o n s o l i d at e d f i n a n c i a l s tat e m e n t s f u r t h e r i n f o r m at i o n Risk report
Further signifi cant individual risks for NA’s business
Financial risks
The unlimited availability of suffi cient liquidity is a basic requirement for the business operations. This is ensured by strong cash fl ow generation and the availability of unused short-term and long-term credit lines at the banks. The possi- ble economic repercussions of the fi nancial crisis can also affect the level of future cash fl ows at NA. In general, the fi nancial crisis has made access to the capital markets more diffi cult. This could have an impact on the generation of addi- tional liquid funds, i. e. on the further expansion of our busi- ness activities. In 2006, Cumerio issued bonds in the amount of € 125 million with a seven-year term. In some cases, bor- rowings and cash deposits have variable interest rates and are thus subject to interest rate risks, which are constantly moni- tored. The fi nancing conditions and the maintenance of exist- ing credit lines are dependent on the adherence to certain covenants, which have been complied with.
The plan assets for the fi nancing of the pension obligations are exposed to capital market risks. NA’s aim is to invest the assets in real estate, securities and funds in such a way that the pension obligations can be fulfi lled long-term by the future income from the investments.
Risks in the business environment and the industry
Insuffi cient supply of raw materials
The ample supply of the production facilities with suitable raw materials is of paramount importance for NA. Most of the raw materials needed for the production of copper are procured in the form of copper concentrates, while the remainder are fed into the process in the form of various recycled raw materials. We ensure a suffi cient supply of copper concentrates, our quan- titatively most important raw material, by concluding long- term procurement contracts with a variety of concentrate suppliers in various countries and continents. Our exposure to
production stoppages due to the possible failure of individual suppliers to deliver is thus reduced to a minimum. In addition, long-term agreements on treatment and refi ning charges reduce the impact on NA’s earnings of short-term price fl uctu- ations on the spot market for concentrates. NA only did very limited business on the spot market.
We procure the copper scrap and other recycled materials, which we need as further raw materials for our production processes, on the national and international markets. Our extensive supplier network represents an important success factor for our raw material supply. The decision on the exten- sions to our Kayser Recycling System (KRS-Plus project) in order to expand the processing capacities for complex secondary raw materials in the autumn of 2008 was an important step in the long-term raw material supply of our Company. This measure will consistently reduce our dependence on the vola- tile copper scrap market.
An adequate supply of raw materials was ensured throughout the fi scal year.
The supply of copper for our Copper Processing Segment was mainly ensured by our own output of copper cathodes. We were therefore able to control the quality of our copper prod- ucts throughout the production process from the refi ning stage to the end product. In addition to continuous full utili- sation of the Copper Production Segment, we were at the same time able to ensure very high reliability in the supply and quality of our products.