Risk Factors

Risk Management

SCG has established extensive risk management procedures to track and
respond to risk factors affecting organizational goals and to manage
risks to an acceptable level. These procedures are defined in the “SCG
Risk Management Manual”. In addition, SCG appointed a Business
Continuity Management Committee. Our risk management performance in 2010
was highly satisfactory.

Roles and Responsibilities

The Board of Directors is accountable for setting and overseeing SCG’s
risk management policy and making sure that implementation is effective.
To this end, the Audit Committee evaluates risk management performance
on a quarterly basis. The management of each business unit appoints a
Risk Management Committee responsible for monitoring and controlling key
risks or significant changes that could have an impact on business
operations. Each committee assesses risks, establishes appropriate
response strategies, administers these strategies and prepares quarterly
reports for submission to SCG management.

SCG’s risk management activities are integrated with the Company’s
policy to support sustainable development. The Company has specified
social and environmental risk indicators relevant to this policy. Each
business unit uses these indicators to enhance the efficiency of
economic, social and environmental risk assessment. SCG’s overall policy
and guidelines aiming to create sustainable development in communities
and societies where SCG has business operations are set by the
Sustainable Development Committee.

In addition, SCG appointed the SCG Business Continuity Management
Steering Committee, responsible for defining policy and guidelines for
practice on sustaining business during emergencies or unusual situations
and minimizing the impact of unexpected circumstances.

Risk Management Process

The risk management process commences when the Risk Management Committee
of any business unit analyzes circumstances which may affect business
goals. The Committee prioritizes risks by considering levels of
likelihood and significance in order to identify which ones are most
important and in need of cautious management. The management and the
Committee then develop strategies or measures in order to manage
specific risks to the acceptable level. Management and the Committee
monitor risk management performance and improve the risk management
process on a continuous basis.

SCG’s risk management process is in accordance with the framework of the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company has applied these standards since 2002, expanding them to
encompass COSO Enterprise Risk Management, a process applied throughout
the company in order to achieve strategic, operational, reporting, and
compliance objectives. SCG’s risk management is recognized
internationally. It was classified in the Gold Class level of the Dow
Jones Sustainability Indexes (DJSI) in 2010, marking the third
consecutive year it won the highest rank.

Key Risks and Risk Management Strategies According to Sustainable
Development Guidelines
In 2010, SCG managed risks regarding economy, society, and environment
related to sustainable development as follows:

1. Economic Risks

Even though economic problems impacted on SCG’s business operations,
risks decreased, and risk management performance surpassed the previous
year level, which reflects SCG’s efforts to manage risks systematically
and on a continuous basis. Critical risks are summarized as follows:

1.1 Fluctuation of coal prices Coal is a primary source of energy for
cement and paper production. Average world coal prices showed an upward
trend in 2010, increasing by approximately 37% over the previous year
due to rising demand in China, while supply diminished owing to
transportation problems arising from adverse weather. As a result,
manufacturing costs for cement and paper exceeded projections. SCG has
taken counteractive measures such as increasing use of replacement
fuels, exploring new sources of fuel, entering into long-term purchase
contracts, and hedging prices. It invested in efficient energy
generating and consumption projects such as waste-heat power generators
(WHGs). The Company completed installation of WHGs in all its cement
plants during 2010.

1.2 Fluctuation of product and raw material prices The sales prices of
SCG Chemical products and its costs for raw materials fluctuate
according to global prices. In 2010, the price of naphtha soared by
approximately USD 100 per ton, on average, compared to the same period
the previous year due to rising crude oil prices, while the price of
plastic resin shrank by USD90 per ton as a result of increasing supply
from new entrants. In response, SCG has attempted to preserve market
share in countries where strategic customers are located; push sales to
foreign markets providing better yields; consistently develop high
value-added products and services conforming to customer wants;
accelerate forward-selling in order to increase sales opportunities; and
prevent risks by entering into hedging transactions.

1.3 Fluctuation of waste paper prices Prices for waste paper, a major
raw material used by SCG Paper, fluctuated significantly, and showed an
upward trend because of limited supply from manufacturers in the U.S.
and Latin America, while demand for waste paper rose in ASEAN. SCG Paper
responded by purchasing some waste paper directly from users, improving
manufacturing processes to enhance efficiency and reduce costs, and
closely monitoring price fluctuations.

1.4 Changes in consumer behavior Consumers today increasingly select
eco-friendly products. SCG is responding to this risk by focusing on
research and development of high value-added products and services and
by promoting environmentally friendly products under the “SCG Eco Value”
label. This label is applied to products that are green in their own
right and that have been made using green manufacturing processes. In
2010, sales of high value-added products and services accounted for 29%
of total sales, while sales of products labeled SCG Eco Value were 18%
of total sales.

1.5 Fluctuation in foreign exchange rates Many SCG business units are
involved in import and export and have loans denominated in foreign
currencies. Moreover, SCG has greatly expanded abroad. As a consequence,
foreign exchange rate fluctuations are an important factor affecting the
Company’s costs and revenues. To mitigate this risk, SCG appointed a
Finance Committee charged with determining policy and overseeing
efficient financial management, including the use of appropriate
instruments such as forward contracts and hedges. As a result, risks
from foreign exchange fluctuations have declined to a satisfactory
level.

2. Social Risks

Concern for social responsibility is one of the four core values of SCG.
In order to protect its good reputation and reduce related risks to the
acceptable level, the Company must firmly adhere to this value. Over the
years, SCG has been effective in undertaking CSR activities that have
generally been accepted. To support sustainable development, the Company
has organized a number of projects and activities engaging all concerned
parties.

The Company set three CSR goals: to expand the “Partnership Model”
project for collaboration to new regions in Thailand by 2014; to help
young people develop their capabilities in sports, sciences and
technology; and to strengthen communities by 2015. Measures in support
of these goals are as follows:

2.1 Partnership Model SCG and five other businesses operating in the Map
Ta Phut industrial estate have collaborated to organize the “Partnership
Model” project. The objectives are to earnestly develop clean and green
industry; to jointly solve problems on a priority basis; and to enable
industry and the community live and grow together with mutual support
and sustainability. The project has expanded to other nearby areas where
SCG operates.

2.2 Support for skills development among young people SCG has for
several years hosted the Thailand Rescue Robot Championship, providing
support to each years winning team to compete in the world competition.
Thailand’s representatives have won the World Robot Cup Rescue for four
consecutive years since 2006. In sports, the Company founded the SCG
Badminton Academy for the first time in Thailand to support development
of young athletes. SCG also continues to sponsor the Thai National
Female Junior Golf team and the Samut Songkram Football Club.

2.3 Disaster relief and support for local communities SCG has organized
various projects and activities fostering cooperation amongst all
relevant parties. The Company encourages employees at all levels to
volunteer for socially beneficial activities through the “Sharing
Opportunities, Drawing the Future” project. In 2010, floods struck many
areas in Thailand, causing severe and widespread damage. SCG worked to
alleviate the impact both during the emergency period and after flooding
subsided. Employees throughout the organization prepared survival packs
and sanitary wares made from corrugated paper; donated money; and
participated in the “SCG Restoration of 100 Schools and 100 Child Care
Centers” project.

In its regional business expansion, SCG places the same importance on
CSR as it does in Thailand. SCG focuses on hiring local workers and
increasing educational opportunities by providing unconditional
scholarships. SCG believes that individuals who receive scholarships
will enhance their nations development while also boosting SCG’s local
human resources to attain the knowledge and skills meeting our
standards.

3. Environmental Risks

Environmental responsibility is one of the three concerns of sustainable
development. SCG works to mitigate environmental risks systematically,
consistently monitoring results until the risks are within the
acceptable level. SCG applies these practices to its foreign units as
well.

SCG invited representatives of nearby communities to examine and measure
water quality at sites near our factories. Water quality achieved the
target outcomes that the company promised to the communities. As a
result, water from these sources can now be used for fisheries and
agriculture. Another example is risk management of projects in the Map
Ta Phut industrial estate. Environmental conservation is an issue of
high and rising concern worldwide. Consumers are gradually moving to
favor eco-friendly products and services. Recognizing these trends, SCG
aims to conduct business on a green basis. It has set three
environmental goals: application for USGBC certification according to
the requirements of Leadership in Energy and Environmental Design
(Leed); waste management; and reduction of greenhouse gas emissions.
These goals and supporting measures are summarized below:

3.1 Risk management at Map Ta Phut The Central Administrative Court has
ordered eight government agencies to temporarily halt projects in the
Map Ta Phut industrial estate and neighboring areas. Operations at a
total of 18 SCG project were thereby suspended. On September 2, 2010,
the Central Administrative Court ruled to revoke permissions to operate
granted under Thailand’s 2007 constitution. This included 11 projects
classified as adversely affecting the local community according to an
announcement by the Ministry of Natural Resources and Environment dated
August 31, 2010., Only a minority SCG’s projects are of types that might
be considered as having potential to adversely affect the local
community, along the lines of that announcement. SCG management,
coordinating efforts between the Company’s businesses and the local
community, managed to conform to Section 67, Paragraph 2 of the
constitution, which requires environmental impact assessments and public
hearings for projects affecting the public. In addition, SCG and other
businesses operating at Map Ta Phut collaborated to organize the
Partnership Model!! in order to solve problems on an urgent basis and
enable industry and the community to live together and grow with mutual
support and sustainability

3.2 LEED certification During 2011, SCG will apply for certification by
the United States Green Building Council (USGBC), an organization
dedicated to the promotion of energy-saving practices in building design
and construction. SCG renovated the headquarters building of SCG Trading
to serve as a model for energy savings, which won it a “Gold-Label”
designation by the Ministry of Energy for the first energy efficient
building of excellence in Thailand. SCG added other environmentally
friendly features to the energy saving framework, and will renovate the
Headquarters and SCG Trading buildings following practices to save
energy and reduce environmental impact. The green merits include reduced
water consumption and waste, higher air quality, and procurement of
green building materials. The renovation process is expected to finish
during the month of June 2011, allowing SCG to apply for certification
at the Platinum level.

3.3 Industrial waste management SCG has set a goal of zero hazardous and
non-hazardous wastes for landfill by 2012. In 2010, hazardous waste
accounted for just 1 % of landfill wastes. SCG has promoted green
business practices encompassing green manufacturing processes and
development of green products and services. It has also emphasized
efficient consumption of resources and energy, and reduction of waste
and pollution.

3.4 Reduction of greenhouse gas emissions Energy used in the production
process produces greenhouse gases, impacting on climate change. SCG aims
to lower greenhouse gas emissions by 10% by 2020 compared to the
baseline year of 2007. Long-term measures include preparation of
greenhouse gas emission records to be used as primary information for
reductions; study and development of technology for replacement energy
use; and advancement of machines to enable efficient energy consumption.
SCG Cement can decrease greenhouse gas emissions by approximately
300,000 tons per year by employing waste heat power generators to
produce electricity from excess heat created during the cement
manufacturing process.

At the Company’s units abroad, SCG is developing policy on safety and
environment, while also monitoring progress, evaluating performance, and
reviewing indicators, so that overseas operations achieve targets
rapidly and efficiently. SCG is expanding its performance audit to
encompass the assessment of safety and environmental practices at all of
its overseas investments.