3. Risk issues

Risk relating to Revenue and Profits

Raw material prices

The primary raw material for manufacturing carbon black is carbon black
feed stock oil, which is mostly imported and constitutes about 90-95% of
the total raw material cost and about 85-90% of cost of production. The
prices of carbon black feed stock oil are closely related to fuel oil
prices internationally. During the year the raw material prices remained
high as compared to 2002 more so in last 2 quarters of 2003 and if the
oil prices continue to remain high and any volatility and change in
demand / supply situation in the world oil market may affect the prices
of company’s raw material and its profitability in the year 2004.

The company always exercise prudent judgment in covering the larger
quantities of oil when the oil prices are low for requirement of future
periods and by this company gets ample time to monitor oil prices
closely and buy again when oil prices are low.

Carbon Black prices

The prices of company’s product “Carbon Black” of various grades is
generally governed by demand & supply situation in the world market,
international price trend, oil prices in world market and specific
features of the product. The company has the policy of fixing the price
with major customers on 3-6 months basis to provide stability in the
prices.

Any increase in oil prices, adverse world economic situation due to
continuous slow recovery of US and Japanese economies and its impact on
economies of various countries, reduction in consumption and impact on
Automobile Industry will affect the company’s profit margins. The
ability to pass on the full impact of increased cost of raw material
through higher selling prices of carbon black is very limited due to
competitive market condition of carbon black industry and the company
may be able to pass on the impact of increase cost only partially.

Exchange rates

The company exports almost 50% of its production. The domestic sales
prices are also indirectly influenced by exchange rates as the major raw
material is imported. The company does not have any dollar denominated
borrowings. As currently the raw material prices are high the company
expect to have net deficit of US dollar in 2004 and any strengthening of
Thai Baht will help company in buying the US dollar at lower rates thus
will benefit the company, however at the same time the weaker Thai Baht
does benefit the company for its export and domestic sales and any
appreciation in the value of Thai Baht may impact company’s revenues and
profits as it also affects the export competitiveness of the local
automobile & tire industry and therefore may impact our domestic sales
volume & pricing. This is a normal business risk and evenly poised

Thai Baht has shown strengthening trend during the current year and it
is expected that the strengthening trend will continue in the next year.

Risk from operations

Environmental risk

Generally our production process is environmental friendly and does not
generate any solid wastes. The liquid waste which is a process water is
discharged only after proper treatment. The waste gas (flue gas) is
combusted in dryer and boiler and flue gas is combusted through the
stacks. Flue gas samples are collected and tested regularly which are
within the maximum standard limits set by the government. In fact our
company is the first Asian Carbon Black manufacturing plant to receive
ISO 14001 certificate for ensuring the highest standards of environment
cleanliness and company continuously monitors its pollution control
system to adhere to the standards prescribed by authorities like
ministry of industry. The actual levels are routinely monitored by the
government and any situation of improper treatment carries environmental
and political risk. The company assigns highest priority to remain well
within the maximum allowable limit and has made substantial investment
in the necessary equipments over the year for treatment of wastes.

We have also received the international awards like Deming Prize, TPM
excellence award and Prime Minister Productivity award and these awards
include stringent criteria for environmental control, which the company
have positively demonstrated.

In the year 2002, the company also received ISO 9001: 2000, OHSAS-18000:
1999 and ISO/IEC 17025 for its quality systems and these certifications
also demonstrates company’s commitment for environmental safety.

Risks relating to marketing

Competitive Environment

Thai Carbon Black is one of the largest producers of Carbon Black in the
world. Due to its excellent quality and customer services together with
its low cost of production, Thai Carbon Black is competitively placed in
the world market. In addition, due to company’s capabilities to develop
Carbon Black grades as per the customers’ requirement, it is able to
meet important customer needs which give the company more competitive
advantage.

Domestically company is market leader and commands 54% market share.
Board of investment has some time back approved for new Carbon Black
plant in Thailand but company understands that the implementation of the
new plant will take another 1 years time and it will be manufacturing
certain specialty grades for specific requirements and it will not
affect company’s competitive position both in domestic and international
market.

During the year the company has formed Joint Venture (JV) company with
Private Chinese Enterprise in China with the share holding of 77% and
this will help company to establish strong production and customer base
in China and will leverage upon the various requirements of the customer
either from plant in Thailand or from the subsidiary company in China.

Financial management risks

-   Interest rate and foreign exchange risk on loans

  The company does not have any foreign currency loan and have very
  small amount of short term Thai Baht loan and is therefore not exposed
  to either exchange rate or interest rate risk on loans.

-   Interest rate and credit risk on Short Term Investments

Due to continuing low interest rate environment, the risk of lower yield
on Short Term investment is inevitable. It is company’s endeavor to
exercise significant prudence in selecting only healthy financial
institutions and fixing maximum exposure limit for each institution with
varying tenors upto maximum tenor of 1 year depending on funds
requirement. The company also tries to place the funds for longer
maturity to achieve higher yield.

-   Exchange risk on forex flows

  The company exports almost 50% of its production and at the same time
  the major raw material is 100% imported. Both exports and imports are
  dollar denominated. In the normal situation the volume of exports and
  imports is nearly matched and company follows the consistent policy of
  natural hedge. Only in the situation when due to high raw material
  prices, the company will have net long dollar deficit and follows the
  policy of uniform buying.

-   Risk from Product Substitute

  Silica is being developed as a probable product substitute. However,
  it is not a commercially developed product and it will be a long time
  before silica will become commercially viable and it may replace
  carbon black partially. Also its cost of production is much higher
  than carbon black. At present there is no threat from silica to carbon
  black industry.

External Risks

-   Global Economy

  With the liberalization of market based economies and global trade,
  breaking down barriers and shrinking the world into on big market
  place, no country or region can remain immune from the global economic
  trends. Any recession in major economics like USA, Japan and Europe or
  demand pick up or drop in China may adversely affect the growth of
  automobile industry and in turn carbon black industry.

  The company’s product is well established in the international market,
  which will help consistent salability during the period of economic
  recession.

-   Geo Political risk

  The geopolitical events like terrorism and Middle East tensions
  coupled with epidemics like SARS, bird flue etc have casted their
  shadows on World Trade, increasing cost and risk of business and
  impacting supply and demand cycles. These risks have increased
  substantially in past few years for which company uses proactive
  financial and market risk anticipation and analysis coupled with
  increased global awareness.