Risk Factors

Risk factors

A slowdown in 2006 economy was primarily attributed to political
changes, higher energy costs, unrest in the South of Thailand, and
natural disasters both local and abroad. These risk factors
substantially affected the business operations. SCG, therefore, tracked
and investigated the situations closely in order to formulate a proper
policy on business operations by taking the following risk factors into
consideration.

1. Major Operational Risks for Group Companies

1.1 SCG Chemicals

1.1.1 Risks of fluctuating prices of raw feedstocks and finished
products in the world market

Prices of chemicals products and a core feedstock (Naphtha) have
fluctuated appreciably in the world market due to economic and political
changes, natural disasters, changes in demand and supply of chemicals
products as well as main raw materials used in the production process,
contributing to both positive and negative impact on the business. As a
result, the Company investigated and tracked the situations closely in
order to make a detailed analysis of the situations before formulating
appropriate risk management strategies. The business, therefore,
proceeded to continually cut the production costs and financial costs,
and to improve the production efficiency. In addition, the business
placed special emphasis on downstream and integrated chemicals industry
to develop synergies among various production lines for further
integration, and also focused on high value-added products with higher
margins yet less price fluctuations.

1.1.2 Risk of foreign exchange rate

The business launched a policy on minimizing the impact of foreign
exchange rate fluctuations by creating a balance between the prices of
chemicals products and the prices of feedstock (Naphtha) based on US
dollars, providing a natural hedge against exchange losses, making
forward exchange contracts and using other appropriate financial
instruments.

1.2 SCG Paper

1.2.1 Risks of waste paper and eucalyptus procurement

  As domestic packaging paper manufacturers plan to increase the
  production capacity by more than 700,000 tons during 2006-2007,
  demands for waste paper, core raw materials of packaging paper
  production, has increased. As a result, prices of waste paper in the
  country continue to show an upward tendency due to enormous
  competitions between companies. Therefore, to reduce the risks of
  waste paper shortage and price war, the management has launched a
  policy on increasing the procurement of waste paper from 65 percent to
  70 percent of demands through its own baling and container plants. The
  management has also planned to establish three more baling plants in
  2007, and to collaborate with SCG Distribution to procure waste paper
  more neighboring countries. The risk of procuring eucalyptus, core raw
  materials for the production of pulp, starts to decline due to a
  decrease in woodchip exports, resulted from stronger Thai Baht.
  Nevertheless, the management continues to promote eucalyptus
  plantations for paper and pulp production.

1.2.2 Risk of foreign exchange rate

  Continually strengthening and fluctuating Thai Baht has an impact on
  the production costs and sales revenue, particularly those from
  exports, thus contributing to a competitive pricing of cheap foreign
  imports. To minimize the risk of fluctuating foreign exchange rate,
  the management has emphasized on financial management of imports and
  exports together, and has also focused on the development of new
  products and services in order to gain an advantage over the
  competitors.

1.3 SCG Cement

1.3.1 Risk of fuel cost

  The fluctuating price of coal, the main fuel, pushed the cement
  production costs up higher than estimated. To reduce the risk, the
  management has taken various steps including the use of alternative
  fuels, exploration of new sources of energy supply, making long-term
  purchase contracts of coal, and investments in the projects that
  enhance energy efficiency.

1.3.2 Risk of declining demands

  At the end of 2006, demands for cement in the country declined due to
  floods in many provinces and a slowdown in the construction sector and
  public utilities projects. To cope with the risk, the management
  concentrated on exports to stabilize the production.

1.4 SCG Building Materials

1.  Risk of competitions

  The sluggish economy has heated up market competition. To enhance
  competitive advantages, the management has placed a strong emphasis on
  the research and development of products, services, and processes. New
  high value-added products are constantly introduced in consonance with
  the demand and lifestyle of customers. At the same time, to reduce the
  risks of depending solely on the domestic market, the business has
  expanded its export base extensively.

1.5 SCG Distribution

1.  Risks of competitions in the logistic market

  A large increase in the number of new competitors in the market for
  transportation and the increased transportation costs due to higher
  oil prices have an impact on logistics business. To minimize such
  risks, the management has taken many initiatives to enhance
  competitive edges such as developing multi-purpose vehicles to
  accommodate different types of goods, implementing sophisticated IT
  systems to ensure efficient transportation management, taking
  alternative modes of transport either by ships or by trains for
  economizing on costs, and establishing public truck stations to ensure
  enough trucks to meet the needs of customers at competitive price.

  1.5.2 Risks of the manufactures selling directly to the customers in
  the international trading

  As a trading representative of the companies both within and beyond
  the Group, SCG Distribution is at risk of losing revenues and the
  market shares if the manufacturers deal directly with the customers.
  To minimize that risk, the management focuses on exploring new
  products suppliers and creating more values for products and services
  to achieve the goals as agreed with the customers.

1.  Financial risks

Based on financial position and significant financial ratios, SCG is
able to pay debts on a regular basis. However, SCG may run more risks in
the following areas:

2.1 Risk of interest rate

  The Group continues to deal with risk management of changing interest
  rates by giving strong preference in fixed-interest loans to
  floating-interest loans at a ratio of 85:15, respectively. In
  addition, SCG utilizes other financial instruments such as Interest
  Rate SWAP to adjust ratio of fixed-interest rates and
  floating-interest rates to appropriate target.

2.2 Risk of foreign exchange rate

  SCG has made every effort to minimize the risks of fluctuating foreign
  exchange rates by raising more funds through domestic debentures and
  utilizing other financial instruments, such as SWAP and Forward to
  convert financial liabilities in foreign currencies to Thai Baht,
  resulted in the Group’s debt denominated in foreign currencies
  accounts for only 1percent of total debt at the end of year 2006.
  Furthermore, for exports and imports that generate foreign currencies,
  SCG has utilized financial instruments such as Forward and Natural
  Hedging to minimize the fluctuations of exchange rate and the risks of
  debt and assets in foreign currencies.

Risk Management Policies and Risk Factors

SCG has implemented systematic risk management practices that conform to
international practices since 2003 as a part of its proactive
management. The objectives are to foresee any material business risks
and establish policies/strategies to ensure consistent operational
practices throughout the Group.

Risk Management Policies:

-   Establish a Risk Management Committee with the designated official
    at each business unit to set policies, strategies and practices to
    ensure efficient risk management.

-   The Audit Committee is responsible for reviewing risk management and
    reporting its assessment quarterly to the Board.

-   Provide early risk warning signals to determine what an acceptable
    level of risk is and to implement immediate measures to effectively
    manage the risks.

-   Adopt knowledge management to enhance efficiency, providing
    knowledge to staff and involving them in systematic risk management.