Risk Factors

Risk factors

2005 witnessed a slowdown in the economy, primarily attributed to a rise
in oil prices and inflation rates, natural disasters both local and
abroad, and unrest in Thailand’s South. These risk factors substantially
affected business operation. SCG tracked these factors closely in
management risk and assessing the business impact in order to take
proper measures for the Group’s businesses as follows:

1. Major Operational risks for Group companies

1.1 Chemicals Business

1.1.1 Risks arising from the fluctuations from prices of raw materials
and finished products in the world market.

The prices of chemicals products and a core raw material (Naphtha) have
natural disasters both at local and abroad as well as the changes in the
demand and supply of petrochemical products and main raw materials used
in the production process. The impact of these factors has been both
positive and negative, thus the Group has implemented various measures
including necessitating close tracking, analysis, and assessment, as
well as the formulation of appropriate risk management polices, such as
sourcing forward as a price hedge; developing synergies among various
production lines for further integration; focusing on high value-added
products with higher margins yet less

1.1.2 Risks arising from water shortage

The prolonged drought and the critical water shortage in the country’s
eastern region could have affected the production rates of the Chemicals
Business. However, the government’s short-term and long-term measures to
deal with the water crisis and the Business’ solution to increase water
reserves enabled the Business to maintain its production rates.

  1.2 Paper Business

1.2.1 Risks arising from eucalyptus supply and prices

  Eucalyptus is a major raw material. Supply constraints on eucalyptus
  have pushed prices to a higher level driven by greater demand from
  other industries such as furniture and construction as well as the
  export of woodchips. To reduce these risks, the management promotes
  eucalyptus plantations and explores new domestic and neighboring
  sources of eucalyptus supplies.

3.  Cement Business

  1.3.1 Risks arising from raw material prices

  The cost of coal, the main fuel, has risen sharply, pushing cement
  production costs higher than expected. To reduce the risk, the
  management has taken various steps including the use of alternative
  fuels, exploration of new sources of supply, and making long-term
  purchase contracts.

2.  Risks arising caused by laws and regulations changes

  The Cement Business has been affected by new nationwide regulations
  issued by Department of Industrial Works covering dust, Nitrogen Oxide
  (NO_(x)), and Sulfur Dioxide (SO₂) emissions by cement plants. Surveys
  conducted to measure dust indicate all Group cement plants meet or
  exceed government standards. The Business is also studying approaches
  to reduce Nitrogen Oxide (NO_(x)) and Sulfur Dioxide (SO₂) emissions
  at all cement plants to meet the emerging standards in the future.

  1.4 Building Products Business

1.  Competitive risks

  The sluggish economy has heated up market competition. To enhance
  competitive advantages, the management places a strong emphasis on the
  research and development of products, services, and processes. New
  high value-added products that meet the demand and lifestyle of
  customers are constantly introduced. At the same time, to reduce risks
  arising from heavy reliance on the domestic market, the Business has
  expanded its export base.

  1.5 Distribution Business

1.  Competitive risks in the logistics market

  The dramatic growth in the logistics market has drawn more new
  competitors and the increased transportation costs due to higher oil
  prices can entail risks. To minimize such risks, the Distribution
  Business has taken many initiatives to enhance competitive edges such
  as developing multi-purpose vehicles to accommodate different types of
  goods; implementing advanced IT systems to ensure the efficient
  transportation management; and establishing a truck terminal to ensure
  there are enough trucks to meet the needs of customers with
  competitive price.

  1.5.2 Risks arising from manufacturers selling direct to customers in
  international trading

  As trading representatives for companies both within and beyond the
  Group, the Distribution Business risks losing revenues and market
  shares if the manufacturers deal directly with customers. To lower the
  risks, the management focuses on exploring new product suppliers and
  increasing value for products and services to achieve goals as agreed
  upon with customers.

1.  Financial risks Major risks are as follows

    1.  Interest rate risk

  The Group continues to manage interest rate risks by giving preference
  to loans at fixed, rather than floating, rates at a ratio of 70:30 of
  total loans. In addition, financial instruments have been used to
  manage the risk such as interest rate SWAP, which helps stabilize rate
  at appropriate level.

2.  Foreign exchange rate risk

  The Company reduces foreign exchange rate fluctuation risks by raising
  funds through domestic debentures and other financial instruments,
  such as SWAP and Forward, which move the risk to Baht, rather than
  foreign currencies. As at year end 2005, the Group’s debt denominated
  in foreign currencies accounts for only 1 percent of total debt.
  Furthermore, the Group exports generate foreign currency, providing a
  natural hedge to cover foreign-currency denominated debt.

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.