Risk Factors

Risk factors

As The Siam Cement Public Company Limited is a holding company, its revenue and risks depend on affiliates’ business risks.

The Group’s better performance partly stemmed from internal business
efficiency improvement correlated with the changing environment.
Examples were improvement of production efficiency, services, marketing,
selling, and logistics systems to increase sales as well as reducing
service costs, administration, interest, and financial expenses. This
led to total advantage for the Group. Nevertheless, business is not able
to escape from various business risks that impact both opportunities and
threats. Such risks are classified hereunder:

1. Operational risks for Group companies

Economic, social, and political changes in 2004 created risk factors
that may affect to business operation, such as increases in petroleum
prices; acts of terrorism and unrest in Thailand’s South; the spread of
bird flu; the impact on exports of the strengthening of the baht against
the US dollar; etc. The Siam Cement Group tracked these factors closely
in managing risk and assessing the business impact in order to take
proper measures for the Group’s businesses, as follows:

Petrochemicals Business

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

market.

  The prices of petrochemical products and a core raw material (Naphtha)
  have fluctuated appreciably in world market, due to political factors,
  such as the situation in the Middle East and the threat of terrorism,
  and to economic factors, such as the changes in demand and supply of
  petrochemical products and main raw materials. 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 policies, such as sourcing forward as a price hedge;
  developing synergies among various production lines for further
  integration; achieving greater efficiency to lower production costs;
  etc.

2. Risks arising from manufacturing

  Petrochemical processing does entail safety and health risks, as well
  as risks to plant and equipment from fires, explosions, leaking gas
  pipelines, emission and other unforeseen threats. The Group has always
  paid great attention to these risks and has put in place strict
  policies and practices that meet international petrochemical industry
  standards. Facilities undergo regular inspection, while staff have the
  best equipment available and perform regular emergency drills. In
  addition, the Group carries comprehensive insurance cover for main
  assets used in operations.

Paper and Packaging Business

1. Risks arising from eucalyptus supply and prices:

  Eucalyptus is a major basic raw material. Supply constraints on
  eucalyptus result from limited tree planting areas and the limited
  time window of about 5 years when the wood is mature enough for
  harvesting. This has pushed prices to a higher level than forecasted,
  causing unavoidable increases in the cost of production. To reduce
  these risks, the management promotes eucalyptus plantations;
  undertakes raw materials and alternative sources research and
  development; makes long-term purchasing plans; and merges similar
  operations for more effective management of operations and raw
  materials supplies.

2. Risks arising from recovered paper supply and prices:

  Recovered paper is another basic raw material in this business line.
  In addition to initiatives comparable to those mentioned in 1, two
  additional practices have helped reduce costs: increasing the number
  of receiving stations for recovered paper and improving supply chain
  management to better coordinate with production plans with lower cost.

Cement and Building Products Business

  1. Risks from raw materials price:

  The main raw materials in the cement business are limestone and fuel.
  Limestone comes from domestic quarries under government concessions.
  This year the concession covering the Ta Luang plant is under process
  of extended approval, making it necessary to find alternative sources
  in the area and incurring higher shipping expenses, thereby,
  increasing cement production costs. At the same time, the cost of the
  main fuel (coal) has risen appreciably. These factors have pushed
  average production costs higher than estimated.

  Steps taken by the management to reduce risks such as these include
  explore new domestic and neighbouring sources of supply; long-term
  purchase contracts; and conducting research and development programs
  on raw materials and substitutions.

  In addition to cement being marketed as a finished product, it is also
  a main raw material for range of building products. As its cost rises,
  it has direct impact on the production costs of the Building Products
  Business. To minimize this risk, the management follows a strategy of
  designing and developing new products that add value and meet the
  needs of the market.

2. Risk 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 (SO_(x)) emissions by cement plants with
  a 2-year implementation deadline. In case that the plants are unable
  to meet the standards, authority will then order kilns shut down. To
  reduce this risk and to preserve the surrounding environment, the
  management takes precaution steps to ensure that all required
  regulations are met. The best practices operated by plants are
  according to laws and regulations i.e. indicators measuring on dust,
  Nitrogen Oxide, and Sulfur Dioxide emissions. Surveys conducted
  indicate all Group cement plants meet or exceed government standards.
  The Group has a policy of monitoring all facilities closely and
  implementing preventive and corrective measures in advance.

  Distribution

1. Business competition risks

  These risks arise from both existing and new competitors who may have
  some strategic competitive advantages in such areas as types of goods
  and services; cost of goods and transportation; or investment capital.
  To lower such risks, to strengthen competitiveness, and to better meet
  customer needs, the Distribution Business has implemented a range of
  policies that cover management practices and the use of leading-edge
  software, such as Customer Relations Management (CRM); Transportation
  Management System (TMS); and Supply Chain Management (SCM). In
  addition, new, more comprehensive service systems have been developed.

2. Credit risks

  Extending credit to foreign customers can entail risks, because
  information about their credit standing is limited, especially in
  countries where the Group has no offices. To minimize this risk, the
  Group has a policy of requiring letters of credit or remittance
  guarantees. In addition, a credit committee has been established to
  screen credit extensions, control funding, followup on credit
  collections, and build a customer database to better manage credit.

3. Risks arising form inappropriate management of distribution channels

  Risks arising from inappropriate management of distribution channels
  may be opportunity losses from sales and services. The Distribution
  Business is managing this risk by enhancing the capabilities of
  distributors and by providing information useful in developing
  competitive distribution methods through better technology. The
  Distribution Business has entered a cooperative agreement with Do It
  Best — a US leading retail distribution network handling construction
  and home improvement products — to overhaul the Cementhai Home Mart
  network to better fit changing consumer behavior that has seen a
  switch to buying from Modern Trade stores and a general increase in
  consumers purchasing construction and home improvement products
  themselves.

2. Financial risks

2.1 Interest rate risk:

  Changes in interest rates normally have an impact on operations.
  However, since prevailing interest rates at this time are at a low
  level and trends indicate any rise will be gradual, the risks from
  this source in the short run are minimal. In the long run, interest
  rate levels are uncertain, so the Group manages interest rate movement
  risks by giving preference to loans at fixed, rather than floating,
  rates in a ratio of 80:20 of total loans, thereby, minimizing any
  impact interest rate movements may have on operations. In addition,
  another method of managing this risk with other financial instruments,
  such as interest rate swaps that help stabilize rates at appropriate
  levels.

2.2 Foreign exchange rate risk

  The Company reduces foreign exchange rate fluctuation risks by raising
  funds through domestic debentures and other financial instruments,
  such as swaps and forwards, that move the risk to baht, rather than
  foreign currencies. At the end of the year 2004, the Group’s debt
  denominated in foreign currencies accounts for only 1 percent of total
  debt and has little vulnerability to foreign exchange rate
  fluctuations. Furthermore, Group exports generate foreign currency,
  providing a natural hedge to cover foreign-currency denominated debt.

2.3 Risks arising from providing financial support to Group companies

  The Group promotes a policy of Group companies having a financial
  structure appropriate to their operations. In some cases, Group
  companies may require loan guarantees against late payments or
  defaults that might result in lenders requesting The Siam Cement
  Public Company Limited to cover such obligations. The Company will
  accept such obligations only with Group companies in which it has
  management control or equal to its percentage of shareholdings when it
  does not have management control. The Group minimizes this risk by
  intervening to the least degree possible.

  To ensure proper oversight and timely tracking of these risks,
  management has established a risk warning system for all Group
  companies that triggers reports to the president of each business
  unit, to the audit committee, and to the Board of Directors. In
  addition, Group companies must submit remedial operational plans that
  clearly identify those responsible for follow up on quarterly basis.

3. Management Risk

  The Company is listed in the Stock Exchange of Thailand while none of
  shareholders or any group of shareholders holds more than 50%. Neither
  major shareholders nor any management has a conflict of interest with
  the Company. In addition, the Board of Directors conforms to the Code
  of Best Practices regulated by the SET. The Group strictly and
  concretely adheres to the Good Corporate Governance, employing
  business ethics, transparency and disclosure in every level of the
  organization. Each business unit has its own management team with the
  President or the Vice President responsible as the chairman. The
  Group’s Management Committee and the Board of Directors supervise
  business unit management, encouraging systematic and professional
  management, hence reducing most management risk.

Risk Management Policies

  The Siam Cement Group had an unofficial risk management policy for a
  long time prior to 2002 when a Group-wide, systematic risk management
  policy was instituted. That year, the Board of Directors established a
  Risk Management Committee made up of senior management from various
  level: Group, business units, and companies. Principles and practices
  were established for the entire Group to create the capability for
  competent, timely responses to changing circumstances.

  Risk management policies as follows:-

-   The Board of Directors, managements, staffs, and every office are
    responsible for risk: management, assessment, follow up, and
    ensuring a proper structure and procedures exist for efficient
    management risk.

-   Group business units must have comprehensive, consistent and
    systematic procedures for risk management with regular review,
    assessment, and follow up at least once a year to cope with the
    changing environment.

-   Incorporate risk management assessment practices in medium-term and
    annual action plans covering the entire organization and taking into
    account both internal and external risk factors with provision for
    managing risk and proper early warning signals.

-   Establish a risk management committee in each business unit to set
    policies, provide direction, and oversee the risk management system
    to ensure risk stays at a tolerable level and to provide staff with
    communication and training to ensure they understand risk and see
    the important of managing it effectively.

-   The Audit Committee has the role of reviewing risk management and
    reporting its assessment quarterly to the Board.

-   Build a culture of understanding and awareness of risk by
    establishing a knowledge base accessible to staff at all levels to
    study, research, and exchange ideas and experience about risk,
    thereby, fostering continuing development and improvements of risk
    management procedures that ensure an efficient vehicle exists for
    strategic management.