Risk Factors

Risk factors

In 2008, Thailand has faced the sluggish economy by several acute
internal and external factors. The major external factor is the subprime
mortgage crisis in the USA that affects the world economy. Many major
manufacturers have closed and there has been an increase in
unemployment. In addition, domestic political turmoil affected
investors’ confidence which led to rapid decline in major market
indices. SCG management was aware of these problems and implement
measures to maintain risks at an acceptable level. Important risks for
SCG include:

The risk of competition: The economic slowdown resulted in less
consumption and fiercer competition in terms of pricing, production
costs and services. SCG focused on developing high value-added products
and expanding its product lines to better respond to customer needs as
well as introducing new innovative services and distribution networks
expansion.

The risk from the fluctuation of oil prices: The escalation of oil
prices rose quickly and continuously in the 1st half of the year and
then dropped in the 2^(nd) half. SCG; therefore, had to monitor the
situation closely to adjust its strategies in line with the world
situation.

The risk of raw material and product prices fluctuation: The prices of
petrochemical feedstock and products are based on the global market.
Therefore, when there is change in demand and supply, the prices of
feedstock and products are consequently influenced and the company’s
performance affected. For the feedstock, SCG Chemicals had a better
management of feedstock flexibility to enjoy a more competitive
production cost. For products, the business tried to increase the sales
volume of high value-added products, which yielded more profits, and
expanded to new markets worldwide with a focus on high-reward customers.

The risk from less demand: Due to global economic crisis and the
slowdown in constructions of residential and government projects, the
demand for cement, building materials and paper products reduced
dramatically. SCG applied many strategies included: attempted to push
sales in existing markets and expand to new ones as well as export,
better managed the production volume to match with fluctuated demand,
maintained inventory at appropriate level, and implemented Customer
Relationship Management principles.

The risk of foreign exchange rate fluctuation: SCG has determined
various measures to manage risk of foreign exchange rate fluctuation by
raising more funds through local debentures and utilizing financial
instruments, such as SWAP and Forward to convert financial liabilities
in foreign currencies to Thai Baht. Consequently, the Group’s debt
dominated in foreign currencies as at the end of 2008 is equivalent to
only 10% of the total debt, comprising long-term debts and those of
overseas entities. SCG was able to mitigate such risks by entering into
natural hedge transactions for income denominated in foreign currencies.

The risk of liquidity: Apart from decline in demands, the global crisis
intensified banks consideration on granting credit lines, which
decreases the liquidity of the business in the country. SCG sees the
necessity of maintain an appropriate level of working capital by
reducing the volume of inventory, tightening approval criteria for
investment projects, postponing new and non-urgent projects or those
with long-term return on investment. Furthermore, the Group has raised
funds for the projects in progress by using services of stable financial
institutions and therefore, the liquidity risk was managed to be in an
acceptable level.

Risk Management Assessment Policy

The business operation in 2008 was challenged by several acute internal
and external factors, include the bankruptcies and losses of financial
institutions in the U.S. that affected the world economy, currency
fluctuations, and volatile oil prices due to fewer market. In addition,
domestic political tension and conflicts in the South of Thailand and
Cambodia all contributed to an economic slowdown. In order to run
business with stability, maintain its leadership and set a good example
for society, SCG’s management has adopted the risk management policy to
ensure sustainable development. Each business unit is required to assess
its financial, social and environmental risks at least once a year,
implement measures to maintain risks at an acceptable level, monitor the
efficiency of its risk management as well as develop and modify
appropriate risk warning signals in accordance with changing
environments.