Risk Factors

Risk Management

Risk management is an essential tool to enable a corporation to achieve
its objectives and goals, adding value for the company, shareholders,
and other stakeholders in a sustainable manner.

Realizing the importance of this, the SCG Board of Directors has
stipulated that an effective risk management process be adopted to
manage risks that may affect the Group’s goals, keeping them at
acceptable levels under the oversight of the Audit Committee. The roles,
responsibilities and procedures involved in risk management are defined
in the ‘SCG Risk Management Manual.’ In 2011, the Group’s risk
management efforts were as follows:

Roles and Responsibilities

The Board of Directors

The Board of Directors is accountable for establishing the risk
management policy and overseeing the risk management of SCG both in
Thailand and in the countries where SCG invests. For its part, the Audit
Committee shall evaluate risk management to ensure that it is efficient,
effective and compliant with the established guidelines and encompasses
all related risks including those arising from global and regional
crises and the risks specific to each country where SCG operates.

The Management

The management takes responsibility for the risk management process by
establishing objectives, evaluating risks, establishing strategies, and
managing the risks to acceptable levels. Its responsibility also extends
to disseminating policy and providing guidelines in analyzing and
setting out strategies as well as disseminating them to the management
committee of each business unit and other concerned departments so that
risk management is incorporated into their operations. This will empower
SCG to meet the challenge of risks at both strategic and operational
levels on a timely basis and in response to the Group’s diverse range of
businesses. The SCG risk management structure is as follows:

1.  SCG Risk Management at the Corporate Level The SCG Risk Management
    Team consists of top executives from every business unit. The team
    is responsible for defining direction, policy, goals, and strategies
    in managing risks that could affect SCG’s domestic and overseas
    business operations materially, and on a broad scale, at the global
    level, regional level and in the countries where it operates. To
    that effect, various working committees have been set up, each of
    which will be dedicated to a specific area to ensure autonomous
    management and enable it to closely keep track of the situation.
    These committees are as follows:

    1.  The SCG Risk Management Team takes charge of evaluating and
        monitoring risks and opportunities that could affect the overall
        operations of SCG. It is also responsible for defining policies,
        strategies, controlling risks and following up on risk
        management in accordance with the established policies and
        guidelines.

    2.  The SCG Sustainable Development Committee is accountable for
        setting up sustainability policies and raising sustainable
        development performance to international levels in the areas of
        safety, occupational health, environment, community and social
        responsibility, with the goal of setting examples for other
        organizations in Thailand to follow. The Committee is also
        responsible for monitoring and reporting various indicators to
        the SCG Management Committee.

    3.  The SCG Business Continuity Management Steering Committee takes
        responsibility for defining policies and business direction
        relating to business continuity. The SCG BCM Steering Committee
        also sets measures to prevent risks from business interruptions
        due to natural disasters or unforeseen circumstances, and it
        defines approaches to mitigating the impacts of these problems.

    4.  The SCG Financial Committee manages financial risks, sets out
        policies, develops the Group’s financial structure and defines
        approaches and strategies in managing risks arising from
        volatile foreign exchange rates.

    5.  The Commodity Hedging Price Risk Management Committee is
        responsible for defining policies, approaches and strategies in
        managing risks due to the increase or fluctuation of prices of
        major raw materials and fuels used in the production process,
        enabling the Group to be more cost competitive in global
        markets.

    6.  Other committees have been set up by the Management as deemed
        appropriate.

2.  Risk management at a business unit level SCG encompasses a diverse
    rage of businesses. To ensure that the risk management of each
    business unit is efficient and can cope with its own specific risks
    on an effective and timely basis in conformance with SCG’s corporate
    risk management policy, the Business Unit Risk Management Committees
    have been established. Each of these committees comprises top
    executives of a business unit, and is accountable for assessing,
    setting out strategies, controlling and monitoring risk management.
    To ascertain that the Group has an enterprise-wide risk management
    policy in place and that it has been incorporated into the Group’s
    operations, SCG stipulates that the managing director and the
    management committee of each business unit integrate risk management
    practices into processes and designate a person as ‘risk owner’. A
    risk owner takes responsibility for assessing, analyzing risks to
    define response strategies for each company, following up the risk
    management results to develop strategies appropriate to changing
    circumstances, and reporting the risk management performance to Risk
    Management Committees at the business unit level and corporate level
    according to the significance and impact levels of such risks.

Risk Management Process

SCG has SCG has developed the ‘SCG Risk Management Manual’ to provide
guidelines and create a common understandings among all concerned
parties. As described in this publication, the Risk Management Process
involves the following key actions:

1.  Establish a ‘common language’ to ensure the same frame of reference
    for definitions of each type of risk factor.

2.  Evaluate and identify potential risks which may affect the business
    goals.

3.  Analyze and prioritize the importance of risks by establishing

    -   Risk analysis documents to provide definitions, indicators and a
        basis for assessing each important risk.

    -   Risk maps to provide a basis for assessment of the likelihood,
        significance and manageability of each risk.

    -   Control maps to analyze risk management status.

    -   Risk evaluation sheets to carry out risk assessment using actual
        data based on the prescribed criteria.

4.  Define strategies or measures to manage the risks to an acceptable
    level.

5.  Follow up the implementation of risk management strategies and
    overall performance of risk management.

6.  Continually improve risk management capabilities to enable the
    business to effectively define strategies in response to risks in a
    timely manner.

Key Risks and Management Strategies in Accordance with a Sustainable
Development Approach

In 2011, SCG managed risks associated with the economy, society and the
environment to ensure that it engages effectively in sustainable
development both in Thailand and in the countries in which SCG operates.
These risks are summarized as follows:

1. Economic Risks

  1.1 Impact of severe flooding This year Thailand was stricken by the
  worst floods in decades, which hit many provinces including Bangkok.
  The floods swamped several massive industrial estates, causing damage
  valued at hundreds of billions of Baht. Many offices and factories in
  these industrial estates, including SCG subsidiaries, were damaged.
  Because political crises and natural disasters have become more
  frequent and severe in recent years, the Management Committee has
  prioritized preparing for these critical situations, to prevent
  business disruptions and to mitigate the impact from such risks. To
  achieve these goals, the SCG Business Continuity Management Committee,
  both at the corporate and business unit level, which consists of
  executives and representatives from different departments, is
  accountable for closely monitoring situations to assess risks that may
  cause interruptions. It is also responsible for establishing a risk
  treatment plan, crisis management plan, and business continuity plan
  in the wake of any disaster. Further, the Committee designates the
  structures, roles, and responsibilities of the divisions in charge of
  overseeing business continuity management. When conditions show signs
  of rapid aggravation and deterioration, a war room will be established
  to monitor the situation and define guidelines and an operating plan
  to prevent problems. The Committee will coordinate with concerned
  departments, such as the Corporate Communications Office, Human
  Resources Department, etc., to communicate reliable, detailed
  information to employees and other persons involved, both within and
  outside SCG, to promote clear understanding.

  In the wake of the floods, SCG adopted the above measures, focusing on
  the safety of employees and all people concerned. The Group also
  offered immediate assistance to alleviate the widespread effects of
  the deluge, providing flood control equipment and temporary shelter
  for flood sufferers. It set up a relief center for SCG employees to
  provide assistance to affected staff and their families, thereby
  helping to reduce the burden on the government sector. To ensure the
  continuity of business operations, the Group established a Backup
  Office to provide services to customers and a Mobile Office to provide
  services to other supporting departments. (These efforts are described
  in SCG’s ‘Sustainability Report’, published separately.)

  Although a number of SCG subsidiaries and factories were ravaged, they
  all had insurance that covered flooding.

1.2 Fluctuation of fuel and raw material prices was at follows:

  Coal is a primary source of energy for cement and paper production.
  2011 saw fluctuation in world coal prices. The average Newcastle coal
  price was USD 121, increasing by USD 22 per ton on average or 22%
  compared to the same period of the previous year. Natural disasters
  like snow storms in China and the tsunami in Japan created great
  demand for coal during the early 2011. On the other hand, the Eurozone
  debt crisis in the latter half of the year shrank demand and reduced
  coal prices. However, in the long term, the demand for coal in China,
  India, and other countries around the world still shows upward trend
  and is expected to exceed supply. Consequently, the production cost
  for cement and paper will continue to rise.

  SCG has taken several counteractive measures such as increasing the
  use of alternative fuels, exploring new sources of energy, entering
  into long-term purchase contracts and hedging prices to mitigate price
  fluctuation risk. The Group also invested in efficient energy
  generation/consumption projects, such as a waste-heat power generator
  (WHG) enabling the reuse of waste heat from cement production.

  The main raw materials used in the manufacturing processes at SCG are
  as follows: Naphtha is a main feedstock in petrochemical production.
  Over the past year, the price of naphtha increased on average by USD
  214 per ton compared to the previous year, to USD 938 per ton, due to
  crude oil price hikes, while the price of the HDPE plastic resin rose
  USD 149 per ton to USD 1,373 per ton. The variance of HDPE – Naphtha
  gap reduced to USD 435 per ton, from USD 500 per ton, due to the
  higher supply from new entrants and shrinking demand because of
  concerns over the European crisis.

  In response, SCG attempted to maintain market share in countries where
  strategic customers are located; push sales to foreign markets
  providing better yields; consistently conduct research and develop
  high value-added products and services based on customer needs;
  accelerate forward selling to increase sales opportunities; and
  prevent risks by entering into hedging transactions. Waste paper is a
  major raw material in the production process at SCG Paper. In 2011,
  waste paper prices fluctuated dramatically and showed an upward trend
  due to the dwindling supply of waste paper as a result of Japan being
  hit by the devastating tsunami and a series of nuclear reactor
  explosions. The diminishing supply forced paper manufacturers
  throughout the world to rely on the limited supply of waste paper from
  the United States and Latin America. In response, SCG Paper resorted
  to purchasing some waste paper directly from users by increasing
  purchase points and bailing plants both locally and internationally.
  This effort ran concurrent with improving manufacturing process
  efficiency to reduce costs.

  1.3 Fluctuation of foreign exchange rates SCG has expanded its
  investment abroad, especially in the ASEAN nations, including Vietnam,
  Myanmar, Indonesia, Cambodia, Malaysia, and so on, to boost trading
  opportunities. In 2011, Vietnam, one of the countries in which SCG has
  invested, was wracked by high inflation and financial volatility,
  prompting its government to undertake several rounds of devaluation of
  the Vietnamese dong, the same scenario wreaking havoc in many
  countries globally. To ensure efficient and systematic risk
  management, the SCG Financial Committee takes responsibility for
  monitoring global economic and financial conditions, including the
  countries in which SCG has invested, to assess risks and impacts from
  fluctuating foreign exchange rates in various scenarios. Further, SCG
  adopts sensitivity analysis tools for analyzing variations of exchange
  rate and currency value, allowing the Group to forecast the potential
  effects of such changes and define response strategies in a timely
  manner, thereby reducing the risks to an acceptable level.

2. Social Risks

  2.1 Changing consumer behavior Consumer behavior has been changing,
  marked by an increasing preference for eco-friendly products.
  Foreseeing opportunities to mitigate such risk, SCG stresses the
  importance of research and development of high value-added products
  and services. To that effect, the Group has introduced the SCG eco
  value label which encompasses both ‘green process’ and ‘green
  product’. In 2011, sales of HVA products accounted for 32% of total
  sales, while sales of SCG eco value products accounted for 13%.

  2.2 Participatory involvement with communities and societies SCG
  realizes that business cannot survive, let alone thrive, if
  communities and societies fail. This is one of the material risks that
  the Group takes seriously. As a consequence, SCG attaches enormous
  significance to social responsibility, setting up a CSR division for
  each business unit so that they reach out to communities more
  effectively both in normal circumstances and times of crisis. This was
  very evident in late 2011, when Thailand was hit by the most severe
  flooding in decades. SCG gave assistance to its employees and also
  provided relief support and aid to flood-ravaged communities and flood
  victims at the company’s fullest capacity. The relief response covered
  four areas as follows:

-   Donating relief supplies such as meal boxes, survival bags, life
    jackets, boats, paper toilets, water purification units, etc. Rescue
    teams comprising SCG volunteers were sent out to help evacuate
    employees and their families from flood-prone areas. In their
    efforts, the rescue teams helped more than 800 SCG employees and
    their families to evacuate, while also evacuating 6,600 other flood
    victims.

-   Providing flood prevention equipment to the government and Bangkok
    Metropolitan Administration.

-   Supporting rebuilding after floods by running a clinic to provide
    consultation and advice about repairing and rebuilding flooded homes
    and infrastructure.

-   Preparing for future floods by introducing a long-term project to
    develop special-purpose flood shelters, such as floating houses. SCG
    also joined forces with the Department of Disaster Prevention and
    Mitigation to provide training for people on preventing and
    preparing for a flood.

  2.3 Life and health safety SCG emphasizes ensuring the safety of
  employees and business partners. The Group has established preventive
  measures related to machinery, plant sites, work stations and work
  procedures. SCG has also worked to instill safety awareness among
  employees, business partners and third parties. In addition, safety
  performance is designated as one of the key performance indicators to
  be followed up on and reported to the SCG Management Committee and
  Business Unit Management Committee on a monthly basis.

3. Environmental Risks Environmental responsibility is a major component
of sustainable development. Today, the planet has faced with more
pressing environmental issues as evidenced by increasing natural
disasters which are becoming more frequent and severe and the grave
threat of global warming. As part of society, SCG realizes these
problems and commits to developing itself as a green business. The
Group’s environmental targets encompass waste management and greenhouse
gases reduction. SCG has undertaken systematic efforts and constant
monitoring as follows:

  3.1 Industrial waste management SCG aims to achieve ‘zero waste to
  landfill’ by 2012.

  3.2 Greenhouse gases reduction Greenhouse gases are emitted from a
  variety of industrial processes. They have significant impact on
  climate change and contribute to global warming. As a consequence, SCG
  has set its sights on reducing greenhouse gas emissions by 10% by the
  year 2020, from the base year 2007. The long term measures begin with
  a systematic inventory of greenhouse gases that provides data for
  practical greenhouse gases reduction measures. We also undertake the
  study and development of alternative fuel technology and
  energy-efficient machinery. For its part, SCG Cement achieved a
  reduction of approximately 300,000 tons of greenhouse gases per year
  by recapturing waste heat from the cement production process for
  electricity generation, using waste heat power generator.

  3.3 Minimizing risks for projects in Map Ta Phut In September 2009,
  the Central Administrative Court ordered 76 industrial projects in the
  Map Ta Phut area to temporarily halt operations, 18 of which were
  operated by SCG Chemicals. On September 2, 2010, the Central
  Administrative Court ordered the revocation of the industrial licenses
  of the projects approved after the 2007 Constitution and falling into
  the 11 types of projects with serious environmental impacts under the
  Notification of the Ministry of Natural Resources and Environment
  dated August 31, 2010. This ruling affected a small number of SCG’s
  projects, which fell under the Notification. However, SCG management
  worked with the involved agencies and complied with all requirements
  stipulated by Article 67, Paragraph 2. At present, only one project is
  working toward Article 67, Paragraph 2 compliance and its
  environmental impact assessment report is being considered by the
  Office of Natural Resources and Environmental Policy and Planning.