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What are Umicore's main sensitivities?
Metals:
Umicore’s metal price risk can be split into three distinct categories: structural, transactional and inventory risks.
Structural Risk
Umicore is exposed to structural metals-related price risks. Those risks relate mainly to the impact that metal prices have on surplus metals recovered from materials supplied for treatment. Umicore has a policy of hedging such metal price exposure if forward metal prices expressed in Euros are above their historical average and at a level where attractive margins can be secured. The extent to which metal price risk can be hedged depends on the liquidity of the relevant markets.
Structural metal price sensitivity
The Precious Metals Services segment recycles platinum, palladium, rhodium, gold and silver and approximately twelve other base and specialty metals such as indium and selenium. In this segment the short-term sensitivity of revenues and operating profits to metals prices is material. However, given the variability of the raw-material feed over time and the variable duration of the supply contracts negotiated, it is not suitable to provide a fixed sensitivity to any particular metal. In general terms, higher metals prices tend to be earnings enhancing for the Precious Metals Services business.
In the cobalt activities of Advanced Materials there is a limited sensitivity to the cobalt price. This relates primarily to the recycling / refining throughput and in general terms a higher cobalt price carries short term benefits for the profitability of the business.
In Zinc Specialties the business has a short-term small EBIT sensitivity to the zinc price. This stems from the recycling activities of Zinc Chemicals. However, other commercial conditions which are largely independent of the zinc price, such as product premiums, are also significant and independent drivers of revenues and profitability.
The impact of price changes for other metals are not of particular significance at Group level.
Structural metal price hedging
For some metals quoted on futures markets Umicore hedges part of its forward metal exposure. This hedging is based on documentation demonstrating a high probability of future metal price based cash flows originating from commercial contracts.
In prior years Umicore hedged part of its forward metal exposure for 2007 and 2008 in Precious Metals Refining. In the course of 2007 and 2008, as a result of increased visibility on future commercial agreements in this business, Umicore extended such hedges to cover part of the price risks for 2008, 2009 and 2010.
In Zinc Specialties some three quarters of the sensitivity to the zinc price (see above) has been locked in for 2009 and 2010. For 2009 locked-in prices are at a higher level than the average anticipated received zinc price in 2008, while for 2010 it is at similar levels. The residual sensitivity is not material.
Transactional Risk
The Group faces transactional price risks on metals. The majority of its metal-based transactions use global metal market references, like the London Metal Exchange. If the underlying metal price were to be constant, the price Umicore pays for the metal contained in the raw materials purchased would be passed through to the customer as part of the price charged for the product. However, because of the lapse of time between the conversion of purchased raw materials into products and the sale of products, the volatility in the reference metal price creates differences between the price paid for the contained metal and the price received. Accordingly, there is a transactional exposure to any fluctuations in price between the moment raw materials are purchased (i.e., when the metal is “priced in”) and the moment the products are sold (i.e., when the metal is “priced out”). The Group’s policy is to hedge the transactional risk to the maximum extent possible, primarily through forward contracts.
Metal inventory Risk
The Group faces metal price risks on its permanently tied up metal inventories. This risk is related to the market metal price moving below the carrying value of these inventories. Umicore tends not to hedge against this risk.
US dollar:
The US dollar exchange rate sensitivity can be calculated as follows:
USD / EUR exchange rate: 1 USD cent= approx. EUR 1.0 million on an annual basis (at conditions prevailing at the end of 2007).
This sensitivity is attributable to the Advanced Materials business and to a lesser extent Precious Metals Services
The sensitivity is theoretical since the exchange rate level impacts commercial conditions negotiated in US dollars. For example the company is able to use its pricing power in certain markets to offset the effects of a weakening dollar. It must also be remembered that the sensitivity is valid for limited variations in the exchange rates and are not applicable should large swings occur.