Central Risk Areas

Overall Economic Risks

Scenario

A marked slowdown in the pace of economic recovery.

Impact on WACKER

Production-capacity utilization drops, specific manufacturing costs rise, and the Group’s sales and earnings decline.

Measures

We counter this risk by continuously observing economic trends in our key sales markets. If we detect economic weakness, we take early precautions to flexibly realign production capacities, resources and inventories in line with customer demand. In such cases, we focus on production locations with the best cost position and temporarily shut down some production facilities. To counter an economic slowdown, we also use the instrument of short-time work and do not extend temporary employment contracts.

Assessment

We expect to see the global economy weaken in the first half of 2012, followed by a mild recovery in the second half of the year. This economic weakness is due to the sovereign-debt crisis in various European countries and the USA, as well as to low growth in the US economy combined with high unemployment. Asia, too, will grow more slowly. In China, the Purchasing Managers’ Index, for instance, points to more sluggish economic growth. Compared with 2011, there is a significantly elevated risk of a marked slowdown in the global economy.

Sales-Market Risks

Scenario 1

Chemical-segment overcapacity.

Impact on WACKER

Price and volume pressure on our products.

Measures

WACKER minimizes this risk in various ways. For example, we align production with demand and perform quantity controls to ensure appropriate plant-utilization rates. Our approach also includes structured price management, process optimization and intense cultivation of growth markets. Importantly, a key ongoing goal is to increase the share of resilient product groups in our portfolio and to rank among the global leaders in all our business fields. By cooperating closely with customers, we aim to quickly open the way to novel applications and, thus, foster long-term customer loyalty.

Assessment

We expect overcapacity-related risks for our products to increase in 2012. At WACKER POLYMERS, we anticipate overcapacity for dispersible polymer powders in Europe and Asia. Nevertheless, we expect plant utilization to be strong despite this overcapacity. WACKER SILICONES faces overcapacity for siloxane production in China and for certain segments (such as liquid silicone rubber) – this could reduce plant utilization. Price pressure on some of our chemical divisions’ products will increase in 2012.

Scenario 2

Cyclical fluctuations and intense competition on the semiconductor market.

Impact on WACKER

Volume and price declines.

Measures

Siltronic tries to reduce these risks through systematic cost management and through flexible structures and production operations.

Assessment

2012 will be a challenging year for the semiconductor industry. The first quarter of 2012 is likely to see volumes increase compared with Q4 2011, accompanied by price pressure on all wafer diameters. Overall, we expect that demand for 300 mm silicon wafers will climb, while demand for 200 mm wafers will remain stable and that for smaller-diameter wafers will decline. Siltronic’s capacity utilization will broadly remain at 2011’s level. With the Hikari site’s closure, 200 mm silicon-wafer capacity utilization at other sites will increase as of the second half of 2012.

Scenario 3

Polysilicon price and volume risks, greater competition among producers, and harsher market conditions due to lower state incentives.

Impact on WACKER

Potential volume risks – plus stronger, competitive price pressure on margins – could hold back sales and earnings, as could lower state incentives for photovoltaic systems in certain countries.

Measures

We counter this risk by continually improving our productivity, cost positions and quality. If demand should dip, we will adjust production flexibly in line with the market trend. Through long-term contracts with customers, we secure loading for our production capacities. In response to market developments in the final three months of 2011, we have negotiated additional individual arrangements with our customers to adjust to the situation. Our capacity expansion program is targeted to meeting market growth.

Assessment

The photovoltaic industry is currently suffering from production overcapacity and deteriorating prices at all stages of the value chain. Consequently, 2012 will see the industry experience a consolidation phase that will be relevant to its future development. We also expect to see further cuts in state incentives for photovoltaics. High stock levels at customers have elevated the risk of output remaining unsold. On the other hand, the marked fall in prices for polysilicon, wafers, cells and modules makes photovoltaics more competitive. The levelized cost of solar systems will therefore be lower than for other renewable energies. This trend will make it easier to access new markets and will promote further growth in the global market for photovoltaic applications. Overall, as a cost and quality leader, we expect to emerge from this consolidation process with renewed strength.

Procurement-Market Risks

Scenario

Higher raw-material prices, and bottlenecks in the supply of certain raw materials.

Impact on WACKER

Earnings dampened by higher raw-material and energy prices. In the event of supply bottlenecks, delivery times to customers grow longer and there could be sales-volume losses.

Measures

We regularly perform risk monitoring (“raw-material matrix”) for strategic raw materials and energy. This process is a clear, quick way of pinpointing existing risks and is the starting point for developing strategies and measures. We minimize risks through long-term supply contracts with highly creditworthy partners, through centrally negotiated procurement agreements and by having multiple suppliers for any one product. With the acquisition of the silicon-metal production site in Holla (Norway), we have achieved backward integration for one of our key raw materials, greatly reducing our dependency on external suppliers. We are now in a position to produce just under one-third of the quantities we need ourselves – to a high quality standard. On the electricity market, we practice structured procurement. We purchase electricity at different moments in time while simultaneously covering our remaining needs on the spot market. This reduces our price risk. In 2011, we also introduced structured procurement for the Nünchritz plant’s gas supplies.

Assessment

Our good position for energy and raw-material procurement means we are now better able to manage the risks inherent in both economic upturns and downturns. If the global economy should weaken markedly, our contracts for key raw materials allow us to adjust purchase volumes flexibly and to benefit – wherever possible – from price decreases through escalator clauses. If the global economy grows, we have volume and price guarantees such that we do not see any major risks affecting the supply of raw materials. We expect energy prices to remain relatively stable in 2012. The risk of rising energy prices is low in the short term. Silicon prices are falling slightly. Prices for methanol and ethylene (petrochemical raw materials) are likely to climb further. However, that will largely depend on how the world economy performs. A recession would prompt raw-material prices to fall.

Market-Trend Risks

Scenario

An incorrect projection of market trends, and lack of customer acceptance for newly developed products.

Impact on WACKER

If we misjudge future market trends, this could impact our market strength and earnings position. New product developments that fail to meet market needs could negatively impact our sales and earnings.

Measures

WACKER works closely with its customers and, therefore, has reliable information for developing new products and applications. At the same time, we monitor the market and our competitors very closely (all the way down to a business-field level), hold customer and supplier interviews and regularly attend tradeshows that are important to WACKER. In individual cases, we commission market research. We minimize risks relating to product developments by collaborating on specific projects with customers. WACKER also cooperates with universities and scientific institutions on R&D projects to stay abreast of state-of-the-art technological and product-development trends.

Assessment

WACKER has many years of market experience and can update its detailed planning as soon as market developments change. We consider the risk of misjudging market trends, or not reacting to them appropriately, to be low.

Investment Risks

Scenario

Bad investments, higher-than-expected investment costs, and postponed plant start-ups.

Impact on WACKER

Bad investments lead to idle-capacity expenses and/or impairments on assets. Higher investment costs will lead to higher depreciation expenses in our operating result. Postponed start-ups pose the risk of being unable to fulfill supply agreements and, thus, of posting sales-revenue and earnings declines.

Measures

As with many competitors, WACKER has its own Corporate Engineering department with some 400 employees. This department ensures that projects are implemented as timely and on-budget as possible, thanks to its many years of experience in planning new production facilities, in monitoring assembly work and construction sites, in project-budget management, and in plant start-ups.

WACKER has numerous measures in place for countering investment risks. We check the completeness and plausibility of plans for all new projects with an investment volume exceeding €1.5 million. Economic feasibility is assessed using comparative studies that look at other plant projects, including those of competitors. We only approve investments in stages. Intensive project-budget management helps prevent or minimize delays.

Capacity expansion at our polysilicon facilities is backed up by customer contracts, some of which involve advance payments. By establishing partnerships with companies such as Samsung or Dow Corning, we have reduced our own investment risk. In this regard, however, there are long-term purchasing commitments with the respective associated companies or joint ventures.

Assessment

Over the past few years, WACKER has proven that it can complete complex technical investment projects on schedule, or even earlier than planned, without exceeding budgeted costs. WACKER’s Corporate Engineering department plays a major role here by providing engineering expertise. For 2012, we currently see no major risks due to investment activity.

Production Risks

Scenario

Risks relating to the production, storage, filling and transport of raw materials, products and waste.

Impact on WACKER

Potential personal injury, property damage, environmental impairment, production downtimes and operational interruptions, and the obligation to pay damages.

Measures

WACKER coordinates its operational processes through its integrated management system (IMS). The system regulates workflows and responsibilities, attaching equal importance to productivity, quality, the environment, and health and safety. Our IMS is based on legal regulations, and on national and international standards, such as Responsible Care® and the Global Compact that go far beyond legally-stipulated standards. We monitor maintenance extensively and regularly perform inspections to ensure the highest possible level of operational safety at our production sites. We conduct thorough safety and risk analyses, from the design stage through to commissioning, to ensure our plants’ safety. We regularly hold seminars on plant/workplace safety and explosion protection. Every WACKER site has its emergency response plan to regulate cooperation between internal and external emergency response teams, and with the authorities. When we work with logistics providers, we ensure that hazardous-goods vehicles are always checked prior to loading and faults are systematically recorded and tracked.

Assessment

Risks stemming from the production, storage, filling and transport of raw materials, products and waste can never be completely ruled out. Currently, we see no risks that could constitute a serious threat.

Financial Risks

WACKER is exposed to financial risks from ongoing operations and financing. Such risks include credit, market-price, financing and liquidity risks. They are managed by the individual WACKER departments responsible for them. We employ primary and derivative financial instruments to cover and control the financial needs and risks necessitated by our operations. Such financial instruments are not to be used unless they are based on actual or planned operational business. The Notes to the consolidated financial statements provide extensive information about risk hedging using derivative financial instruments.

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Controlling Financial Risks

Risk

 

Corporate Department Responsible

 

 

 

Credit risks

 

Corporate Finance

Market-price risks

 

Corporate Finance

Liquidity risks

 

Corporate Finance

Currency-exchange and interest-rate risks

 

Corporate Finance

Raw-material price risks

 

Raw Materials Procurement

Credit Risks

Scenario

Customers or business partners fail to meet their payment obligations.

Impact on WACKER

Loss of receivables due to trade receivables, bank failures due to the banking crisis.

Measures

We use a variety of instruments to reduce the risk of any loss on receivables. Depending on the nature and scope of what we provide, we may demand collateral, including retention of title. Other preventive measures range from references and credit checks, to the evaluation of historical data from our business relationship to date (particularly payment behavior). We take out credit insurance to minimize the risk of default. We prevent counterparty risk vis-à-vis banks and contractual partners by carefully selecting these partners. We strictly limit cash investments and derivative dealings to banks with a minimum rating of A- from Standard & Poor’s or a comparable rating agency. Investment activities are additionally subject to maximum investment and term limits. In exceptional cases, investments or derivative dealings may be conducted with banks of lower creditworthiness within tight limits and terms. The same criteria apply to the acquisition of government and corporate bonds.

Assessment

The risks stemming from credit business are manageable and we consider the probability of their occurrence to be low. Credit risks from other contractual obligations are posed by “other” financial assets, current banking assets, and derivative financial instruments. Our Corporate Finance department centrally handles global dealings with currency-exchange and interest derivatives, as well as liquidity management. We consider that this approach to counterparty risk minimizes our risk concentration in relation to bank failures.

Market-Price Risks and Risks of Fluctuating Payment Flows

Scenario

Fluctuations in currency exchange rates, interest rates and raw-material prices.

Impact on WACKER

Effect on earnings, liquidity and financial investments.

Measures

Currency-exchange risks primarily arise from exchange-rate shifts for receivables, liabilities, and cash and cash equivalents that are not held in euros. The currency risk stemming from financial instruments is of particular importance for the US dollar, Japanese yen, Singapore dollar and Chinese renminbi. WACKER hedges the resultant net exposure via derivative financial instruments. Their use is governed by WACKER’s regulation on currencies. We employ currency-option and forward-exchange contracts, and foreign-exchange swaps. Foreign currencies are hedged predominantly for the US dollar, Japanese yen and Singapore dollar. Plus, we counter exchange-rate risks through our local production sites, and through local bank financing.

Interest-rate risks arise due to changes in market rates that impact future interest payments for variable-rate loans and investments. Thus, the changes have a direct influence on the Group’s liquidity and financial assets. When exposure for euro amounts is identified, interest-rate hedging is performed. The use of derivative financial instruments is governed by internal regulations that separate trading and settlement functions and is subject to strict controls within the entire processing procedure. The effectiveness of the measures taken is continually monitored. In certain cases, commodity prices are hedged by traded futures.

Assessment

We hedge part of our US dollar, yen and Singapore dollar business. We assume that the euro will stay at the same level as in 2011 against the main foreign currencies relating to WACKER. The possible impact of a stronger euro will be partially cushioned by hedging measures. Consequently, we do not expect any significant effects from exchange-rate shifts in 2012. Currently, we consider the influence of interest-rate risks to be low.

Liquidity Risk

Scenario

Lack of funds for payments, and tougher access to credit markets.

Impact on WACKER

Higher financing costs, and modifications to further expansion plans.

Measures

Liquidity risk is managed centrally at WACKER. Our Corporate Finance department employs efficient systems to control both cash management and rolling liquidity planning. To counter financing risks, WACKER holds sufficient longer-term and firm credit-line commitments, and has set aside enough liquidity. As part of cash pooling, liquid funds are passed on internally within the Group, as required.

Assessment

WACKER’s liquidity did not change significantly in 2011 compared with the previous year. As per the reporting date, it totaled €873.6 million. At that time, liquidity (consisting of current and noncurrent securities, and cash and cash equivalents) exceeded financial liabilities by €95.7 million. Concurrently, there were used and unused credit lines of some €1.18 billion. We invest liquid funds only in issuers or banks that have a credit rating in the sound investment-grade range. The investment of liquid funds is, moreover, subject to limits that we have defined. We consider the probability of financing and liquidity risks actually occurring to be low. At the moment, we see no risks relating to financial-covenant infringements.

Pensions

Scenario

The greater life expectancy of pension-fund beneficiaries – and additional obligations due to pension adjustments – raise pension obligations. Low capital-market interest rates impair the investment result.

Impact on WACKER

Increase in pension provisions, possible addition of payments to the pension fund or to plan assets affect Group net income.

Measures

The majority of WACKER’s pension guarantees are covered by the Wacker Chemie VVaG pension fund, by pension-related funds and special-purpose assets, and by insurance plans. The largest contribution comes from the pension fund. It manages the pension insurance of our German-based employees in accordance with its Articles of Association and General Terms and Conditions of Insurance. To ensure a sufficient rate of return and to limit investment risks, the fund diversifies its investment portfolio among various asset classes and regions. As part of its asset-liability management, the pension fund controls and optimizes all asset items to attain the required return within specified risk limits. As one of the fund’s sponsoring entities, WACKER makes payments to it (when necessary) to enable sufficient coverage for pension obligations. In fiscal 2011, we made an extraordinary allocation of €29.9 million to pension provisions to take account of the rising life expectancy of beneficiaries.

Assessment

Pension-fund beneficiaries are getting ever older. The rate of return is insufficient to fulfill long-term pension obligations. The contribution for Wacker Chemie AG’s defined-benefit pension commitments thus rose from 250 to 350 percent of the employee contribution. This applies from January 1, 2012.

Other Risks

Emission Allowances

Scenario

From 2013, WACKER’s CO2 emissions exceed the expected number of allotted emission certificates.

Impact on WACKER

Acquisition of emission certificates, and higher specific production costs.

Measures

So far, WACKER had a surplus of emissions certificates and the only effects we have experienced to date relate to electricity price rises. From 2013, according to EU and national decisions, we will need to include individual production facilities in the trading system, in addition to our power plants that are already subject to emissions trading. WACKER has installed an early-warning system so that we can respond quickly if our carbon credits are insufficient to cover the emissions produced. We limit the costs for the emissions required by constantly working to improve our facilities’ energy efficiency.

Assessment

The necessary emissions certificates have been allotted to us free of charge for the 2008-2012 period. We assume that we will have to contend with additional, medium-term charges due to the purchase of emissions certificates.

Legal Risks

Scenario

Diverse tax, brand, patent, competition, antitrust and environment-related legal risks could arise from our international business.

Impact on WACKER

Drawn-out legal disputes that could impact our company’s operations, image and reputation, and could be costly.

Measures

We limit legal risks via centralized contract management and via legal review by our legal department. In many cases, we seek highly-qualified and specialized external legal advice.

Our Intellectual Property department protects and monitors patents, brands and licenses. By reviewing patent regulations, we determine – before initiating R&D projects – whether existing third-party patents and intellectual property rights impair the competitive marketing of any newly developed products, technologies or processes.

We limit risks arising from possible legal infringements by means of compliance programs. WACKER’s Code of Conduct defines and stipulates binding rules of behavior for all employees. Through training programs, WACKER enhances awareness of these issues and attempts to prevent reputation-related risks.

Assessment

We currently do not foresee any legal disputes, patent infringements or other legal risks that could significantly influence our business.

IT Risks

Scenario

Attacks on, interference with, and unauthorized access to, IT systems and networks, threatening data security.

Impact on WACKER

Negative impact on the company’s financial situation, on production processes and on workflows, loss of know-how.

Measures

We continually monitor our use of information technology and do everything we can to ensure that IT-supported business processes function reliably. Our IT security and risk management specialists are responsible for handling hazards in a cost-efficient way. Their work is based on ISO 27001. Using risk analyses, we define the requirements for WACKER’s central systems – in terms of availability and data integrity/confidentiality. We anchor these requirements in service level agreements at our business divisions and corporate departments. To ensure that corrective action can be taken at any time should malfunctions occur, we continually monitor the SLAs. For our central ERP systems (Enterprise Resource Planning), we set – and exceeded – an availability goal of 99.5 percent for 2011. We achieved this primarily by designing our systems for maximum availability and by installing an associated backup and recovery procedure. We have taken appropriate precautions to cover emergency situations (business continuity management).

We minimize project-related IT risks with the help of a uniform project and quality-management method. It ensures that changes are integrated into our system landscape in a controlled manner. Systematic enterprise architecture management reduces complexity and risks.

As part of risk management, we log and evaluate operations-related risks and initiate countermeasures. We use state-of-the-art hardware and software solutions to counter network downtime, data loss or manipulation, and unauthorized access to our network. We use efficient software security programs to protect ourselves against malware. Worldwide, we have set up a security team that addresses problems involving the confidentiality, integrity and availability of data and systems by introducing organizational and technical measures, and by holding awareness programs. We regularly conduct audits and penetration tests at domestic and international sites to prevent the risk of hacker attacks.

Assessment

We can never completely rule out interference with, and attacks on, our IT systems and networks. Thanks to our precautionary measures, we classify the possible occurrence of such events and the associated risks as being not high.

Personnel-Related Risks

Scenario

Demographic change, lack of qualified technical and managerial employees, and problems in filling executive positions.

Impact on WACKER

The lack of technical and managerial employees could dampen our continued growth and lead to the loss of our technological edge.

Measures

To counter these risks, we have a series of personnel-policy measures in place. For example, we offer exemplary benefits, performance-oriented compensation and attractive training programs. We also offer a wide range of working-time models and arrangements, and opportunities to achieve a positive work-life balance.

For executive positions, WACKER has a detailed successor-planning process and deputizing regulation. As part of groupwide successor planning, we observe up to three potential candidates for every upper management position to correctly evaluate their potential and performance. In successor planning, WACKER distinguishes between short-term needs (up to two years) and medium-term ones (two to four years). Regardless of the above distinction, WACKER has appointed a deputy for each executive member in the event of a lengthy absence or illness.

Assessment

Demographic change and the related lack of qualified technical and managerial employees will increase the medium-term risk of being unable to find enough appropriate personnel. For 2012, we only see minor risks to our personnel needs.

External Risks

Scenario

Pandemic, natural disaster, war or civil war.

Impact on WACKER

Impairment of our entrepreneurial capacity to act, production downtimes, loss of trade receivables, impact on sales and earnings.

Measures

WACKER is a globally operating Group with production facilities and technical centers in Europe, the Americas and Asia, and about 50 sales offices worldwide. Pandemics, natural disasters and acts of war in individual countries or regions where we are active represent a potential risk to our business and production operations, product sales, fixed assets and therefore our net assets, financial position and earnings. Our managerial entities and our sites have worked out and publicized plans and measures to minimize the effects of a pandemic on the health of our employees and on our business processes. A standardized and coordinated approach is ensured by a “pandemic preparedness plan” (corporate regulation). The financial impact of damage to our production plants due to natural disaster is partly covered by insurance. Since WACKER has production sites on different continents, our manufacturing and delivery capability will remain viable to a certain extent even if particular plants should fail. We counter the default risk with respect to trade receivables due to natural disasters and acts of war, inter alia, by demanding collateral depending on the nature and scope of what we provide.

Assessment

Risks from pandemics, natural disasters, acts of war or civil war can never be ruled out entirely. Our preparedness plan and our internationally distributed production sites and local offices help to limit the impact of local or regional damage on our business processes.