Central Risk Areas

Overall Economic Risks

Scenario

A sharp 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 to meet customer demand. In such cases, we focus on production locations with the best cost position and temporarily shut down some production facilities. During the recent economic crisis, we successfully used short-time work as an instrument to adapt staffing levels to sinking capacity utilization.

Assessment

For 2011, we expect the economic recovery to continue, though not at the same pace as in the first half of 2010. There are still downward economic risks that could dampen positive developments. If the US economy fails to recover substantially, this could impact our sales opportunities in the USA. We do not anticipate a slowdown in Asian markets. Should the pace of global growth continue, this will lead to further increases in raw-material and energy prices.

Sales-Market Risks

Scenario 1

Chemical-segment overcapacity.

Impact on WACKER

Price pressure on our products.

Measures

We minimize these risks 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 strive 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 remain low in 2011. All three of our chemical divisions anticipate that 2011’s sales volumes will rise.

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 production flexibility.

Assessment

We expect higher wafer demand (by surface-area sold) in the global semiconductor sector in 2011. The key growth engine is the 300 mm silicon wafer. For smaller diameters, we anticipate demand remaining stable. In our opinion, accelerating 300 mm demand will increase Siltronic’s capacity utilization in this segment compared to 2010 and may lead to a slight price recovery. We consider the risk that Siltronic could face sales-volume declines and much stronger price pressures in 2011 to be rather low.

Scenario 3

Polysilicon price risks, greater competition among producers, and more subdued market growth due to lower state incentives.

Impact on WACKER

A potential loss of market share – 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. We secure most of our production capacities via long-term contracts with customers. We flexibly align capacity expansion to meet market growth.

Assessment

In Germany (our key photovoltaic market), feed-in tariffs will fall by 13 percent per kilowatt hour in 2011. Plus, Italy is planning to cut its incentives by a total of 18 percent per kilowatt hour. This could slow market growth. WACKER has already sold its entire production output for 2011. We consider the risk of being unable to sell our output as low. Expansion of polysilicon-production capacities continues. In our view, this may lead to surplus capacities in the medium term and to falling polysilicon prices. However, cost and quality leaders will not be as strongly affected by this as other players.

Procurement-Market Risks

Scenario

Higher raw-material and energy 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

To counter these risks, we continuously monitor our key raw materials. Moreover, we minimize risks by concluding long-term supply contracts with highly creditworthy partners, by negotiating procurement agreements centrally 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 and have greatly cut our dependency on suppliers. We now produce nearly a third of the quantities we need. Structured procurement on the electricity market reduces energy-related price risks.

Assessment

The economic recovery will continue in 2011. As a result, prices for certain raw materials (such as silicon metal) will keep rising. Other raw materials (such as methanol) will remain comparatively stable. As for energy prices, we foresee strong price increases in 2011, especially for electricity. Gas prices should remain more or less stable compared to the previous year.

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 our earnings position. New product developments that fail to meet market needs could negatively impact our sales and earnings trends.

Measures

We counter these risks by monitoring the market and our competitors intensively (all the way down to a business-field level), by holding customer and supplier interviews and by regularly attending tradeshows that are vital to WACKER. 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 can lower the sales-volume potential. Postponed start-ups pose the risk of not being able to fulfill supply agreements and thus of posting sales-revenue and earnings declines.

Measures

We reduce this risk by fixing future production quantities (e.g. for polysilicon) through customer contracts, which sometimes include advance payments. We only approve investments in stages. By establishing joint ventures with companies like Samsung, we reduce our own investment risk. There are, however, long-term purchase obligations relating to these joint ventures. We monitor projects very closely to minimize or eliminate delays. In contrast to many competitors, WACKER has its own Corporate Engineering department with some 800 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 lines and construction sites, in project-budget management, and in plant start-ups.

Assessment

Over the past few years, we have proven that we 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 via its engineering expertise. Currently, we 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 and 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). This 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/work 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 that 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. We define financial risks as credit, market-price, financing and liquidity risks. Different WACKER departments are responsible for controlling these risks. 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 Group management report provide extensive information about risk hedging using derivative financial instruments. See Note 20

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 lower this risk by demanding sufficient collateral to cover the nature and extent of the product/service provided. Collateral includes 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). In addition, we take out credit insurance to minimize the risk of default.

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 prevent counterparty risk vis-à-vis banks and contractual partners by carefully selecting these partners. Cash investments and derivative dealings are strictly limited 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. We expect this approach to minimize our risk concentration.

Market-Price Risks and Risks of Fluctuating Payment Flows

Scenario

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

Impact on WACKER

Diminished 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 an exposure is identified, interest-rate hedging is performed predominantly for the euro and the US dollar. 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 measures taken is continually monitored.

Assessment

We hedge part of our US dollar, yen and Singapore dollar business. In comparison to 2010, we assume that the euro will strengthen against the main foreign currencies relating to WACKER. However, we will use hedging measures to partially counter the impact that is likely to result. Consequently, we do not expect any significant effects from exchange-rate shifts in 2011. 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 credit lines and long-term bonds.

Assessment

In 2010, we enhanced our liquidity, which totaled €797.4 million on the reporting date. At that time, liquidity (consisting of current and noncurrent securities, and cash and cash equivalents) exceeded financial liabilities by €264.0 million. Concurrently, there were used and unused credit lines of some €1.2 billion. 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

Pension provisions increase, additional payments to the pension fund possibly needed; and Group net income affected.

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.

Assessment

Pension-fund beneficiaries are getting ever older. The rate of return is insufficient to fulfill long-term pension obligations. This is why the risk of further payments by Wacker Chemie AG to the pension fund will rise over the short and medium term.

Other Risks

Emission Allowances
Scenario

WACKER’s CO₂ emissions exceed allotted emission certificates.

Impact on WACKER

Acquisition of emission certificates, and higher specific production costs.

Measures

The only emissions-trading effects that WACKER has experienced to date relate to electricity price rises. The exact nature of European emissions trading as of 2013 is currently unclear. According to existing EU decisions, large parts of the chemical industry will be included in the trading system. WACKER has installed an early warning system that enables us to react quickly if our emission allowances are inadequate for our needs.

Assessment

The exact nature of emissions trading as of 2013 is not conclusively assessable. We expect that we will have to contend with additional, medium-term charges due to emissions trading.

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 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 could impair the competitive marketing of any newly developed products, technologies or processes.

We limit potential risks from possible legal infringements with compliance programs. WACKER’s Code of Conduct defines and stipulates binding rules of behavior for all employees. Via training, 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; plus 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 securely. 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 (SLAs) at our business divisions and corporate departments. For 2010, our central ERP (enterprise resource planning) systems attained an availability rate of 99.5 percent. This figure was possible thanks to our systems’ setup, to a related backup/recovery process and to emergency preparations (business continuity management).

We minimize project-related IT risks via a uniform project-management method. This ensures changes are integrated into our system landscape in a controlled manner. As part of risk management, we log and evaluate operation-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 protect ourselves against “malware” via efficient software security programs. We regularly conduct audits and penetration tests at domestic and international sites to prevent hacker attacks.

Assessment

We can never completely rule out interference with, and attacks on, our IT systems and networks. However, thanks to our precautionary measures, we continue to classify the associated risks as being low.

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

We counter this risk with a series of personnel-policy measures. For example, we offer exemplary benefits, performance-oriented compensation and attractive training programs. We also offer a wide range of working-time models and policies, and opportunities to achieve work-family 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 not being able to find enough appropriate personnel. For 2011, we only see minor risks to our personnel needs.