Economic and Legal Factors

WACKER sells its products and services to virtually every industry. Although economic fluctuations cannot be avoided in individual business divisions, their impact and onset may vary greatly. We are, however, able to mitigate the impact of these fluctuations thanks to our product portfolio and broad customer base.

Development of Orders

Order-placing is handled very differently by WACKER’s individual business divisions. Most orders placed by WACKER SILICONES are short-term. Delivery is usually effected within six months of receipt of order. At WACKER POLYMERS, business is based on contracts and master agreements with terms of up to one year. Around 30 percent of incoming orders are short term. WACKER POLYSILICON’s contracts are short, medium or long term. In certain instances, they include flexible volume-specific escalator clauses. The spot market business plays a limited role. Siltronic usually negotiates orders with the customer from one quarter to the next. As a rule, we aim for fixed contracts with negotiated prices and quantities. Due to differences in order-placement procedures at the Group and its divisions, order-level reporting is not very meaningful and hence does not serve as an indicator in our monthly reports.

Operational Metrics as Leading Indicators of Future Developments

By using specific leading indicators based on operational metrics, we try to anticipate potential developments in our business plans and to allocate capacities accordingly. Since we are at home in diverse businesses and markets, we consult a number of leading indicators to gain insights into potential developments at each of our business divisions.

Economic Factors Impacting Our Business

The economic factors influencing WACKER’s business remain unchanged in many sectors. Energy and raw-material costs, at 44 percent of production costs, had the largest impact in 2012.

• Energy and raw-material costs
  As a chemical company, we belong to an energy-intensive industry and require diverse raw materials to manufacture our products. Consequently, higher energy and raw-material costs impact our cost structure. WACKER is taking steps to become more independent of this factor. By generating our own power at Burghausen and Nünchritz, we are reducing our energy-procurement needs and costs. Regulatory requirements or additional costs, such as electricity tax or levies relating to German renewable energy (EEG) legislation, can adversely impact energy costs. In contrast, exemptions from Germany’s EEG levy can positively influence energy costs. Backward integration at WACKER SILICONES in 2010 has enabled us to secure part of our long-term silicon-metal needs, thus gaining us more independence from price fluctuations. At the same time, we have enhanced supply reliability during demand peaks. As part of our ongoing efforts to improve energy efficiency, we have initiated the POWER PLUS program, which aims to reduce specific energy consumption by 11 percent by 2022. When procuring raw materials, we often work with short-term contracts in order to achieve greater price flexibility.
• Exchange-rate fluctuations
  Fluctuations in the euro exchange rate affect our Siltronic business. We have used currency hedging (derivatives) to secure at least half of our dollar exposures for the next year. The hedging ratio for 2012 is around 50 percent. Without hedging, a one US-cent increase in the euro-dollar exchange rate lowers EBITDA by some €4 million.
• State-regulated incentive and tariff programs for renewable energy sources
  As one of the world’s leading suppliers of hyperpure polycrystalline silicon, we are affected by regulatory changes to incentive and feed-in tariff programs for renewable energy sources. In 2012, as in past years, photovoltaic incentives declined in several countries, including Germany and Italy, the two largest solar markets to date. Conversely, incentives increased in other major markets, such as China and Japan, fueling growth there. To maintain its competitive position, WACKER focuses continuously on improving productivity. Our cost leadership, product quality, international orientation, customer structure and our medium- to long-term supplier contracts all offer us competitive advantages over other producers.

Legal Factors Impacting Our Business

In 2012, WACKER’s legal environment remained essentially unchanged overall, with one exception. Pending anti-dumping proceedings – by the European Union against Chinese solar companies and by the Chinese Ministry of Commerce against polysilicon manufacturers in the USA, South Korea and Europe – could negatively impact our business if punitive duties were the outcome. WACKER rejects all forms of restraints on trade. In both cases, we are making efforts to help avoid punitive duties. A final decision in both sets of proceedings is expected by mid-2013. The proceedings instigated by the Chinese Ministry of Commerce allow for an interim judgment, which may be published at an earlier date.

146 Registration Dossiers Submitted as Part of REACH

As of June 2008, we are obligated to register all substances on the European market – and classify them by property – if annual quantities exceed one metric ton. The exact conditions of use must be taken into account: Registration is governed by the EU-wide REACH regulation (Registration, Evaluation, Authorization and Restriction of Chemical Substances). By late 2012, WACKER had submitted 146 registration dossiers to the European Chemicals Agency (ECHA). As part of the normal REACH procedure, ECHA requires companies to provide additional information on dossiers submitted during the first phase (2010). Together with the EU members’ regulatory bodies, ECHA has identified 138 “substances of very high concern” for authorization. WACKER has only been marginally affected to date, with only a few purchased substances, and none of its own. As part of the EU Commission’s GHS (Globally Harmonized System of Classification and Labeling of Chemicals), all mixtures will have been reclassified pursuant to EU-GHS (7,000 mixtures) by 2015. A central register for hazardous substances has been set up at ECHA. We registered all relevant substances in 2011.