Economic and Legal Factors

WACKER sells its products and services to virtually every industry. Although our individual business divisions are not immune to economic fluctuations, their impact and onset may vary. Our product portfolio and broad customer base enable us to mitigate the magnitude of these fluctuations.

Orders

The terms for orders placed with WACKER vary from division to division. Most orders received by WACKER SILICONES are short term, though a small number are long term. Goods are usually shipped within three months of receipt of order. At WACKER POLYMERS, business is based on contracts and framework agreements with terms of up to one year. Around 30 percent of incoming orders are short term. WACKER POLYSILICON concludes short- and medium-term contracts. An increasing proportion of incoming orders are short-term ones based on market benchmarks. As a rule, our aim is to conclude fixed contracts with negotiated prices and quantities. Due to varying 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 referring to specific leading indicators based on operational metrics, we try to factor potential developments into our business plans and to allocate capacities accordingly. Since our operations are based on diverse businesses and markets, we use a number of leading indicators to gain insights into potential developments at each of our business divisions.

Economic Factors Impacting Our Business

The main economic factors influencing WACKER’s business remained unchanged in many areas. Accounting for around 44 percent of production costs, energy and raw-material costs had the largest impact in 2018.

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 affect our cost structure after a time lag. WACKER constantly strives to keep costs at a competitive level. By generating our own power at Burghausen and Nünchritz, we reduce our energy-procurement needs and, consequently, the cost risk. Amendments to the regulatory framework – such as to grid charges, to energy and electricity taxes, to CO₂ certificates in the European Emissions Trading Scheme (ETS) and to the German Renewable Energy Act (EEG) – can negatively affect WACKER’s energy costs both directly and indirectly, e. g. through higher grid charges or fees. We continually strive to improve our energy efficiency. Our goal is to reduce specific energy consumption by half between 2007 and 2022. When procuring raw materials, we ensure not only favorable pricing, but also price flexibility, by sometimes concluding contracts featuring varying durations, greater freedom as regards the volume procured or regular adjustments of wholesale market prices.

Exchange-Rate Fluctuations

As a rule, WACKER hedges against exchange-rate fluctuations. We hedge about half of our dollar exposure for each subsequent year with a mix of derivative currency-hedging transactions. In determining sensitivity, we simulate a 10-percent devaluation of the US dollar against the euro. Without hedging, such an increase in the euro against the US dollar would have negatively impacted EBITDA by around €50 million.

State-Regulated Incentive and Feed-In 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. Substantially lower prices for solar modules and cells have greatly increased the competitive advantage of solar energy over fossil fuels and other methods of power generation. The cost of manufacturing photovoltaic products is expected to continue decreasing, which will further reduce dependence on state-regulated incentive and feed-in tariff programs over the next few years. Our assumption is that, in a few years, solar energy will get along even without special incentives, particularly in combination with cost-efficient storage options. China’s announcement in late May that it was curbing solar feed-in tariffs and capping the amount of new photovoltaic installations in 2018 slowed demand for solar modules. Our strong cost position, high product quality, international orientation, broad customer base and fixed supply contracts give us a competitive edge over other manufacturers. WACKER will maintain its focus on improving its specific production costs to secure its competitive position.

Legal Factors Impacting Our Business

China imposed anti-dumping and anti-subsidy tariffs on polysilicon made in the USA. These tariffs currently affect polysilicon produced at our site in Charleston, Tennessee (USA). Trade relations with China were additionally impaired by the USA’s introduction of safeguard tariffs in 2018 through a Section 201 proceeding (global safeguard tariffs on solar cells and modules) and by its use of similar proceedings. An amicable settlement to the dispute over solar products is likely to be part of a comprehensive trade agreement between the USA and China. Additionally, a new shipper review may enable WACKER to request exemption from China’s anti-dumping and anti-subsidy tariffs on polysilicon from the USA. The chances of success are hard to estimate given the current situation.

On the other hand, the anti-dumping and anti-subsidy tariffs between Europe and China have ended. Back in May 2014, WACKER and the Chinese Ministry of Commerce (MOFCOM) signed a minimum price agreement for exports of polysilicon produced in Europe. MOFCOM, in turn, refrained from imposing anti-dumping and anti-subsidy tariffs on this material. After the EU Commission allowed its anti-dumping and anti-subsidy tariffs on Chinese makers of solar cells and modules to expire in September 2018, MOFCOM ended all its restrictive measures, effective November 1, 2018. As a result, WACKER’s EU-made polysilicon can be imported into China without the restrictions of a minimum price agreement.