bold spirit - ArcelorMittal South Africa

176
ArcelorMittal South Africa
Annual Report 2010
26. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT continued
26.3 Financial risk management overview and objectives
The group’s and companies financial risk management programme focus on the unpredictability of financial
markets and seeks to minimise potential adverse effects on financial performance.
Financial risks to which the group and company are exposed consist of:
• Financial market risk, consisting of:
– foreign currency risk;
– commodity price risks;
– interest rate risk; and
– liquidity risk, being
• cash flow volatility, and
• fair value and cash flow interest rate risk.
• Capital management and gearing risk.
• Customer credit risk as detailed in note 18.
Treasury and financial risk management policy details the framework within which financial risk (other
than customer credit risk) of the group and company are managed. The policy is approved by the Board of
Directors and is reviewed annually.
The Treasury Policy addresses market, liquidity, capital management and gearing risk through the direction of
the following activities:
• Financing facilities.
• Financial guarantees and letters of credit.
• Market risk management through:
– foreign currency risk management;
– commodity risk management;
– interest rate management; and
• Cash management through liquidity management.
The Treasury Policy is enacted by the Treasury department (Treasury). Treasury identifies, evaluates and
mitigates financial risks in close co-operation with the group’s and company’s operating units. Boardapproved
written policies cover the specific activities noted above and address risk limits, the use of
derivative and non-derivative financial instruments to hedge certain exposures, and the approval framework
governing transaction levels.
26.4 Financial market risk
The group’s and company’s activities expose the reporting entities primarily to the financial risks of changes
in commodity prices, foreign currency exchange rates, interest rates and potential liquidity constraints.
The group and company have not undertaken any economic hedging of commodity or foreign exchange
rates since mid-2008. Markets continue to be monitored in order to determine the most opportune time to
commence hedging.
Movement in the cash flow hedging reserve for the reporting and the comparative period is visible in the
statement of changes in equity. The movement for 2010 was limited to the release of a deferred loss for
the group and company relating to base metal forward contracts. The hedging reserve for the group and
company at 31 December 2010 is Rnil (December 2009: R6 million deferred loss).