bold spirit - ArcelorMittal South Africa

178
ArcelorMittal South Africa
Annual Report 2010
26. FINANCIAL INSTRUMENTS AND FINANCIAL RISK MANAGEMENT continued
26.6 Commodity risk managed by embedded derivatives
Embedded derivative instrument
Expiry
period
Fair
value
Rm
Recognised
fair value
gains/(loss)
Rm
Group and company
For the year ended 31 December 2010
Energy – pricing cap 2011 to 2013 251 18
For the year ended 31 December 2009
Energy – pricing cap 2010 to 2013 233 (133)
The embedded derivative represents a pricing cap on the purchase of natural gas.
The natural-gas supplier invoked the four year claw-out mechanism, effective from 1 January 2010.
The mechanism limits off-take volumes to actual levels in the year (the “reference year”) preceding the
invocation, namely 2009. In the first year of the claw-out period (2010), volumes are limited to 100% of
those of the reference year, reducing to 75% (2011), 50% (2012) and 25% (2013) respectively for the
subsequent three years.
26.7 Interest rate risk management
Sources of interest rate risk are:
• interest expenses, as companies in the group enter arrangements to fund the construction of assets either
in the form of bona fida borrowing arrangements or through supply arrangements containing financial lease
structures at fixed interest rates; and
• interest income, due to the group’s and company’s net cash position and the investment thereof at variable
interest rates.
The group’s and companies’ sensitivity to interest rates has decreased due to lower average ZAR cash
holdings and interest rates compared with the comparative reporting period.
26.8 Liquidity risk management
Ultimate responsibility for liquidity risk management rests with the Board of Directors, which has built an
appropriate liquidity risk management framework for the management of the group’s and company’s short-,
medium- and long-term funding and liquidity management requirements.
The objectives of the liquidity management policy are as follows:
• maintenance of adequate reserves, banking facilities and reserve borrowing facilities by continuously
monitoring forecasted and actual cash flows and matching the maturity profiles of financial assets and
liabilities;
• optimise the account and domestic cash pool structures;
• minimise bank charges (payments and collection fees, spreads etc);
• optimise the availability and use of short-term liquidity positions across the group without compromising
the day-to-day cash needs;
• optimise the net interest result; and
• minimise the number of bank accounts, to reduce risk of misuse and costs.
Liquidity and interest risk tables
(i) Contractual maturity for its non-derivative financial liabilities
The following table details the group’s and companies’ remaining contractual maturity for non-derivative
financial liabilities.