sain t-gobain annu al report 2008 annual report

Currency risk
The currency hedging policies described below could be
inadequate to protect the Group against unexpected
or sharper than expected fluctuations in exchange rates
resulting from the current economic and financial
market conditions.
The Group’s currency risk management policy consists
of hedging commercial transactions carried out by subsidiaries
in currencies other than their functional currency. Compagnie
de Saint-Gobain and its subsidiaries may use currency
options and forward contracts to hedge exposures arising
from existing or forecast commercial transactions.
The subsidiaries enter into currency option contracts solely
with Compagnie de Saint-Gobain, the Group’s parent company,
which then hedges the risk on the market.
Most forward contracts have short maturities, of around three
months. However, hedges of orders may have maturities
of up to two years. The majority of transactions are hedged
invoice-by-invoice or order-by-order with Saint-Gobain
Compensation, the entity set up to manage the Group’s
currency risks. Saint-Gobain Compensation hedges
these risks solely through the use of forward contracts.
The system enables participating companies to hedge
their commercial positions as soon as the exposure arises.
Saint-Gobain Compensation reverses all of its positions
with Compagnie de Saint-Gobain and does not therefore have
any open positions.
For the other companies, hedges are set up with Compagnie
de Saint-Gobain upon receipt of the orders sent
by the subsidiaries, or with the local Delegation’s cash pool or,
failing that, with the subsidiaries’ banks.
The Group’s exposure to currency risks is tracked by means
of a monthly reporting system incorporating the subsidiaries’
currency positions. At December 31, 2008, 94% of the Group’s
foreign exchange position was hedged. At that date,
the net exposure of subsidiaries in currencies other
than their functional currency was as follows:
In millions of euro equivalents Long Short
EUR 8 10
USD 17 21
Other currencies 1 2
Total 26 33
The following table shows the impact on net income
of a 10% increase in the exchange rates
of hedging currencies:
Impact in € millions
Net gain or loss
EUR - 0.2
USD - 0.5
A 10% decrease in the above currencies at December 31, 2008
would have an equivalent impact in the other direction,
assuming that all other variables were unchanged.
Energy and raw materials risk
The Group is exposed to the risk of changes in the price
of raw materials used in its products and in energy prices.
These prices have been particularly volatile in recent months
and may remain so in the current financial and economic
environment. The energy hedging programs may be
inadequate to protect the Group against significant
or unforeseen price swings that could result from
the current financial and economic environment.
To reduce its exposure to energy price fluctuations,
the Group hedges part of its natural gas purchases
in the United States and certain European countries,
as well as its fuel oil purchases in Europe, using swaps
and options in the functional currencies of the entities
whose exposures are hedged. The hedges are organized
by steering committees made up of representatives
of the Finance Department, the Purchasing Department
(Saint-Gobain Achats) and the General Delegations concerned.
Hedges of gas and fuel oil purchases, other than fixed price
purchases negotiated directly by the Purchasing Department,
are set up by the Treasury and Financing Department,
on the instructions of Saint-Gobain Achats.
There is no hedging policy managed at Group level
by a steering committee for other energy sources
and other regions not mentioned above, because:
MANAGEMENT REPORT
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Saint-Gobain - 2008 Annual Report