BROADENING OUR HORIZONS - Arrium

Finance & Risk ManagementOneSteel material business risksThe following key business risks have been identified as having thepotential to impact on the company’s earnings stream. OneSteelis taking the necessary steps to ensure that these risks areappropriately managed.Domestic and global economic environment and capitalmarket conditionsOneSteel’s financial performance and market capitalisation willfluctuate due to movements in capital markets; broker analystrecommendations; interest rates; exchange rates; inflation;economic conditions; changes in Government fiscal, monetary andregulatory policies; commodity prices; construction, mining andmanufacturing industry activity levels; scrap metal prices; globalgeopolitical events and hostilities and acts of terrorism; investorperceptions and other factors that may affect OneSteel’s financialposition and earnings.Cyclical nature of the steel industryOneSteel’s revenues and earnings will be sensitive to the level ofactivity in the Australian construction, manufacturing, mining,agricultural and automotive industries and will also be sensitive tothe level of activity in the global mining and rail industries.Adverse impact of certain commodity price fluctuationsOneSteel is a buyer of various commodities, including coking coal,hot rolled coil and zinc, and is a seller of iron ore. In addition, supply/demand levels for commodities such as gold, copper etc. couldhave direct effects on OneSteel’s Mining Consumables business.Fluctuations in the global prices of these commodities will impactOneSteel’s profitability and balance sheet.Adverse impact of foreign currency exchange ratesOneSteel has exposure to foreign exchange translation risk.Fluctuations in foreign currency exchange rates, in particular,volatility of the US dollar against most major currencies andstrengthening of the Australian dollar against the US dollar, mayhave a material adverse impact on the financial position andperformance of OneSteel.CompetitionOneSteel faces competition from imported and domesticmanufactured steel long and tubular products, some of which mayhave lower manufacturing costs than OneSteel.A significant increase in competition, including through imports,could materially affect the future financial position and performanceof OneSteel by putting downward pressure on steel prices or byreducing OneSteel’s sales volumes.Risk of competition also exists in OneSteel’s Recycling business wherethe relatively high operating base of the domestic Recycling businessputs it at an increasing disadvantage against its competitors.Dependence on key customer and supply relationshipsOneSteel relies on various key customer and supplier relationshipsand the loss or impairment of any of these relationships couldhave a material adverse effect on OneSteel’s operations, financialcondition and prospects.Proposed Carbon TaxOneSteel had concerns with the proposed Carbon Tax as originallyannounced, due to the likely adverse implications the tax would havehad on the industry’s competitive position. Steelmaking technologyconstraints mean there is little the industry can do to materiallyreduce emissions from its key manufacturing processes. This meansthat rather than act as a price signal to reduce emissions, the taxas originally announced would merely have been an additional costburden not faced by our international competition.OneSteel has been advocating that the Government take a sectoralapproach for the steel industry that takes into account the uniqueaspects of steelmaking technology and its markets to avoid damagingthe competitiveness of the industry. We believe that the sectoralapproach announced by the Australian Government on 10 July 2011for the steel industry, including the introduction of the Steel TransitionPlan (STP) is both appropriate and sensible. Our concerns about theadverse impacts of the proposed Carbon Tax on our competitiveposition have been recognised and substantially addressed, at leastover the four-year life of the STP. We also support the Government’srecognition of the need for appropriate review mechanisms to beavailable to address the merits of continued support.Mineral Resource Rent Tax (MRRT)OneSteel is a miner and seller of iron ore and also uses iron oreinternally for steel production.If the proposed MRRT is introduced, it will have an adverse impacton the financial performance of OneSteel. However, the extent ofthis impact is uncertain, as it is dependent on the final form of theMRRT, if it is legislated, and how the tax will treat materials usedinternally by our steelworks. It is our understanding that the MRRTis not intended to affect the Whyalla Steelworks.Operational riskThe production of iron and steel products involves a number ofinherent risks relating to the operation of OneSteel’s manufacturingfacilities that involve the use of energy and infrastructure resources,including electricity, gas and water, the production and movementof liquid metal, the hot rolling and cold forming of steel sectionsand, at times, complicated logistical processes. Operational risksexist with respect to the major units at Whyalla and electric arcfurnaces. Investigations into the unplanned extended stoppage ofthe Whyalla blast furnace have resulted in the decision to undertakesome repairs and redesign work which has now been completed.OneSteel’s Iron Ore business’s operational risks relate to theinfrastructure of the supply chain capability in order to meetincreasing export demand. Natural disasters that have taken placein the last 12 months such as the floods in Queensland and CycloneYasi have illustrated these risks and their potential knock-on effects.The Recycling business is also exposed to operational risks relatingto its supply chain.InsuranceOneSteel will seek to maintain insurance for business interruption,property damage, goods in transit and public and product liability.However, OneSteel’s insurance will not cover every potential riskassociated with its operations and, in some cases, will be subjectto large deductibles. The occurrence of a significant adverse event,the risks of which are not fully covered by insurance, could havea material adverse effect on OneSteel’s financial condition andfinancial performance.Occupational Health and Safety (OHS)OneSteel has been granted self–insurance status for workers’compensation in all eligible states. OneSteel’s continued safetyperformance and compliance with OHS systems and practices isa key component to maintaining self–insurance status. If OneSteelfails to maintain adequate occupational health and safety systemsand practices, OneSteel may lose its self–insurance status, whichmay have a material adverse effect on the financial performanceof OneSteel.Product riskOneSteel maintains an internal risk management process and alsofollows quality assurance procedures in relation to the manufactureof its products and materials. OneSteel’s steel mills are accreditedto internationally recognised standard ISO9001. However, due to thenature of its operations, it is possible that claims against OneSteelcould arise from defects in materials or products manufacturedand/or supplied by OneSteel.Industrial and personnel riskInterruptions at OneSteel’s production facilities arising fromindustrial disputes, work stoppages and accidents may result inproduction losses and delays, which may adversely affect thefinancial position and performance of OneSteel. OneSteel may alsohave difficulty in attracting and retaining staff with the specialisedskills necessary for the operation of OneSteel’s facilities, particularlyin regional locations.39