Risks related to social, economic and market environment
Level of risk
-
low
-
medium
-
high
Change in the level of risk compared to 2016
-
decrease
-
unchanged
-
increase
-
Risk associated with the global economic circumstances
- medium
- decrease
A downturn in global economies, in particular in the steel and power industry or events causing a significant decline in demand for coal and coke, may have an adverse impact on the Group’s activity, results and financial standing. In 2017 we witnessed continuation of an upward trend toward higher prices for steel goods, higher margins in steel producers and improvement in their financial condition. The European Union’s implementation of anti-dumping and anti-subsidized customs duties diminished the strength wielded by imported cheap steel from third countries, chiefly from China. According to the World Steel Association, in 2017 global steel production climbed 5.5% compared to 2016 (+87.5 million tons). Production trended up in most regions in the world: +5.7% in Asia, +15.9% in Africa, +4.1% in the European Union and +13.1% in non-EU European countries. China, the largest steel producer in the world, produced nearly 787 million tons in 2017. Compared to 2016 it posted 5.7% growth in steel production (+44.8 million tons).
-
Risk of fluctuations in demand and supply on key product markets
- medium
- decrease
The oversupply of coal and coke in global markets may cause a significant decrease of prices, which may have significant adverse impact on the Group’s activity, results and financial standing. Due to the interconnections of these industries, a downtrend (lack of demand) in the coke and steel market, has direct influence on the results generated by the coal market. The expansion of local and global competition may also pose a threat through the higher volume of coal and coke produced at lower costs and the influx of cheap coal and coke from imports. The Group’s coal production volume in 2017 reached 14.8 million tons, i.e. 2.0 million tons less than in 2016. Coal sales to external buyers were slightly below output: 10.1 million tons, i.e. 1.6 million tons below 2016.
-
Risk of reduction in blast furnace pig iron production capacity in europe
- medium
- decrease
We continue to grapple with a structural glut of steel production capacities on the European and global markets. The extensive consolidation and M&A processes in steelworks in progress on the market may lead to relocation of steel production within large metallurgy concerns. In Europe, at the end of 2017, from among 75 installed blast furnaces, 12 still remained shut down. Demand for coke and coking coal is also affected by planned overhauls of blast furnaces as well as sudden and unplanned downtime resulting from failures or accidents.
-
Risk of coal and coke price volatility
- high
- unchanged
In the past, the Group has experienced periods of significant volatility in coal and coke prices and there is a probability that such volatility may occur in the future. The situation on the coking coal market is linked to the coke and steel market; business cycles entail variation in prices in those sectors. The prices of coking coal depend heavily on demand in the global metallurgical and steel markets. In 2017, a major change occurred in terms of market benchmarks shaping the pricing policies of coal producers. Market participants no longer negotiate previously set benchmarks for each quarter. Instead, transactions are executed on the basis of underlying indices. The departure from the benchmark set prior to or at the beginning of the delivery quarter opens up the possibility of using different calculation periods for reference prices, depending on contractual arrangements. Also possible is the application of various spot quotations. The market has a number of indices to choose from (Platts, TSI, Argus). Market participants apply them independently or use them as the basis for constructing index baskets shaping their pricing strategies. Such indexes differ from each other most notably by the methodology, qualitative parameters (chiefly CSR, VM and ash) and the source of origin of the commodity. The changes in coking coal prices in 2017 were affected to a large extent by the following non-recurring events: supply disruptions caused by adverse weather phenomena (cyclone Debbie in Australia), geological problems (Australia, USA) and logistical challenges (bottlenecks in coal terminals in Australia and the United States, rail transportation problems). Each of these events caused a rapid price increase followed by a price drop when the event came to an end. In the future, such events may re-emerge and trigger new changes in the prices. To reduce the impact of the risk, the Group conducts on-going monitoring and analyses price trends in the coal, coke and steel markets. The terms and conditions of long-term contracts allow for periodic price negotiations.
-
Industry competition risk
- high
- unchanged
The competition in the coal and coke industry is influenced, among other things, by the price, production capacity, quality and physiochemical properties of coal and coke, logistics, costs and occurrence of new competitive producers. The Group may not be able to compete effectively with the repercussions of this risk due to the possible occurrence of worse mining and geological conditions in coal mining and changes in the production split of appropriate coal grades. In order to maintain the competitiveness of its products, the Group pursues a flexible pricing policy; otherwise, the Group would be exposed to customer churn and deterioration in its performance.
-
Changes in fiscal and monetary policy
- high
- unchanged
In January 2014, amendments to the value added tax took force. The legal regulations introduced amendments to the determination of the tax liability, the moment of tax deduction and taxable income. Tax authorities may intensify their efforts aimed at increasing tax receipts. The Value-Added Tax Act continues to be amended, just like other tax laws. Moreover, VAT sanctions were implemented as of January 2017 along with making the penalties more stringent in the Criminal Tax Code and the Criminal Code. Actions taken in the area of risk minimization include: development of tax procedures, organization of training events, issue of tax instructions, ongoing monitoring of changes in legal regulations.