Risk Management

As a global group with operations in different parts of the world, Gränges is exposed to various risks and uncertainty. Gränges’ risk management aims to identify, assess, and reduce risks related to the Group’s business and operations. Gränges is primarily exposed to risks in the following areas stated below.

Business risks

Business risks are managed by the operative units in accordance with the guidelines and procedures established for every business area and unit.

About half of Gränges’ sales volume goes to suppliers in the automotive industry. Vehicle production is in turn dependent on a number of external factors such as the economy, interest rates, consumer behaviour and taxes. During an economic downturn, the automotive industry normally sees significant decreases in production, which results in lower demand for aluminium products that are used in vehicles.

Risk management and comments for 2016

As Gränges has a global offering, the risk of downturns in individual markets affecting the company, is reduced. Gränges also sells materials for stationary heat exchangers used in for example buildings. The aim is to increase sales to new end-customer markets other than the automotive industry. Due to the acquisition in the US that was finalized in 2016,

Gränges’ exposure to the automotive industry declined.

Casting houses and rolling mills are work environments that contain significant health and safety risks where strict safety routines may never be bypassed or assigned a lower priority. If the implementation of safety procedures is unsuccessful or is not effective, employees and other persons may be injured. Unsafe workplaces can also increase employee turn-over and raise operating costs. Injuries can also mean production stoppages, which could result in financial costs for Gränges.

Risk management and comments for 2016

Gränges has zero tolerance of injuries and accidents. Gränges has strict safety routines and continually invests in different types of safety measures to prevent accidents at the production facilities. Three of the injuries that occurred in 2016 were deemed serious. Hand and finger injuries were the most common kind of injury. During the year Gränges carried out projects for increased fire safety at the facilities in Finspång and Shanghai.

Gränges conducts operations in properties where industrial operations have been carried on for a long time. Local environmental laws and regulations govern the operations and Gränges can be held responsible for polluted land that Gränges uses or has used. Under current regulation, the party that conducted the polluting operations is also responsible for cleaning up the land.

The manufacture of aluminium materials is energy-intensive and the capacity to reuse process scrap and to ensure quality is thus crucial to the Group’s total environmental impact.

Risk management and comments for 2016

When requested, Gränges takes part in investigations conducted by local authorities to ascertain who is responsible for cleaning up land. At present investigations are ongoing in a number of municipalities in Sweden where business operations stem from business operations conducted by Gränges.

During the year, a number of projects were carried out aiming to reduce energy consumption.

Gränges is dependent on the supply of input goods, especially aluminium. Insufficient supply of slabs means that Gränges cannot produce certain alloys. In the future, high-quality slabs at the right price may be difficult to source as it is not a standardised commodity but requires specially qualified suppliers.

Risk management and comments for 2016

As a rule, Gränges enters into agreements with slab suppliers for the year to come on the basis of estimated volumes. Agreements are entered into with two to five suppliers in each market in order to ensure deliveries. Gränges has its own casting houses in the production facilities, which makes the company less sensitive to supply issues regarding slabs.

Financial risks

Gränges has international business operations and is exposed to financial risks such as currency risk, interest rate risk, commodity price risk, liquidity risk and credit risk. Gränges uses derivatives and other financial instruments to reduce the risks in accordance with the Group’s financial policy. Gränges Group Treasury most important responsibility is securing the Group’s financial flexibility in the short and long term, as well as monitoring and managing financial risks in collaboration with the individual operative units.

Almost all of Gränges Group’s sales are generated outside of Sweden. Sales contracts are mainly signed in US dollars, euro and Chinese yuan, depending on where the customers are located. Changes in exchange rates have an impact on Gränges’ income statements, balance sheets and cash flow. Over time, changes in exchange rates also affect the company’s long-term competitiveness and thus its earning capacity.

Risk management and comments for 2016

Gränges’ treasury policy strictly regulates the company’s management of foreign exchange risk. Gränges uses financial instruments, mostly futures, to reduce the company’s exposure to changes in exchange rates with regard to the company’s commercial cash flows. Changes in exchange rates for firm commitments are managed in accordance with a model whereby the entire exposure with a duration of up to 18 months is hedged. Exposures relating to customer orders without firm commitments are in part hedged up to 24 months.

Gränges procures large volumes of aluminium for the company’s production facilities in Sweden, China and the US. The price of aluminium is based on the trade price on LME in London or SHFE in Shanghai. Gränges’ revenue model means that the cost of aluminium is passed on to the customer to the extent possible, through adjustment in agreements both with customers and suppliers. Sometimes lag can arise from the aluminium procurement date to the sale of the finished product, which means that Gränges to some extent is exposed to fluctuations in the price of aluminium.

Risk management and comments for 2016

The aim of Gränges metal policy is to balance the short and long position, that is that the company should not be affected by changes in the price of aluminium. Gränges does not take any positions whereby the company speculates in the future value of aluminium. Financial instruments allow Gränges to minimise the risk of changes in the price of aluminium during the time that Gränges has the metal in store for processing.

Gränges’ interest rate risk mainly relates to the Group’s interest-bearing liabilities. Changes in interest rate levels may affect the Group’s results and cash flow and/or the fair value of financial assets and liabilities. The actual interest rate risk is also dependent on the size of the interest bearing debt.

Risk management and comments for 2016

Gränges’ borrowings are mainly in Swedish kronor and US dollars at floating interest rates. The duration of the interest bearing debt portfolio can be changed by longer interest periods or by interest rate swaps. The target for the duration of the interest bearing debt portfolio is regulated in the Treasury policy. During 2016 no interest rate swaps where used to prolong the duration.

Liquidity risk is the risk that Gränges will not be able to meet its payment obligations. Cash flow from operations, which is affected by changes in working capital, among other factors, is managed at the Group level. By monitoring liquidity flows in the short and long term, Gränges maintains good financial readiness.

Risk management and comments for 2016

Gränges shall have a liquidity reserve that covers payments on loans for the coming twelve months, investment requirements and a strategic reserve. Excess liquidity is managed by the Group’s treasury function and can be invested at approved banks to mature within six months. The aim is to minimise excess liquidity in the Group and at the same time minimise the liquidity risk.

The credit risk is the risk that a counterparty does not meet its obligations to Gränges. The management of credit risk related to accounts receivables and other operating receivables is handled as part of the business risk according to strict routines. Gränges seeks to minimise the liquid assets invested outside the Group and deposits of excess liquidity with other counterparties.

Risk management and comments for 2016

Gränges’ exposure to trade receivables is managed and followed up continually in local credit committees. The need for provisions to be made is tested on a quarterly basis or when necessary according to predefined criterias. The credit risk on financial counterparties is handled by choosing counterparties with a good credit rating and by agreements, such as ISDA-agreements.

Other risks

Gränges is exposed to a number of other risks in areas such as personnel and legislation. To manage these risks, Gränges is actively working with education, policies and guidelines for employees of the Group.

Gränges operates in a specialised niche where experience and knowledge of the company’s markets, customers and production are key factors for the company’s success. Among other things, Gränges has a number of specialists in research and development who may be hard to replace. The loss of key employees can have a negative impact on Gränges’ possibilities of conducting and developing its operations and its ability to develop new products.

Risk management and comments for 2016

Gränges offers remuneration levels in line with market rates and conditions of employment necessary to recruit, develop and retain key employees.

Gränges operates in many different markets, with local laws and rules. If employees or persons who work on Gränges’ behalf violate these laws and rules it could have negative consequences for Gränges. The company may be affected by events that damage confidence in the company, its operations or employees, e.g. if environmental, quality or ethical requirements are not met in the manner prescribed by Gränges.

Risk management and comments for 2016

Gränges ensures that the company’s employees are regularly informed of relevant changes in legislation or other rules that the company must follow. This is done through external partners, and also through membership in various industrial organisations. Gränges conducts in-house training of marketing and sales managers to ensure good knowledge and understanding of legal risks and requirements.

As a public company, far-reaching requirements are imposed in respect of conduct, ethics and transparency. Gränges has adopted a Code of Conduct, policies, guidelines and core values in order to ensure that the company and all employees always pursue sustainable entrepreneurship. Violations of the company’s internal policies and Code of Conduct may have negative consequences for the company’s reputation and brand and thereby adversely affect the company’s earnings.

Risk management and comments for 2016

Gränges ensures that the company’s employees receive regular training in questions concerning morals and ethics and that the company’s core values are complied with. The company’s internal communication, in the form of the intranet, the personnel magazine and actual meetings, has the task of supporting and developing this work. The company’s policies and guidelines have also been developed during 2016.