Company annual reports can sometimes be a turgid read, but every now and again they may include an exciting flash of something interesting, almost like seeing the flash of a metallic-blue kingfisher darting along a non-descript and over-grown ditch. However, the recent LafargeHolcim (LH) Annual Report 2017 was a very interesting read throughout, and nowhere more so than in the section on ‘Risk management,’ especially after its recent and ongoing travails in regards to the operation of its cement plant in Syria (see Page 69, Global Cement Magazine - June 2018).
The company explains that the Group’s ‘risk map’ is established on the basis of ‘strategic, operational and topical risk assessments’ to form a Group risk report, on the basis of several steps; Risks are assessed and prioritised according to their significance and likelihood: Top risks are analysed more deeply regarding their causes; Risk mitigating actions are defined. Risk management is a line-manager’s responsibility, backed-up by Group Risk Management and with ‘internal audit’ as a third line of defence.
In its annual report, LafargeHolcim lays out the results of this risk management exercise for us all to see. In no particular order, the company’s greatest risks are:
Market demand risks: changes in demand leading to changes in pricing and/or industry structure - LH says that it maintains a globally-diversified portfolio, with top-3 positions in 80% of its markets, and that it trades in clinker, cement and other products to take advantage of shifting demand between countries;
Legal and compliance risk: such as being found to have violated law covering business conduct such as bribery, corruption, terrorism and unfair competition - LH says that it maintains a comprehensive risk-based compliance programme with dedicated resources, alongside comprehensive training;
Energy prices: the risk being that energy costs rise, or that certain alternative fuels become unavailable - LH says that fuel mix and energy efficiency are key areas of focus for all plants, and that it uses ‘derivative instruments’ to hedge part of its exposure to these risks;
Raw materials risk: ‘That raw materials cannot be supplied at economical cost or suitable quality’ (eg sand and limestone) - LH says that ‘We apply a range of tactics including strategic sourcing, changing input mixtures and maintaining minimum long-term reserve levels. At Group level our R&D is devoted to finding ways to mitigate this risk while at the same time lowering our environmental footprint, eg by using waste-derived materials’;
Sustainability risk: ‘The cement industry is associated with significant negative externalities, notably high CO2 emissions - By 2030 LH aims to reduce net CO2/tonne of cement by 40% compared to 1990 levels, and advocates a carbon price, while increasingly aiming the business towards sustainable products and solutions;
Political risk: Due to political instability in its operating markets - LH believes that diversification is the key response, and is politically neutral;
Talent risks: Does the company have enough of a ‘talent pipeline’ for its global ambitions? - LH evaluates talent in its staff and invests in talent development;
Cyber risk: LH has established a Group cyber-security roadmap to protect critical assets from cyber attacks and to improve its cyber resilience;
JV and associate risks: LH says that where it does not have a controlling interest, there may be a restriction of its ability to generate adequate returns and to ensure its compliance programmes are adhered-to - which it says it seeks to manage through formal agreements with the companies in question;
Goodwill and asset impairment: Significant under-performance of any unit - LH says it monitors units on a timely basis, or when a ‘triggering event materialises;’
Financial risks: Including liquidity, interest rates, foreign exchange and credit risk, possibly causing a downgrade of the Group’s credit rating and the availability and cost of future funding - buried deep in the Annual Report, it says that a 1% change in interest rates would cost the group CHF34m (Euro29m);
Insurance risks: Not all risks can be insured - LH monitors its status to determine if additional insurance is required;
Defined benefit pension risk: These pensions are volatile and the Group may have to pay into them to ‘top them up’ - Where possible, LH has closed such pension schemes and actively manages the remainders.
LafargeHolcim says that ‘additional risks and uncertainties not presently known to LH or that it deems immaterial’ may develop into issues as well.
What, I wonder, would be the impact of a carbon emission floor price in Europe of Euro20/t of CO2? What if the price was set at US$123/t of CO2, according to a December 2016 ‘worst-case’ estimate of the ‘social cost’ economic impact of the emission of CO2 according to the US EPA and other agencies? How would LH cope? How would any cement company in the world?
1 https://www.epa.gov/sites/production/files/2016-12/documents/social_cost_of_carbon_fact_sheet.pdf