Consolidated financial statement of JSW S.A. Capital Group for 2012

3.1. Financial risk factors

The business conducted by the Group exposes it to the following financial risks: market risk (including: price risk, foreign exchange risk and cash flow risk related to changes in interest rates), credit risk and liquidity risk.

a. Price risk

The Group has no material investments in capital securities classified in the consolidated statement of financial position as available for sale or carried at fair value through profit or loss and therefore is not exposed to price risk related to changes in the prices of such investments.

b. Foreign exchange risk

The overriding objective of the Group's policy is to mitigate as much as possible the Group's FX risk arising from its foreign currency exposure and which results from the uncertainty as to the level of future cash flows and financial result due to changes of the exchange rate. The Group is exposed to a significant foreign exchange risk associated with the sales of products on international markets. Moreover, in order to mitigate the foreign exchange risk, the Group concluded FX forward transactions in 2012. The Group also makes small purchases of materials, services or investment assets in foreign currencies and incurs foreign currency loans. This curtails the FX volatility risk resulting from selling products in a natural way.

The Group does not apply hedge accounting.

Potential impact of an increase in the EUR/PLN exchange rate on net profit:

	31 Dec 2012	31 Dec 2011
% change	5.00%	5.00%
Change in the value of financial assets:	15.1	14.6
Change in the value of financial liabilities	(8.0)	(19.0)
Impact on pre-tax profit	7.1	(4.4)
Tax effect	(1.4)	0.8
Impact on net profit	5.7	(3.6)

Potential impact of a decrease in the EUR/PLN exchange rate on net profit:

	31 Dec 2012	31 Dec 2011
% change	-5.00%	-5.00%
Revaluation of financial assets	(15.1)	(14.6)
Revaluation of financial liabilities	1.8	19
Impact on pre-tax profit	(7.1)	4.4
Tax effect	1.4	(0.8)
Impact on net profit	(5.7)	3.6

Changes in exchange rates of currencies other than EUR do not have a material impact on the Group’s net profit.

c. Cash flow volatility risk caused by changes in interest rates

The Group’s exposure to interest rate risk concerns primarily potential changes in cash flows caused by shifts in market interest rates. The Group companies finance their operating and investing activities partly with external funds bearing variable interest rates and invest surplus cash in the financial assets bearing also floating interest rates. The Parent Company is the main entity exposed to the interest rate risk affecting deposits and cash, while other companies that use external financing are exposed to the risk of volatile interest rates affecting liabilities under loans. The Group does not use derivatives to hedge against interest rate risk. However in 2012, in order to minimize the adverse effect of the declining interest rates on the Parent Company's performance, action was taken to maintain income on term deposits, i.e. before the announced interest rate decrease, term deposits maturing in over 3 months were concluded which may be terminated without waiving any interest.

The tables below present the potential impact of a +/- 50 basis point change in interest rates on net profit.

The impact of an interest rate increase on net profit:

	31 Dec 2012	31 Dec 2011
Volatility in basis points	50bp	50bp
Change in the value of financial assets:	13.2	14.2
Change in the value of financial liabilities	(1.3)	(2.1)
Impact on pre-tax profit	11.9	12.1
Tax effect	(2.2)	(2.3)
Impact on net profit	9.7	9.8

Effect of an interest rate decrease on net profit:

	31 Dec 2012	31 Dec 2011
Volatility in basis points	(50)bp	(50)bp
Change in the value of financial assets:	(13.2)	(14.2)
Change in the value of financial liabilities	1.3	2.1
Impact on pre-tax profit	(11.9)	(12.1)
Tax effect	2.2	2.3
Impact on net profit	(9.7)	(9.8)

d. Credit risk

Credit risk in the Group is concentrated in the following areas:

• trade receivables,
• cash and bank deposits,
• derivatives,
• debt securities and loans granted.

Credit risk identified in trade receivables is linked to reliability of the customers. Internal changes in the Group's coke sales policy, resulting in credit risk shifting from related entities (coking plants and Polski Koks S.A.) directly to JSW S.A. had no material effect on the credit risk associated with receivables. The ArcelorMittal Group and companies controlled by the State Treasury remain the principal buyers, responsible for respectively 36.2% and 12.4% of receivables as at 30 September 2011.

In order to mitigate the risk of uncollectible receivables, the following security interest is established:

•   blank promissory notes,
•   sureties extended by companies with a strong position on the market,
•   assignment of receivables,
•   letters of credit.

In the case of new customers or customers with an uncertain financial position, the Group makes the sale after the business partner has made a prepayment. In the case of some buyers using commercial credit, their trade receivables are covered by trade receivables insurance from insurance companies. The Group does not require any security interest from buyers with a strong market position, considering the strategic nature of the cooperation and the ability to assess their financial documents. Taking into account the above security interest and the history of cooperation, the risk of uncollectible receivables is deemed to be very low. As at 31 December 2012, the insurance covered 13.2 % of the Group's trade receivables; additionally, 46.7 % receivables were secured through one of the aforementioned contractual securities.

The Group believes that the maximum exposure to sales-related credit risk on the final day of the reporting period is the full book value of trade receivables without the fair value of security accepted, cash and cash equivalents and financial assets in the form of bank term deposits.

In order to mitigate the risk associated with investing its temporarily free financial resources, the Group reduced the number of financial institutions with which it cooperates to solely banks with an established market position. The current number of such institutions on the financial services market allows the Group to diversify the level of cash held in respective banks thus minimizing credit risk.

Concentration of free financial resources in respective banks:

Bank	Rating	Rating organization	31 Dec 2012	31 Dec 2011
A	A	Moody's	21.5%	14.7%
B	Baa2	Moody's	21.0%	0.7%
C	A2	Moody's	14.8%	15.0%
D	A2	Moody's	13.4%	22.7%
E	Aa2	Moody's	12.1%	21.0%
F	Baa1	Moody's	7.4%	1.2%

The table above presents concentration of cash and deposits above the 5% level.

e. Liquidity risk

Prudent management of liquidity risk requires the Company, among others, to maintain an appropriate level of cash and an available credit facilities. The Group regularly forecasts and monitors liquidity based on expected cash flows.

Group companies have active overdraft facility limit in the aggregated amount of PLN 209.0 million. In 2012, Group companies used overdraft financing quite rarely.

Taking into account the Group’s accumulated financial reserves and the level of liabilities, we may assume that the risk of losing financial liquidity is slight.

The table below contains an analysis of the Group's financial liabilities in respective age groups, distributed according to time to contractual maturity on the final day of the reporting period. The amounts presented in the table represent undiscounted contractual cash flows. The balance to be repaid within 12 months is posted at book values, since the impact of discounting is not significant.

	Under	From 1 up to 2 years	From 2 up to 5 years	Above 5 years	Total
As at 31 Dec 2011
Loans and borrowings	187.6	62	179.2	-	428.8
Trade liabilities and other financial liabilities	1,081.8	34.3	10.9	-	1,127.0
Financial derivatives (gross settled)	288.8	-	-	-	288.8
Total	1,558.2	96.3	190.1	-	1,844.6
As at 31 Dec 2012
Loans and borrowings	86.8	97.9	111.6	-	296.3
Trade liabilities and other financial liabilities	1,016.8	21.6	11.3	5.9	1,055.6
Financial derivatives (gross settled)	208.7	-	-	-	208.7
Total	1,312.3	119.5	122.9	5.9	1,560.6