- JSW GROUP
- Our surrounding
- Strategy
- Activities in 2018
- Innovations
- Management rules
- Risks
- Outlook
Risk and threat factors
INDICIES:
Deliberate management of threats and opportunities makes it possible to protect value and increase the Group's value-building capacity.
JSW Group’s key risks:
- [[G.3.2]]
Level of risk
| low |  |
| medium | |
| high | |
Change in the level of risk compared to 2017:
| decrease |  |
| unchanged |  |
| increase |  |
| RISKS ASSOCIATED WITH SOCIAL, ECONOMIC AND MARKET ENVIRONMENT | |
|---|---|
| RISK OF RECESSION IN GLOBAL ECONOMY
|
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 2018, the EU steel market grew relatively quickly, supported by the good operating results of industry sectors using steel. Among the EU states that are important for the Group’s sales, the largest decline was recorded in Austria (-1.25 million tons, -15.4%, as a result of an overhaul of a blast furnace at Voestalpine), in Germany (-0.86 million tons, -2.0%), Sweden (-0.27 million tons, -5.5%) and in Poland (-0.17 million tons, -1.6%, as a result of an overhaul of a blast furnace at Dąbrowa Górnicza). An increase in production occurred in the Czech Republic (+0.4 million tons, +9.1%), Italy (+0.4 million tons, +1.7%) and Slovakia (+0.3 million tons, +5.0%). According to the World Steel Association, in 2018 global steel production climbed 4.6% up to 1,808.6 million tons (up by 78.8 million tons). The largest increase in production was in Asia (+67.9 million tons, +5.6%), including China (+57.4 million tons, +6.6%). |
| RISK OF FLUCTUATIONS IN DEMAND AND SUPPLY ON KEY PRODUCT MARKETS
|
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 coal producers. 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 2018 reached 15.0 million tons, i.e. 0.2 million tons more than in the corresponding period of 2017. Total sales of coal to external and internal offtakers were slightly below production levels: 14.8 million tons, i.e. 0.2 million tons more than 2017. |
| RISK OF REDUCTION IN BLAST FURNACE PIG IRON PRODUCTION CAPACITY IN EUROPE
|
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.
75 blast furnaces are installed in Europe. Demand for coke and coking coal is also affected by planned overhauls of blast furnaces as well as sudden and unplanned downtime resulting from breakdowns or accidents. Production activity in the EU’s steel-consuming sectors increased rapidly in the first half of 2018, with an increase of 0.7 percentage points after the first quarter. In the second half of 2018, we can see a more moderate growth rate and a similar trend is expected to continue in 2019. |
| RISK OF COAL AND COKE PRICE VOLATILITY
|
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 the Group’s coking coal depend heavily on demand in the global metallurgical and steel markets. On the other hand steam coal prices depend on other domestic producers and the prices of other fuels. 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. These indices differ from each other mainly in the methodology, the quality parameters (primarily CSR, VM and ash) and the origin of the raw material. The changes in coking coal prices in 2018 were affected to a large extent by non-recurring events: a bottleneck in an port in Australia (ships waiting more than 3 weeks for loading), supply problems in Australia), rebuilding of coking coal inventories after the monsoon season in India, a fire and announcement of a force majeure event at the North Goonyella mine in Australia. 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
|
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.
Actions taken to minimize these risks include the flexible pricing policy adopted by the Group. |
| CHANGES IN FISCAL AND MONETARY POLICY
|
Tax authorities may intensify their efforts aimed at increasing tax receipts. The Value-Added Tax Act continues to be amended and Corporate Income Tax regulations have also changed significantly. 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 to minimize these risks include: ongoing monitoring of the control mechanisms implemented in order to revise them as needed, and regular update of the internal document entitled “JSW S.A. Tax Procedure” to comply with the changing regulations. |