Strategic focus areaEconomic performance
Change in risk profileNo change
Change in opportunity profileNo change
Umicore’s earnings are exposed to risks relating to the prices of the metals which we process or recycle. These risks relate mainly to the impact that metal prices have on the surplus metals recovered from materials supplied for recycling, and concern platinum, palladium, rhodium, gold, silver and a wide range of base and specialty metals.
For some metals quoted on futures markets, Umicore hedges a proportion of its forward metal exposure to cover part of the future price risks. Umicore also faces transactional price risks on metals. The majority of its metal-based transactions use global metal market references. If the underlying metal price were constant, the price Umicore pays for the metal contained in the raw materials purchased would be transferred to the customer as part of the price charged for the product.
However, because of the lapse of time between the conversion of purchased raw materials into products and the sale of products, the volatility in the reference metal price creates differences between the price paid for the contained metal and the price received. Accordingly, there is a transactional exposure to any fluctuations in price between the time raw materials are purchased (when the metal is “priced in”) and the time the products are sold (when the metal is “priced out”).
The Group’s policy is to hedge the transactional risk to the maximum extent possible, primarily through forward contracts. The accelerating growth in battery materials is rapidly increasing the exposure to specific related metals such as cobalt or nickel. Increasing volumes, the vulnerability to the associated price volatility and in the case of certain metals such as cobalt, the absence of a liquid paper forward market, result in increased metal risks.
For more information on the structural risk and on the transactional and inventory risk related to the metal prices, see Statements, note F3.
Change in context
Prices for precious metals strengthened in 2019, particularly in the second half of the year. Prices for palladium and rhodium increased significantly, while gold, silver and platinum prices showed a more modest increase over the full year cycle.
Demand for cobalt containing products was weak in 2019, as customers were reducing excess inventories built up in 2018, when the cobalt price was more than double the price of 2019. This more moderate global demand resulted in continued pressure on the price.
Measures taken by umicore
Over the course of 2019, Umicore entered into additional forward contracts securing a substantial portion of its structural price exposure for certain precious metals and base metals in 2020 and 2021, thereby increasing earnings predictability. In particular for gold and palladium, Umicore locked in more than half of its 2020 and 2021 exposure.
Umicore also hedged a significant portion of its platinum exposure for 2020. In the absence of a paper market, no forward contracts were entered into for rhodium. For cobalt, Umicore’s transactional hedging policy aims to match to a maximum extent the pricing in and pricing out of the contracted metal. Such physical back-to-back hedging in 2019 enabled Umicore to manage transactional risks related to cobalt.