Merit Commodity Management

Vienna, March 2010

Specialist in Commodities

Vienna, March 20102

About MERIT

MERIT provides tailor-made commodity management servicescommodity management services:

Analysis & monitoring of commodity exposure – effective risk control effective risk control

Defining commodity hedging strategies – budget balancebudget balance

Realizing commodity trading strategies – stabilisation of company stabilisation of company earningsearnings

MERIT was founded in Vienna in 1988 as an independent commodity independent commodity specialistspecialist company by visionary Dr. Michael Zillner, who is still the CEO today

MERIT’s methodology is based on a robust ++2020--year business year business experienceexperience with industrial companies in Germany and Austria Dr. Michael Zillner

Founder & CEO of MERIT Group

Vienna, March 20103

MERIT‘s Convictions

MERIT is strongly convinced that commodity management is now-more-than-ever strategically importantstrategically important for industrial companies as a real value driver to strengthen company earnings and competitiveness:

Many companies are confronted with price risks without taking adequate measures

Commodity buyers lack the tools -based on independent price information and accurateforecasting methods- for effective control of theirexposure to fluctuations and increases in rawmaterial prices

Although good negotiation skills of purchasing departments remain important, the importance of commodity risk managementcommodity risk management and timingtiming is essential to ensure relative stability and predictability of company earnings

YTD Price-evolution, Source: MERIT

70

75

80

85

90

95

100

105

110

115

120

1/4/2010 1/18/2010 2/1/2010 2/15/2010 3/1/2010

Aluminium CopperLead Nickel

Tin Zinc

Vienna, March 20104

MERIT‘s Approach

As a human business MERIT emphasises a clientclient--needsneeds--drivendriven approach

IInn--house trained specialistshouse trained specialists team-up with clients

Aiming for long-term partnershippartnership based on mutual trust

MERIT offers services developed under one roofunder one roof:

Consultancy

Exposure Management

Execution Services

Physical Trading though dedicated wholly-owned group company

Inventory / Storage Financing

Vienna, March 20105

MERIT‘s Core Services (1/2)

ConsultantsIdentification, analysis and quantification of price risks (commodity and financial)Developement and optimisation of a customized Management Information System (MIS) for continous quantification and controll of all relevant price risksDefinition of hedging strategiesDaily reporting, customized value- and risk presentation

Risk- and Exposure ManagementData capture, analysis and active management of market price risksOutsourcing with clearly defined links to client‘s risk departmentOptimisation of the result with best possible product mixExposure Management using quantitative tools to improve overall results

Vienna, March 20106

MERIT‘s Core Services (2/2)

Execution ServicesExecution of Hedging Strategies via 24h Brokerage Desk*

Implementation of appropriate account setup

Signaler function

Physical Trading

Physical trading and delivery capabilities

Inventory / Storage Financing

*Execution in cooperation with group company Merit Alternative Investments GmbH (FMA authorised)

Vienna, March 20107

Related ServicesMERIT Stock Control Elimination of the stock price risk

MERIT Order ManagementSecuring income

MERIT Procurement ManagementControl of the purchase price risk

MERIT Exposure ManagementOverall risk assessment of a company

MERIT Budget ManagementAssistance in keeping to budget targets

Reconciliation of group-wide financial risks (Currency, interest and raw materials risks)taking correlation and price elasticity into account

Direct market access to relevant exchangesThrough the MERIT-Group, with direct exploitation of market opportunities to optimise purchasing results

MERIT Cash Flow ManagementSafeguarding cash flows from raw materials risks

MERIT Strategy DevelopmentStrategic support for company boards with regard to financial risks

Active Risk ManagementTaking into account the respective purchasing, sales and stock situations

Scenario Simulation and Evaluation Using our standard software suite RIVa

MERIT Overlay ManagementStabilisation of financial results through targeted overlay management of a company’s financial risks

MERIT Value ManagementResults optimisation within pre-defined risk thresholds

Derivation and Modelling of Hedging Measures in accounting systems (IAS 39 – hedge accounting)

Group Reporting – Risk Report Assistance in compiling the risk report for annual reports

Vienna, March 20108

Core Industry Expertise

Automobile producers

Suppliers to automobile industry

Airlines and other transportationbusinesses

Metal processors

Utilities

High Energy consuming industries

Steel Industrie

Energy providers / public sectorrelated

Paper and pulp

Other commodity processingindustries

Vienna, March 20109

Markets we cover

Soft commoditiesCorn, wheat, soybeans, sugar, cocoa and coffee beans, cotton, palm oil

Non-ferrous and precious metalsCopper, aluminium, zinc, nickel, tin, lead, magnesiumGold, silver, palladium, platinum, rhodium

Energygas oil, crude oil, natural gas, coal, keroseneElectricity, CO2

Steel and steel derivativesLong steel, flat-rolled steel, high-grade steel types, tubes,…Iron ore

Customer-specific special materials and alloys

PlasticsPP, PE, PA6, PA6.6, ABS, PC/ABS

Pulp

Vienna, March 201010

MERIT – Tools

Our teams use internally developped tools such as:

MERIT Risk Matrix

MERIT Sensitivity Analysis

MERIT Chart – Parameter Analysis

Academically relevant evaluation modelssuch as Value at Risk are actively used:

MERIT VAR - Example

MERIT Risk Matrix - Example

MERIT Sensitivity Analysis - Example

MERIT Chart – Example (Gas)


Critical Client Challenges

The budgeting processHuge divergence between planning and operational processing / fluctuatingprices of raw materials / lack of transparent profit centre calculations

Difficulties with the order calculation processPrice variation while preparing/processing the order / contribution margin cannot be estimated/foreseen / sales pressure on costs through large corporations

Stock & inventory valuationChanges in prices between purchase and processing / build-up of risk positionsand hidden risks / working capital costs

Difficulties stating earningsDependency on international markets / uncertainty due to external factors / imprecise reporting / unpredictable cashflows


How MERIT turns Challenges into Opportunities (1/3)

Securing price levels to achieve competitive advantagesThe prices of nearly all important commodities markets have recovered from their historical lows and rallied considerably since the beginning of the year. The first signs of recovery in the world economy are visible. The peaks in prices of last year presented huge problems for many manufacturers and energy-intensive companies. In the medium term there is an opportunity to secure raw materials prices and purchasing budgets with some room to the downside. By using standardized options and futures contracts one can profit from short-term setbacks and hedge against a new rise in prices.

Presentation of the risk factors to investors and lenders of capital The tightened regulatory capital requirements for financial institutions under Basel II and the shortage of capital for the banks caused by the financial crisis will make company financing much more difficult in the future. As a result, a good credit rating and a strong investor relationship will be ever more important. In addition to the general economic and market factors, company key performance figures (KPIs) as well as controlling and management functions will become increasingly important.



Securing and improving the earnings positionCompanies should be able to concentrate on what they’re best at – producing innovative products and selling them at competitive prices. Supply side situation and competitive product price calculation are very important. Exogenous variables such as raw materials prices can be actively managed using standardised finance instruments – use of such instruments leads to a stabilisation in the earnings position and, over and above this, frequently to an improvement in earnings themselves. Implementation calls for expertise based on experience, which is often not sufficiently available in many organisations.

Efficient corporate management Due to the growing complexity of financial products and the increasing volatility of the financial and commodities markets senior executives are confronted with increasing expectations to risk management. Planning is made increasingly more difficult as a result of rising or falling raw materials prices - and the efficient use of financial products for risk management is hampered because of a lack of modelling systems.



Reduction in the cost of purchased materialsDue to the increasing volatility of raw materials prices planning of raw materials-based purchasing costs is difficult. These can be partly compensated by medium to long-term supply contracts, which then leads to increased sales price risk, however.

Evidence of raw materials risksProduction costs are becoming ever more influenced by raw materials prices. The costs not only of primary products but also of consumables and energy have to be taken into account here too. Pushing procurement risks and management thereof onto suppliers is an insufficient solution to the problem. The problems that suppliers in a variety of sectors have recently been experiencing have shown that those businesses that are actually more at the end of the supply chain are indirectly affected by the risks.


In Conclusion: Your Benefits of Partnering with MERIT

Strengthening your business:

Risk control – knowing the impacting risks and preparing for appropriate action

Budget balance - independent price information and accurate forecastingimprove planning & cost efficiency

Stabilization of company earnings – improving your bottom line

Tailor-made commodity management services based on a robust 20-year experience

RISK IDENTIFICATION

DEFINITION OF RISKMANAGEMENT

STRATEGIEEXPOSURE CONTROL Fragility

Added Value


Reference Clients


Reference Projects (1/2)

Client Year Description/aim of project

Central European manufacturer of alloy rims 2008

Provision of consultancy on how to approach fixed pricing for customers. Its suppliers having changed the basis for their supply contracts, our client was faced with the problem of variable prices for purchasing but supplying to its customers at prices fixed for years in advance.

Multinationalconglomerate 2008

New energy purchasing concept for the main operation in Austria and thereafter for its subsidiaries in the UK/US. Optimisation of electricity supply and development of a strategy for pulp purchasing.

Large European metal trader 2008

Hedging of stock values and recalibration of the trading risk through capping overall exposure. Introduction or regular risk reporting to allow timely control of the relevant risk factors. As a result, the company can deal with price fluctuations in non-ferrous metals markets in a controlled way.

Cable manufacturer basedin CEE 2008

Development of a strategy to reconcile the risks at each location. Definition of a product catalogue to handle the Group’s existing nickel, plastic and currency exposures. The positive operating result istherefore assured, even if there are sharp declines in the raw materials markets.


Reference Projects (2/2)

Client Year Description/aim of project

Important Europeansteel merchant 2008

Cross-hedging analysis of the product portfolio – in particular for long steel and flat-rolled steel. Creation of a risk profile for the whole group. Hedging solutions by means of different market segments (cross, LME, OTC…)

2009

Data collection and analysis of the overall exposure on raw materials. Development of measures to demarcate value-added/raw materials components in purchasing. Development and deployment of strategic overlay management.

Germancar manufacturer

2009

Analysis and evaluation of the existing fuel supply contracts. Development of planning and analysis tools to aid optimal fuel stocks. Establishment of a Group-wide hedging strategy and supervision of its implementation with core banks.

Germanairline

Merit Commodity Management

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