Risk Factors

Our business is affected by certain variables posing risk factors that are mapped and monitored by the organization as shown below:

1. Currency exchange rates – a devaluation of the Brazilian Real (BRL) means higher costs of raw materials quoted in US dollars and affects road transport and port logistics costs too, thus undermining our ability to compete on an even footing with exports from countries such as China.
2. Brazil’s high tax burden plus the tax authority’s bureaucratic approach, as well as rising transaction costs and the expense of complying with official environmental standards required to obtain environmental licenses for producers, also add to the impact of production costs and therefore hit earnings
3. The Company’s employees are represented by a labor union that has a strong position in the chemicals and petrochemicals segment. Annual collective bargaining negotiations normally use the inflation rate as the basis for pay rises, including for minimum wages. Personnel expenses, including payroll taxes charges for social insurance, account for a significant portion of costs and any pay rise outstripping inflation may have a significant detrimental effect on the business.
4. The Company may also be adversely affected if its employees are involved in strikes, stoppages or other disputes arising from negotiations or litigation that leads to amounts being paid out in this respect.

MARKET RISKS

The main products produced by Cristal Pigmentos do Brasil S.A. and its subsidiary Cristal Mineração do Brasil Ltda. are titanium dioxide based pigments and zirconite, rutile, kyanite and ilmenite ores. Once processed, these products are mainly used by the Paints, Construction, Automobile, Plastics and Machinery & Equipment industries.

Cristal Pigmentos does not have sufficient capacity to meet the local demand and its pigment market share varies from 30 to 40%, depending on total demand each year. On the minerals side, our share may range from 50% to near 100%, in the particular case of Ilmenite.

The remaining demand for both product lines is met by international suppliers whose imports are affected by risks related to currency exchange exposure, financing, and inefficient logistics. The point of making this comment is that even if there is contraction and/or turbulence in demand for products in the abovementioned sectors, we are fairly well hedged in relation to volumes, but exposed to a substantial increase in price volatility.

Cristal is the only local producer of titanium dioxide based pigments and we produce over 90% of our ore supplies, so market risks are associated more with international factors than local ones.

There is excess inventory of competing products in Europe, Asia and North America and our competitors have to balance their cash flows. In this situation, a significant rise in the supply of chemicals may exert downside pressure on prices. Moreover, government policies concerning incentives, electricity, managed tariffs, currency exchange rates and interest rates have also been a relative burden for the competitiveness of the industry in Brazil. Based on the fluctuation and volatility we have seen in 2009, 2012 and 2013 in particular, our conclusion is that the Company’s earnings are exposed to moderate-high risk in terms of both volumes and prices.