Raw Material Risks

In 2014 natural rubber, synthetic rubber and petroleum based raw materials (especially chemicals and carbon black) will remain an uncertain factor in the Group’s cost structure, due to the sharp volatility witnessed over the past several years and their impact on the cost of finished products (about 37% of cost of sales). While uncertainty will also stem from the possible ramifications on commodity markets of the tapering off of quantitative easing in the United States and/or possible conflicts or geopolitical tensions, the probability of occurrence of such events seem rather remote, at least for the time being. Indeed, Pirelli expects a positive impact from raw material (vs 2013) of around 100 million euros (excluding exchange rate effect) mainly due to the downward trend in natural rubber price. However, recently unfavourable developments in the FX arena have more than offset such positive gains, thus resulting in an overall negative net impact of 75 mln€.

Contingent price scenarios for the principal commodities purchased by the Group are simulated on the basis of their historic volatility and/or the best information available on the market (e.g. forward prices). On the basis of various scenarios, sales price increases and/or other internal cost efficiency recovery actions have been identified (e.g. use of alternative raw materials, reduction of product weight, improvement of process quality, and reduction of discarded material) as necessary to guarantee the forecast profitability levels.

Last Revised: 20 Jun 2014