Raw Material Risks

In 2012 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 months and their impact on the cost of finished products (about 43% of cost on 2011 sales).

Taking into consideration the global slowdown in advanced economies, Pirelli expects a positive impact from raw material (vs 2011) of around 130 million euros (excluding exchange rate effect) mainly due to the downward trend in natural rubber price, and to a lesser extent Butadiene, that offset the negative impact from Brent.

Although exchange rate effects erode such gains, there is an improvement in comparison with the guidance given in May 2012 of around 30mln € (from 90 to 60 million euro 2012 headwind versus 2011).

Uncertainty regarding such forecast stems mainly from possible conflicts or tensions in the Middle East with likely significant repercussions in terms of commodity prices.

Possible price scenarios are simulated for the principal raw materials acquired by the Group, in relation to volatility and/or the best information available on the market (e.g. forward prices). On the basis of various scenarios, increases in sale prices and/or various internal cost efficiency actions (use of alternative raw materials, reduction in product weight, process quality improvement and reduction of discard volumes) have been identified as necessary to guarantee forecast profit margins. On the other hand, in the case of strategic raw materials – which are subject to possible scarcity – Pirelli uses several suppliers for the individual type of raw material and makes long-term agreements in order to guarantee the volumes necessary for production and stabilise purchase prices.