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14. FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2020
Disclosure of detailed information about financial instruments [abstract]  
FINANCIAL INSTRUMENTS
14. FINANCIAL INSTRUMENTS

 

I - Identification and valuation of financial instruments

 

The Company may operate with several financial instruments, with emphasis on cash and cash equivalents, including financial investments, marketable securities, accounts receivable from customers, accounts payable to suppliers and borrowings and financing. Additionally, we may also operate with derivative financial instruments, such as swap exchange rate, swap interest and derivatives with commodities.

 

Considering the nature of the instruments, the fair value is basically determined by the use of quotations in the capital markets in Brazil and the Mercantile and Futures Exchange. The amounts recorded in current assets and liabilities have immediate liquidity. Considering the term and characteristics of these instruments, fair values do not differ from the recorded amounts.

 

• Classification of financial instruments

 

                            Consolidated
Consolidated           12/31/2020       12/31/2019
  Notes   Fair value through profit or loss   Measured at amortized cost   Balances   Fair value through profit or loss   Measured at amortized cost   Balances
             
Assets                            
Current                            
Cash and cash equivalents    4        9,944,586   9,944,586        1,088,955   1,088,955
Short-term investments    5   3,305,109   478,253   3,783,362   2,114,620   518,553   2,633,173
Trade receivables    6        2,867,352   2,867,352        2,047,931   2,047,931
Dividends and interest on equity    9          38,088     38,088          44,554     44,554
Derivative financial instruments    9                   1,364         1,364
Trading securities    9    5,065         5,065    4,034         4,034
Total       3,310,174    13,328,279    16,638,453   2,120,018   3,699,993   5,820,011
                             
Non-current                            
Investments    5        123,409   123,409          95,719     95,719
Other trade receivables    9         2,445    2,445         7,059    7,059
Eletrobrás compulsory loan    9        852,532   852,532        845,284   845,284
Receivables by indemnity    9        517,183   517,183               
Loans - related parties    9        966,050   966,050        846,300   846,300
Investments     10     59,879          59,879     47,300          47,300
Derivative financial instruments    9                   4,203         4,203
Total         59,879   2,461,619   2,521,498     51,503   1,794,362   1,845,865
                             
Total Assets       3,370,053    15,789,898    19,159,951   2,171,521   5,494,355   7,665,876
                             
Liabilities                              
Current                            
Borrowings and financing      13        4,155,483   4,155,483        5,152,234   5,152,234
Trade payables     17        4,819,539   4,819,539        3,012,654   3,012,654
Trade payables -  drawee risk     15        623,861   623,861        1,121,312   1,121,312
Dividends and interest on capital     15        946,133   946,133          13,252     13,252
Leases     16          93,626     93,626          35,040     35,040
Derivative financial instruments        8,722         8,722               
Total        8,722    10,638,642    10,647,364        9,334,492   9,334,492
                             
Non-current                            
Borrowings and financing      13         31,215,128    31,215,128         22,938,469    22,938,469
Trade payables     17       543,527   543,527               
Derivative financial instruments         97,535          97,535               
Leases     16        436,505   436,505        439,350   439,350
Total         97,535    32,195,160    32,292,695         23,377,819    23,377,819
                             
Total Liabilities       106,257    42,833,802    42,940,059         32,712,311    32,712,311

 

• Fair value measurement

 

The table below shows the financial instruments recorded at fair value through profit or loss, classifying them according to the fair value hierarchy:

 

Consolidated           12/31/2020           12/31/2019
  Level 1   Level 2   Balances   Level 1   Level 2   Balances
Assets                        
Current                        
Financial assets at fair value through profit or loss                        
Financial investments     3,305,109        3,305,109     2,114,620        2,114,620
Derivative financial instruments                   1,364     1,364
Trading securities   5,065         5,065   4,034         4,034
Non-current                        
Financial assets at fair value through profit or loss                        
Investments    59,879       59,879    47,300       47,300
Derivative financial instruments                   4,203     4,203
Total Assets     3,370,053        3,370,053     2,165,954   5,567    2,171,521
                         
Liabilities                        
Current                        
Financial liabilities at fair value through profit or loss                        
Derivative financial instruments       8,722     8,722            
Non-current                        
Financial liabilities at fair value through profit or loss                        
Derivative financial instruments        97,535   97,535            
Total Liabilities         106,257    106,257            

 

Level 1 - Data are prices quoted in an active market for items identical to the assets and liabilities being measured.

 

Level 2 - Consider inputs observable in the market, such as interest rates, exchange rates, etc., but are not prices negotiated in active markets.

 

There are no assets or liabilities classified as level 3.

 

II - Investments in securities valued at fair value through profit or loss

 

The Company has common shares (USIM3), preferred shares (USIM5) of Usiminas (“Usiminas shares”) and shares of Panatlântica SA (PATI3), which are designated as fair value through profit or loss.

 

Usiminas shares are classified as current assets in financial investments and Panatlântica shares are classified as non-current assets under the investment item. They are recorded at fair value (fair value), based on the market price quote in B3.

 

In accordance with the Company’s policy, the gains and losses arising from the variation in the share price are recorded directly in the income statement as financial result in the case of financial investments, or as other operating income and expenses in the case of long-term investments.

 

Class of shares   12/31/2020   12/31/2019   12/31/2020   12/31/2019
  Quantity   Equity interest (%)   Share price   Closing Balance   Quantity   Equity interest (%)   Share price   Closing Balance   Fair value adjustment recognized in profit or loss (note 27 and 28)
USIM3    107,156,651   15.19%    15.69   1,681,288    107,156,651   15.19%   9.87     1,057,636    623,652   (168,236)
USIM5    111,144,456   20.29%    14.61   1,623,821    111,144,456   20.29%   9.51     1,056,984    566,837   32,232
                3,305,109                 2,114,620    1,190,489   (136,004)
PATI3     2,065,529   11.31%    28.99     59,879     2,065,529   11.31%    22.90    47,300   12,579   17,224
                3,364,988                 2,161,920    1,203,068   (118,780)

 

III - Financial risk management:

 

The Company uses risk management strategies with guidance on the risks incurred by us. The nature and general position of financial risks are regularly monitored and managed in order to assess results and the financial impact on cash flow. Credit limits and hedge quality of counterparties are also reviewed periodically.

 

Market risks are hedged when we consider necessary to support the corporate strategy or when it is necessary to maintain the level of financial flexibility.

 

We are exposed to exchange rate, interest rate, market price and liquidity risks.

 

The Company may manage some of the risks through the use of derivative instruments not associated with any speculative trading or short selling.

 

  14.a) Exchange rate, market price and interest rate risk:

 

  • Exchange rate risk

 

The exposure arises from the existence of assets and liabilities denominated in Dollar or Euro, since the Company’s functional currency is substantially the Real and is called natural exchange exposure. The net exposure is the result of the offsetting of the natural exchange exposure by the instruments of hedge adopted by CSN.

 

The consolidated net exposure as of December 31, 2020 is shown below:

 

        12/31/2020
Foreign Exchange Exposure   (Amounts in US$’000)   (Amounts in €’000)
Cash and cash equivalents overseas   664,951   13,372
Trade receivables   387,039     2,560
Financial investments     23,748    
 Other assets     9,158     4,474
Total Assets   1,084,896   20,406
Borrowings and financing     (4,812,268)    
Trade payables    (139,672)   (9,258)
Iron ore derivative     (172)    
Other liabilities     (9,305)   (1,010)
Total Liabilities    (4,961,417)    (10,268)
Foreign exchange exposure    (3,876,521)   10,138
Cash flow hedge accounting   3,992,200    
Exchange rate swap CDI x Dollar    (67,000)    
Net foreign exchange exposure     48,679   10,138

 

CSN uses as a strategy the Hedge Accounting, as well as derivative financial instruments to protect future cash flows.

 

Sensitivity analysis of Derivative Financial Instruments and Consolidated Foreign Exchange Exposure

 

The Company considered scenarios 1 and 2 to be 25% and 50% deterioration for currency volatility, using the exchange rate closing rate as of December 31, 2020 as a reference.

 

The currencies used in the sensitivity analysis and their respective scenarios are shown below:

 

                12/31/2020
Currency   Exchange rate   Probable scenario   Scenario 1   Scenario 2
USD                       5.1967                5.2617          6.4959              7.7951
EUR                       6.3779                6.3867          7.9724              9.5669
USD x EUR                       1.2271                1.2124          1.5339              1.8407

 

The effects on the result, considering scenarios 1 and 2 are shown below:

 

                    12/31/2020
Instruments   Notional   Risk   Probable scenario (*) R$
   Scenario 1 R$   Scenario 2 R$
                     
Gross exchange position   (3,876,521)   Dollar    (251,974)     (5,036,279)    (10,072,558)
                     
Cash flow hedge accounting    3,992,200   Dollar   259,493    5,186,566     10,373,133
                     
Exchange rate swap CDI x Dollar      (67,000)   Dollar     (4,355)    (87,045)   (174,089)
                     
Net exchange position   48,679   Dollar    3,164   63,242    126,486
                     
Net exchange position   10,138   Euro   89   16,165   32,330
                     
Exchange rate swap Dollar x Euro    40,697   Dollar    5,264   50,134   78,337

 

(*) The probable scenarios were calculated considering the following variations for risks: Real x Dollar - devaluation of the Real by 1.25% / Real x Euro - devaluation of the Real by 0.14% / Euro x Dollar - appreciation of Euro by 1.20%. Source: Central Bank of Brazil and European Central Bank quotations on 1/14/2021.

 

• Stock market price risks

 

The Company is exposed to the risk of changes in share prices due to investments valued at fair value through the result that are quoted based on the market price at B3.

 

Sensitivity analysis for stock price risks

 

We present below the sensitivity analysis for share price risks. The Company considered scenarios 1 and 2 to be 25% and 50% devaluation in the share price using the closing price on December 31, 2020 as a reference. The probable scenario considered a 5% devaluation in the share price.

 

The effects on the result, considering the probable scenarios, 1 and 2 are shown below:

 

        12/31/2020
Class of shares   Probable scenario   Scenario 1   Scenario 2
 USIM3    (84,064)    (420,322)    (840,644)
 USIM5    (81,191)    (405,955)    (811,910)
 PATI3      (2,994)   (14,970)   (29,940)

 

• Interest rate risk:

 

This risk arises from financial investments, borrowings and financing and debentures linked to the fixed and floating interest rates of the CDI, TJLP and Libor, exposing these financial assets and liabilities to interest rate fluctuations as shown in the sensitivity analysis table below.

 

Sensitivity analysis of changes in interest rates

 

We present below the sensitivity analysis for interest rate risks. The Company considered scenarios 1 and 2 to be 25% and 50% deterioration for interest rate volatility using the closing rate as of December 31, 2020 as a reference.

 

The interest rates used in the sensitivity analysis and their respective scenarios are shown below:

 

          12/31/2020
Interest   Interest Rate     Scenario 1   Scenario 2
CDI   1.90%     2.38%   2.85%
TJLP   4.55%     5.69%   6.38%
LIBOR   0.26%     0.32%   0.39%

 

The effects on the result, considering scenarios 1 and 2 are shown below:

 

                        Consolidated
                    Impact on profit or loss
Changes in interest rates   % p.a   Assets   Liabilities   Probable scenario (*)
   Scenario 1   Scenario 2
CDI     1.90    5,779,452    (9,104,416)     (10,673)   (15,794)   (31,588)
TJLP     4.55        (817,374)    (2,155)     (9,298)   (18,596)
Libor     0.26        (4,533,341)     (43,321)     (2,920)     (5,840)

 

(*) The sensitivity analysis is based on the premise of maintaining the market values as of December 31, 2020 as a probable scenario recorded in the company’s assets and liabilities.

 

• Market price risk:

 

The Company is also exposed to market risks related to the volatility of commodity prices. In line with its risk management policy, risk mitigation strategies involving commodities can be used to reduce cash flow volatility. These mitigation strategies may incorporate derivative instruments, predominantly forward transactions, futures and options.

 

Sensitivity analysis for price risks “Platts index”

 

Below we present the sensitivity analysis for price risks. The Company considered scenarios 1 and 2 to be 25% and 50% increase in the index “Platts” using the closing price as of December 31, 2020 as a reference.

 

The effects on the result, considering scenarios 1 and 2 are shown below:

 

    12/31/2020
 Maturity     Probable scenario (*) R$     Scenario 1 R$     Scenario 2 R$ 
2/2/2021     (33,677)   (120,262)    (240,524)
3/2/2021     (43,144)   (127,915)    (255,830)
      (76,821)   (248,177)    (496,354)

(*) The probable scenario was calculated considering the quotation of “Platts” on 1/14/2021 for the maturities of 2/2/2021 and 3/2/2021. Source: Bloomberg.

 

In item 14.b), we show derivatives and hedging strategies to hedge against exchange and price risks and hedge price risk Platts.

 

14.b) Instruments protection: Derivatives and Hedge accounting cash flow and net investment hedge in foreign subsidiaries

 

CSN uses instruments to hedge against exchange rate risk, price risk Platts and interest rate risk, as shown in the following topics:

 

· Derivative financial instruments portfolio position

 

Swap exchange rate Dollar x Euro

 

The subsidiary Lusosider has derivative transactions to hedge its dollar exposure against the euro.

 

Swap exchange rate GBP (British Pound) x Euro

 

The subsidiary Lusosider had derivative transactions to hedge its GBP exposure against the euro, it was settled in the third quarter of 2020.

 

Swap exchange rate CDI x Dollar

 

The Company has derivative transactions with Banco Bradesco to protect its debt in NCE raised in September 2019 with maturity in October 2023 in the amount of US$67 million (equivalent to R$278 million) at a cost compatible with that usually practiced by the Company.

Consolidated
12/31/2020
Appreciation (R$) Fair value (market) Impact on financial income (expenses) in 2020
Counterparties Maturity Functional Currency Notional amount Asset position Liability position Amounts receivable / (payable)
Exchange rate swap Dollar x Euro  04/26/2021 to 06/08/2021 Dollar  17,377   90,315   (93,823) (3,508)  (4,749)
Exchange rate swap Dollar x Euro  01/06/2021 a 06/11/2021 Dollar  23,320 121,207 (125,528) (4,321)  (4,321)
Total dollar-to-euro swap  40,697 211,522 (219,351) (7,829)  (9,070)
Exchange rate swap GBP x Euro  Settled GBP 3,956  (602)
Total Swap GBP x Euro 3,956  (602)
Exchange rate swap CDI x Dollar  02/10/2023 Dollar (67,000) 289,544 (387,079)  (97,535) (106,143)
Total Swap CDI x dollar (67,000) 289,544 (387,079)  (97,535) (106,143)
501,066 (606,430)   (105,364) (115,815)

 

  

• Cash flow hedge accounting

 

Foreign exchange hedge accounting

 

The Company formally designates relations of hedge of cash flows to protect highly probable future flows exposed to the dollar related to sales made in dollars.

 

With the objective of better reflecting the accounting effects of the hedge exchange rate in the result, CSN designated part of its dollar liabilities as an instrument of hedge future exports. As a result, the exchange rate variation resulting from the designated liabilities will be transiently recorded in shareholders’ equity and will be reflected in the income statement when said exports occur, thus allowing the recognition of dollar fluctuations on liabilities and on exports to be recorded at the same time. It is noteworthy that the adoption of this accounting hedge it does not imply the contracting of any financial instrument.

 

The table below presents a summary of the relations of hedge as of December 31, 2020:

 

                                    12/31/2020
Designation Date   Hedging Instrument   Hedged item   Type of hedged risk   Hedged period   Exchange rate on designation   Designated amounts (US$’000)   Amortizated part (USD'000)   Effect on Result (*) (R$'000)   Impact on Shareholders' equity (R$'000)
12/18/2014   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    May 2020    2.6805    30,000   (30,000)   (82,374)     -
12/18/2014   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    May 2020    2.678    35,000   (35,000)   (96,190)     -
12/18/2014   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    May 2020    2.676    35,000   (35,000)   (96,261)     -
07/21/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    July 2019 - March 2021    3.1813    60,000   (45,000)   (58,475)    (30,231)
07/23/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    July 2019 - March 2021    3.285     100,000   (75,000)   (92,026)    (47,793)
07/23/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.285    30,000   (18,000)   (14,185)    (22,940)
07/24/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.3254     100,000   (60,000)   (46,474)    (74,852)
07/27/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.3557    25,000   (15,000)   (11,467)    (18,410)
07/27/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.3557    70,000   (42,000)   (32,108)    (51,548)
07/27/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.3557    30,000   (18,000)   (13,760)    (22,092)
07/28/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    August 2018 - October 2022    3.3815    30,000   (18,000)   (13,605)    (21,782)
3/8/2015   Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    July 2018 - October 2022    3.394     355,000    (276,500)    (338,777)     (141,512)
2/4/2018   Bonds   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    July 2018 - February 2023    3.3104     1,170,045    (820,045)    (306,189)     (660,205)
07/31/2019   Bonds and Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    January 2020 - April 2026    3.7649     1,342,761    (247,061)    (329,966)     (1,568,823)
10/1/2020   Bonds without express maturity and Export prepayments in US$ to third parties   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    March 2020 - December 2050    4.0745     1,416,000    (102,000)    (136,029)     (1,474,571)
01/28/2020   Bonds   Part of the highly probable future monthly iron ore exports   Foreign exchange - R$ vs. US$ spot rate    March 2017 - January 2028    4.2064     1,000,000    -    -     (990,299)
Total                         5,828,806    (1,836,606)    (1,667,886)     (5,125,058)

(*) On December 31, 2020, the amount of (R$1,667,886) was recorded in Other Operating Expenses. As of December 31, 2019, (R$790,353).

 

In the hedging relationships described above, the amounts of the debt instruments were fully designated for equivalent iron ore export portions.

 

The changes in the hedge accounting amounts recognized in shareholders’ equity as of December 31, 2020 are as follows :

 

              Consolidated
  12/31/2019   Movement   Realization   12/31/2020
Cash flow hedge accounting         1,255,770           5,537,174          (1,667,886)           5,125,058

 

The realization of Hedge accounting cash flow is recognized in Other operating income and expenses, note 27.

 

As of December 31, 2020, the hedging relationships established by the Company were effective according to the retrospective and prospective tests performed. Thus, no reversal for hedge accounting ineffectiveness was recognized.

 

Cash flow hedge accounting - “Platts” index

 

The Company has iron ore derivative instruments, entered into by its subsidiary CSN Mineração S.A., in order to reduce the volatility of its exposure to the commodity.

 

The Company formally designated the hedge relationship and, consequently, applied the hedge accounting with the derivative instrument designated as hedging instrument and the Platts index applicable to a portion of its highly probable future sales of iron ore was designated as the hedged item. Accordingly, fluctuations of the “Platts” index will be initially recorded in the shareholders’ equity as Other Comprehensive Income, and will be reclassified to the income statement when the referred sales occur.

 

The table below shows the result of the derivative instrument on December 31, 2020 recognized in Other Comprehensive Income and, when carrying out shipments, the amount reclassified to Other Operating Income and Expenses:

 

                12/31/2020           12/31/2020
         Appreciation (R$)     Fair value (market)     Other income and expenses     Other comprehensive income     Exchange variation 
 Maturity     Notional     Asset position     Liability position     Amounts receivable / (payable)       
09/02/2020 (Settled)    Platts                   (31,678)          (136)
10/02/2020 (Settled)    Platts                    (132,997)          (9,051)
11/04/2020 (Settled)    Platts                   (85,164)          (7,301)
12/02/2020 (Settled)    Platts                   (33,310)          52
2/2/2021    Platts    486,852    (493,925)     (7,073)       (6,888)     (185)
2/3/2021    Platts    527,684    (521,504)   6,180        6,063   117
        1,014,536    (1,015,429)     (893)     (283,149)   (825)   (16,504)

 

The change in the amounts related to cash flow hedge accounting - “Platts” index recorded in shareholders’ equity on December 31, 2020 is shown as follows:

 

  12/31/2019   Movement   Realization   12/31/2020
Cash flow hedge accounting  –  “Platts”      283,974     (283,149)    825
 Income tax and social contribution on cash flow hedge accounting      (96,551)     96,271   (280)
Fair Value of cash flow accounting - Platts, net      187,423     (186,878)    545

 

Cash flow hedge accounting - index “Platts” has been fully effective since the inception of the derivative instruments.

 

The Company prepares formal documentation indicating how the designation of the hedge accounting cash flow - “Platts” index is aligned with CSN’s risk management objective and strategy, identifying the hedging instruments used, the hedged item, the nature of the risk to be hedged and demonstrating the effectiveness of the hedge relationships, debt instruments and iron ore derivative instruments (index “Platts”) in amounts equivalent to the portion of future sales, comparing the designated amounts with the expected values in accordance with its budgets.

 

Accounting Policy

 

The Company adopts the hedge accounting and designates certain financial liabilities as hedging instruments for foreign exchange commodity price risks (“Platts” index) associated with expected cash flows from highly probable exports (cash flow hedge).

 

The Company documents, at the beginning of the operation, the relationships between hedging instruments and hedged items as well as the objectives of risk management and the strategy for carrying out these hedging relationships. In addition, we document our assessment at the beginning of the hedging relationship, as well as during the life of the hedge to monitor the hedge effectiveness.

 

The amounts accumulated in net equity are realized to the operating results in the periods the forecasted exports affect the result.

 

When a hedge instrument expires or is settled in advance, or the hedge relationship no longer meets the Hedge Accounting or even when management decides to discontinue the hedging relationship, any accumulated gain or loss existing in net equity remains recorded in equity and, therefrom exchange rate changes are recorded in the financial results. When a forecast operation is no longer expected to occur, the cumulative gain or loss that had been previously recorded in shareholders’ equity is immediately transferred to the income statement under “Other Operating Income and Expense”.

 

• Net investment hedge in foreign subsidiaries

 

CSN has a natural foreign exchange exposure in Euros substantially arising from a loan made by a foreign subsidiary with functional currency in Reais, for the acquisition of investments abroad whose functional currency is Euro. Such exposure arises from translating the balance sheets of these subsidiaries for consolidation in CSN, and the exchange rate of the loans affected the income statement in the financial result item and the exchange variation of the net assets of the foreign operation directly affected the equity in other comprehensive income.

 

In order to eliminate this exposure and cover future fluctuations in the Euro on these loans, non-derivative financial liabilities were designated, represented by loan contracts with financial institutions in the amount of € 120 million which matured on January 31, 2020, when was settled financially.

 

                        12/31/2020
Designation Date   Hedging Instrument   Hedged item   Type of hedged risk   Exchange rate on designation   Designated amounts (EUR'000)   Impact on shareholders' equity
09/30/2015   Non-derivative financial liabilities in EUR – Debt contract   Investments in subsidiaries which EUR is the functional currency   Foreign exchange - R$ vs. EUR spot rate   4.0825              120,000             6,293
Total                              120,000             6,293

 

Accounting Policy

 

The Company designates for the hedge of net investment a portion of its financial liabilities as an instrument of hedge of its investments abroad with a functional currency other than the Group’s currency in accordance with IAS39. This relationship occurs because financial liabilities are related to investments in the amounts necessary for the effective relationship.

 

The Company documents, at the beginning of the operation, the relationships between the hedge and objects protected by hedge, as well as the objectives of risk management and the strategy for carrying out credit operations. hedge. The Company also documents its assessment, both at the beginning of the hedge as on a continuous basis, that the operations of hedge are highly effective in compensating for variations in items protected by hedge.

 

The effective part of the changes in the fair value of the financial liabilities designated and qualified as hedge of net investment is recognized in shareholders’ equity, under the caption Hedge Accounting. Gains or losses related to the ineffective part are recognized in Other Operating Income and Expense, when applicable. If at any point of the hedge relationship the debt balance is higher than the investment balance, the exchange variation on the excess debt will be reclassified to the income statement as other operating income / expenses (ineffectiveness of the hedge).

 

The amounts accumulated in net equity will be realized in the income statement upon a total or partial sale of the foreign operation.

 

• Classification of derivatives in the balance sheet and income

 

                        12/31/2020   12/31/2019
Instruments   Liabilities   Other operating income expenses   Other comprehensive income   Financial income (expenses), net (note 28)
  Current   Non-current   Total      
Exchange rate swap Dollar x Euro           (7,829)                                        (7,829)                                                                               (9,070)                  783
Exchange rate swap GBP x Euro                                                                                                                                                            (602)                         
Exchange rate swap CDI x Dollar                                       (97,535)        (97,535)                                                                           (106,143)               4,203
Iron ore derivative             (893)                                           (893)                (283,149)                        (825)            (16,504)                         
           (8,722)                (97,535)      (106,257)                (283,149)                        (825)          (132,319)               4,986

 

14.c) Liquidity risk

 

It is the risk that the Company may not have sufficient net funds to settle its financial commitments, as a result of the mismatch of term or volume between expected receipts and payments.

 

Future receipt and payment premises are established to manage cash liquidity in domestic and foreign currencies, which are monitored on a day-to-day basis by the Treasury Department. The payment schedules for long-term installments of borrowings and financing and debentures are presented in note 13.

 

The following are the contractual maturities of financial liabilities including interest.

 

                  Consolidated
At December 31, 2020 Less than one year   From one to two years   From two to five years   Over five years   Total
Borrowings, financing and debentures (note 13)         4,155,483         14,146,118           4,671,511         12,397,499         35,370,611
Lease Liabilities (note 16)              93,626              143,227              115,398              177,880              530,131
Derivative financial instruments (note 14 I)                8,722                                            97,535                                          106,257
Trade payables (note 17)         4,819,539              528,551                14,976                                       5,363,066
Trade payables – Drawee risk (note 14 I)            623,861                                                                                                  623,861
Dividends and interest on equity (note 15)            946,133                                                                                                  946,133
Total       10,647,364         14,817,896           4,899,420         12,575,379         42,940,059

 

IV - Fair values of assets and liabilities in relation to the book value

 

Financial assets and liabilities measured at fair value through profit or loss are recorded in current and non-current assets and liabilities and gains and losses are recorded as financial income and expenses, respectively.

 

The amounts are recorded in the financial statements at their amortized cost, which are substantially similar to those that would be obtained if they were traded on the market. The fair values of other long-term assets and liabilities do not differ significantly from their book values, except for the amounts below.

 

The estimated fair value for certain consolidated long-term borrowings and financing was calculated at current market rates, considering the nature, term and risks similar to those of the registered contracts, as follows:

 

      12/31/2020       12/31/2019
  Closing Balance   Fair value   Closing Balance   Fair value
Perpetual bonds             5,203,773            5,157,465               4,036,186            3,706,553
Fixed Rate Notes           15,067,341          15,744,067               8,090,297            8,345,471

 

Source: Bloomberg

 

14.d) Credit risk

 

The exposure to credit risks of financial institutions complies with the parameters established in the financial policy. The Company practices a detailed analysis of the financial position of its customers and suppliers, the determination of a credit limit and the permanent monitoring of its outstanding balance.

 

With respect to financial investments, the Company only invests in institutions with low credit risk assessed by credit rating agencies. Since part of the funds is invested in repo operations that are backed by Brazilian government bonds, there is also exposure to the credit risk of the country.

 

As for the exposure to credit risk in accounts receivable and other receivables, the Company has a credit risk committee, in which each new customer is analyzed individually regarding their financial condition, before granting the credit limit and payment terms, and periodically reviewed based on procedures and circumstances of each business area.

 

14.e) Capital management

 

The Company seeks to optimize its capital structure in order to reduce its financial costs and maximize the return to its shareholders. The table below shows the evolution of the Company’s consolidated capital structure, with financing by equity and third-party capital:

 

Thousands of reais   12/31/2020   12/31/2019
Shareholder's equity (equity)        11,251,505        11,361,932
Borrowings and Financing (Third-party capital)        35,270,653        27,967,036
Gross Debit/Shareholder's equity                   3.13                   2.46

 

Accounting Policy

 

The Company’s financial instruments are classified according to the definition of the business model adopted by the Company and the characteristics of the cash flow, in the case of financial assets.

 

Upon initial recognition, financial assets can be classified into three categories: assets measured at amortization cost, fair value through profit or loss and fair value through other comprehensive income.

 

Financial assets are derecognized when the rights to receive cash flows of the investments have expired or been transferred; in the latter case, provided that the Company has substantially transferred all risks and benefits of the property.

 

If the company substantially holds all the risks and rewards of ownership of the financial asset, it must continue to recognize the financial asset.

 

Financial liabilities are classified as amortized cost or fair value through profit or loss. Management determines the classification of its financial assets and liabilities upon initial recognition.

 

Financial liabilities are derecognized only when they are extinguished, that is, when the obligation specified in the contract is settled, canceled or expires. The Company also derecognizes a financial liability when the terms are modified and the cash flows of the modified liability are substantially different, in which case a new financial liability based on the modified terms is recognized at fair value.

 

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle them on a net basis, or realize the asset and settle the liability simultaneously.

 

Derivative Financial Instruments and Hedging Activities

 

Initially, derivatives are recognized at fair value on the date that a derivative contract is entered into and are subsequently measured at fair value with the changes recorded in the income statement in the caption Financial Result in the income statement, unless a hedge designation is not formally applied.