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FINANCIAL INSTRUMENTS
 12 Months Ended
Dec. 31, 2021
FINANCIAL INSTRUMENTS

 

15.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           12/31/2021       12/31/2020
  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     5         16,646,480   16,646,480        9,944,586     9,944,586
Short-term investments     6    2,383,059    261,673     2,644,732    3,305,109    478,253     3,783,362
Trade receivables     7        2,597,838     2,597,838        2,867,352     2,867,352
Dividends and interest on equity   10       76,878   76,878       38,088   38,088
Trading securities   10   12,028       12,028    5,065         5,065
Loans - related parties   10        4,511     4,511             
Total        2,395,087     19,587,380   21,982,467    3,310,174     13,328,279   16,638,453
                             
Non-current                            
Investments     6        147,671    147,671        123,409    123,409
Other trade receivables   10        2,345     2,345        2,445     2,445
Eletrobrás compulsory loan   10        859,607    859,607        852,532    852,532
Receivables by indemnity   10        534,896    534,896        517,183    517,183
Loans - related parties   10        1,143,228     1,143,228        966,050    966,050
Investments   11    190,321        190,321   59,879       59,879
Total        190,321    2,687,747     2,878,068   59,879    2,461,619     2,521,498
                             
Total Assets        2,585,408     22,275,127   24,860,535    3,370,053     15,789,898   19,159,951
                             
Liabilities                              
Current                            
Borrowings and financing    14        5,532,736     5,532,736        4,155,483     4,155,483
Trade payables   18        6,446,999     6,446,999        4,819,539     4,819,539
Trade payables -  drawee risk   16        4,439,967     4,439,967        623,861    623,861
Dividends and interest on capital   16        1,206,870     1,206,870        946,133    946,133
Leases   17        119,047    119,047       93,626   93,626
Derivative financial instruments                     8,722         8,722
Total             17,745,619   17,745,619    8,722     10,638,642   10,647,364
                             
Non-current                            
Borrowings and financing    14         27,221,914   27,221,914         31,215,128   31,215,128
Trade payables   18       98,625   98,625        543,527    543,527
Derivative financial instruments        101,822        101,822   97,535       97,535
Leases   17        492,504    492,504        436,505    436,505
Total        101,822     27,813,043   27,914,865   97,535     32,195,160   32,292,695
                             
Total Liabilities        101,822     45,558,662   45,660,484    106,257     42,833,802   42,940,059

 

 

·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           12/31/2021           12/31/2020
  Level 1   Level 2   Balances   Level 1   Level 2   Balances
Assets                        
Current                        
Financial investments      2,383,059          2,383,059      3,305,109          3,305,109
Trading securities           12,028                              12,028             5,065                                 5,065
Non-current                        
Investments         190,321                             190,321           59,879                               59,879
Total Assets      2,585,408                            2,585,408      3,370,053                            3,370,053
                         
Liabilities                        
Current                        
Derivative financial instruments                                                                                                  8,722            8,722
Non-current                        
Derivative financial instruments                              101,822        101,822                                97,535          97,535
Total Liabilities             101,822        101,822                              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, 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   12/31/2021   Sales of shares   12/31/2020   12/31/2021   12/31/2020   12/31/2019
  Quantity   Equity interest (%)   Share price   Closing Balance   Quantity   Share price   Net cash received   Net gain from the transaction   Quantity   Equity interest (%)   Share price   Closing Balance   Profit or loss for the period in 2021 (notes 28 and 29)
USIM3   106,620,851   15.12%    14.51   1,547,069     (535,800)    23.57    12,627     3,569   107,156,651   15.19%     15.69    1,681,288    (121,593)     623,652     (168,236)
USIM5     55,144,456   10.07%    15.16   835,990    (56,000,000)    23.12     1,294,720    502,275   111,144,456   20.29%     14.61    1,623,821     506,890     566,837    32,232
                2,383,059             1,307,347    505,844                3,305,109     385,297   1,190,489     (136,004)
PATI3    2,705,726   11.31%    70.34   190,321                    2,065,529   11.31%     28.99     59,879     109,254    12,579    17,224
                2,573,380             1,307,347    505,844                3,364,988     494,551   1,203,068     (118,780)

 

In May 2021, 535,800 common shares (USIM3) were sold for R$12,627 and 56,000,000 preferred shares (USIM5) were sold for R$1,294,720, totaling R$1,307,347.

 

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.

 

15.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, 2021, is shown below:

 

        12/31/2021
Foreign Exchange Exposure   (Amounts in US$’000)   (Amounts in €’000)
Cash and cash equivalents overseas    1,656,271    74,652
Trade receivables    212,424    5,004
Financial investments    23,748    
 Other assets     57,424    
Total Assets    1,949,867    79,656
Borrowings and financing    (3,866,290)    
Trade payables   (613,961)   (2,455)
Advances from customer   (197,325)    
Other liabilities   (9,631)    
Total Liabilities   (4,687,207)   (2,455)
Foreign exchange exposure   (2,737,340)    77,201
Cash flow hedge accounting    2,655,350    
Exchange rate swap CDI x Dollar    (67,000)    
Net foreign exchange exposure   (148,990)    77,201

 

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, 2021, as a reference.

 

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

 

                12/31/2021
Currency   Exchange rate   Probable scenario   Scenario 1   Scenario 2
USD                        5.5805                 5.0611           6.9756               8.3708
EUR                        6.3210                 5.7378           7.9013               9.4815
USD x EUR                        1.1327                 1.1337           1.4159               1.6991

 

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

 

                    12/31/2021
Instruments   Notional   Risk   Probable scenario (*) R$
   Scenario 1 R$   Scenario 2 R$
                     
Gross exchange position    (2,737,340)   Dollar    1,421,774    (3,818,931)   (7,637,863)
                     
Cash flow hedge accounting   2,655,350   Dollar   (1,379,189)   3,704,545    7,409,090
                     
Exchange rate swap CDI x Dollar     (67,000)   Dollar    34,800    (93,473)    (186,947)
                     
Net exchange position    (148,990)   Dollar    77,385    (207,859)    (415,720)
                     
Net exchange position   77,201   Euro   (45,024)   121,997   243,994

 

(*) The probable scenarios were calculated considering the following variations for risks: Real x Dollar – valuation of the Real by 9.31% / Real x Euro - valuation of the Real by 9.23% / Euro x Dollar - devaluation of Euro by 0.09%. Source: Central Bank of Brazil and European Central Bank quotations on 2/22/2022.

 

·Stock market price risks

 

The Company is exposed to the risk of changes in stock prices due to investments valued at fair value through profit and loss 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, 2021, 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:

 

        12/31/2021
Class of shares   Probable scenario   Scenario 1   Scenario 2
    5%   25%   50%
 USIM3           (77,353)        (386,767)         (773,534)
 USIM5           (41,799)        (208,997)         (417,995)
 PATI3             (9,516)          (47,580)           (95,160)

 

·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, 2021, as a reference.

 

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

 

            12/31/2021
Interest   Interest rate   Scenario 1   Scenario 2
CDI   9.15%   11.44%   13.73%
TJLP   5.32%   6.65%   7.98%
LIBOR   0.34%   0.42%   0.51%

 

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      9.15           3,908,490           (5,778,965)        (2,041,623)         (2,084,411)         (2,127,198)
TJLP      5.32                  (800,884)           (843,491)            (854,143)            (864,794)
LIBOR      0.34               (5,449,749)        (5,468,210)         (5,472,825)         (5,477,440)
(*)The sensitivity analysis is based on the premise of maintaining the market values as of December 31, 2021 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 and input 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”

 

The cash flow hedge accounting operation - "Platts" index was settled on October 2, 2021, in the amount of R$71,936 and no change occurred.

 

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

 

· 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 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.

 

Additionally, in 2021, the Company sold US$100 million in NDF (Non-Deliverable Forward) with maturity in September 2021.

 

Swap exchange rate CDI x IPCA

 

The subsidiary CSN Mineração has derivative operations to protect its exposure to the IPCA.

 

 

 

                            12/31/2021   12/31/2020   12/31/2019
                Appreciation (R$)   Fair value (market)   Impact on financial income (expenses) (note 29)
Counterparties   Maturity   Functional Currency   Notional amount   Asset position   Liability position   Amounts receivable / (payable)  
Exchange rate swap Dollar x Real   Settled   Dollar                  37,322        
Total dollar x real swap (NDF)                          37,322        
                                     
Exchange rate swap Dollar x Euro    Settled   Dollar                     1,784    (4,749)     783
Exchange rate swap Dollar x Euro    Settled   Dollar                    5,335    (4,321)    
Total dollar-to-euro swap                            7,119    (9,070)     783
                                     
Exchange rate swap GBP x Euro    Settled   GBP                         (602)    
Total Swap GBP x Euro                            (602)     
                                     
Exchange rate swap CDI x Dollar    10/02/2023   Dollar   (67,000)   298,408   (400,230)     (101,822)    (9,960)   (106,143)     4,203
Total Swap CDI x dollar           (67,000)   298,408   (400,230)     (101,822)    (9,960)   (106,143)     4,203
                                     
Interest rate (Debentures) CDI x IPCA   07/15/2036   Real     576,448   616,912   (634,400)    (17,488)     (17,488)        
Interest rate (Debentures) CDI x IPCA   07/15/2031   Real     423,552   464,380   (481,812)    (17,432)     (17,432)        
Total interest rate (Debentures) CDI x IPCA             1,000,000   1,081,292    (1,116,212)    (34,920)     (34,920)          
                                     
        1,379,700    (1,516,442)     (136,742)    (439)   (115,815)     4,986

 

·      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, 2021:

 

 

                                    12/31/2021
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$'000)
07/21/2015   Export prepayments in US$ 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     (60,000)     (33,016)     
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      3.2850   100,000   (100,000)     (52,436)     
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      3.2850    30,000     (24,000)     (12,057)     (13,773)
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   (100,000)     (39,382)     (39,382)
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     (24,150)   (9,694)    (1,891)
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     (56,000)     (27,143)     (31,147)
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     (24,000)     (11,633)     (13,349)
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     (24,000)     (11,478)     (13,194)
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      3.3940   355,000   (343,000)   (131,680)     (26,238)
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)        (794,535)
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   (261,261)     (21,781)    (1,949,731)
10/1/2020   Bonds with no maturity date 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   (1,237,000)   (174,990)    (1,506,060)
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            (1,374,101)
Total                       5,728,806   (3,073,456)   (525,290)    (5,763,401)
(*)On December 31, 2021, the amount of (R$525,290) was recorded in Other Operating Expenses. As of December 31, 2020, (R$ 1,667,886).

 

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, 2021 are as follows:

 

              Consolidated
  12/31/2020   Movement   Realization   12/31/2021
Cash flow hedge accounting          5,125,058            1,163,633               (525,290)            5,763,401

 

 

The realization of Hedge accounting cash flow is recognized in Other operating income and expenses, note 28.

 

As of December 31, 2021, 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 operations were settled on October 02, 2021.

 

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, 2021:

 

      12/31/2021   12/31/2020   12/31/2021   12/31/2020   12/31/2021   12/31/2020
      Other income and expenses (note 28)   Other comprehensive income   Exchange variation
 Maturity     Notional     
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
02/02/2021 (Settled)    Platts  (36,405)         (6,888)     (2,690)     (185)
03/02/2021 (Settled)    Platts  (34,116)       6,063     (2,870)   117
04/02/2021 (Settled)    Platts   11,961          59  
05/04/2021 (Settled)    Platts  (30,226)         1,133  
05/12/2021 (Settled)    Platts  (37,594)         2,308  
06/02/2021 (Settled)    Platts   (134,768)          10,880  
07/02/2021 (Settled)    Platts  (76,330)         5,638  
08/02/2021 (Settled)    Platts  7,088           (305)  
09/02/2021 (Settled)    Platts    233,546           (182)  
10/02/2021 (Settled)    Platts   69,116         2,819  
      (27,728)    (283,149)       (825)    16,790   (16,504)

 

The change in the amounts related to cash flow hedge accounting - “Platts” index recorded in shareholders’ equity on December 31, 2021, is shown as follows:

 

  12/31/2020   Movement   Realization   12/31/2021
Cash flow hedge accounting - “Platts”  825    26,903   (27,728)    
Income tax and social contribution on cash flow hedge accounting (280)   (9,148)    9,428    
Fair Value of cash flow accounting - Platts, net  545    17,755   (18,300)    

 

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.

 

·Net investment hedge in foreign subsidiaries

 

The information related to the net investment hedge did not change in relation to that disclosed in the Company's accounts as of December 31, 2020. The balance recorded on December 31, 2021, and December 31, 2020, is R$6,293.

 

·Classification of derivatives in the balance sheet and income

 

                  12/31/2021   12/31/2020   12/31/2021   12/31/2020   12/31/2021   12/31/2020   12/31/2019
Instruments     Liabilities   Other operating income expenses (note 28)   Other comprehensive income   Financial income (expenses), net (note 29)
    Current   Non-current   Total      
Exchange rate swap Dollar x Real                            37,322       783
Exchange rate swap Dollar x Euro                             7,119   (9,070)  
Exchange rate swap GBP x Euro                               (602)  
Exchange rate swap CDI x Dollar           (101,822)    (101,822)             (9,960)     (106,143)   4,203
Iron ore derivative                (27,728)   (283,149)       (825)     16,790    (16,504)  
Interest rate swap CDI x IPCA      (34,920)        (34,920)              (34,920)      
       (34,920)    (101,822)    (136,742)   (27,728)   (283,149)       (825)     16,351     (132,319)   4,986

 

15.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 14.

 

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

 

                  Consolidated
At December 31, 2021 Less than one year   From one to two years   From two to five years   Over five years   Total
Borrowings, financing and debentures (note 14)          5,532,736            5,293,830            6,645,074          15,283,010          32,754,650
Lease Liabilities (note 17)             119,047               161,417               134,040               197,047               611,551
Derivative financial instruments (note 15 I)                                        101,822                                                                     101,822
Trade payables (note 18)          6,446,999                44,340                54,285                                       6,545,624
Trade payables - Drawee Risk (note 16)          4,439,967                                                                                             4,439,967
Dividends and interest on equity (note 16)          1,206,870                                                                                             1,206,870
         17,745,619            5,601,409            6,833,399          15,480,057          45,660,484

 

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:

 

      12/31/2021       12/31/2020
  Closing Balance   Fair value   Closing Balance   Fair value
Perpetual bonds (1)                                                                          5,203,773             5,157,465
Fixed Rate Notes            15,617,091            15,700,276              15,067,341            15,744,067

(1) The Perpetual Bond was settled on September 23, 2021

 

15.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.

 

 

15.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   12/31/2021   12/31/2020
Shareholder's equity (equity)          23,374,389          11,251,505
Borrowings and Financing (Third-party capital)          32,507,522          35,270,653
Gross Debit/Shareholder's equity                    1.39                    3.13

 

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.

 

Hedge accounting: The Company adopts hedge accounting and designates certain financial liabilities as a hedging instrument for foreign exchange risk and price risk ("Platts" index) associated with cash flows arising from forecasted and highly probable exports (cash flow hedge).

 

The Company documents, at the inception of the transaction, the relationships between the hedging instruments and the hedged items (expected exports), as well as the risk management objectives and strategy for undertaking various hedging transactions. In addition, it documents its assessment, both at the hedge's inception and on an ongoing basis, that the hedge transactions are highly effective in offsetting changes in cash flows of hedged items.

 

The effective portion of changes in the fair value of financial liabilities designated and qualified as cash flow hedges is recognized in equity, under "Hedge Accounting". Gains or losses related to the ineffective portion are recognized in other operating expenses/income, when applicable.

 

Gains and losses from cash flow hedge accounting of debt financial instruments and iron ore derivative financial instruments will not immediately affect the Company's result, but only to the extent that exports are realized.

 

The amounts accumulated in equity are realized in the operating result in the periods when the forecasted exports affect the result.

 

When a hedge instrument expires or is settled early, or when the hedge relationship no longer meets the criteria for hedge accounting, or when Management decides to discontinue hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity, and from that time onwards the foreign exchange variations are recorded in the financial result. When the forecasted transaction is realized, the gain or loss is reclassified to operating income. When a forecasted transaction is no longer expected to occur, the cumulative gain or loss that had been reported in equity is immediately transferred to the income statement under "Other Operations".

 

Investment hedge: The Company designates for net investment hedge a portion of its financial liabilities as a hedging instrument of its investments abroad with functional currency different from 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 inception of the transaction, the relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, that the hedging transactions are highly effective in offsetting changes in the hedged items.

 

The effective portion of changes in the fair value of financial liabilities that are designated and qualify as net investment hedges is recognized in equity under Hedge Accounting. The gains or losses related to the ineffective portion are recognized in Other Operations, when applicable. If at any time during the hedge relationship the debt balance is greater than the investment balance, the exchange variation on the excess debt is reclassified to the income statement as other operating income/expenses (hedge ineffectiveness).

 

The amounts accumulated in the equity will be realized in the income statement by the disposal or partial disposal of the foreign operation.