iii. Financial risk management

The multinational nature of Tenaris’s operations and customer base exposes the Company to a variety of risks, mainly related to market risks (including the effects of changes in foreign currency exchange rates and interest rates), credit risk and capital market risk. In order to manage the volatility related to these exposures, management evaluates exposures on a consolidated basis, taking advantage of exposure netting. The Company or its subsidiaries

may

then enter into various derivative transactions in order to prevent potential adverse impacts on Tenaris’s financial performance. Such derivative transactions are executed in accordance with internal policies and hedging practices.

A. Financial Risk Factors

(i)

Capital Risk Management

Tenaris seeks to maintain a low debt to total equity ratio considering the industry and the markets where it operates. The year-end ratio of debt to total equity (where “debt” comprises financial borrowings and “total equity” is the sum of financial borrowings and equity) is

0.04

as of

December 31, 2018

and

0.08

as of

December 31, 2017.

The Company does

not

have to comply with regulatory capital adequacy requirements.

(ii)

Foreign exchange risk

Tenaris manufactures and sells its products in a number of countries throughout the world and consequently is exposed to foreign exchange rate risk. Since the Company’s functional currency is the U.S. dollar the purpose of Tenaris’s foreign currency hedging program is mainly to reduce the risk caused by changes in the exchange rates of other currencies against the U.S. dollar.

Tenaris’s exposure to currency fluctuations is reviewed on a periodic consolidated basis. A number of derivative transactions are performed in order to achieve an efficient coverage in the absence of operative or natural hedges. Almost all of these transactions are forward exchange rates contracts (see Note

Derivative financial instruments).

Tenaris does

not

enter into derivative financial instruments for trading or other speculative purposes, other than non-material investments in structured products.

In the case of subsidiaries with functional currencies other than the U.S. dollar, the results of hedging activities, reported in accordance with IFRS,

may

not

reflect entirely the management’s assessment of its foreign exchange risk hedging program. Intercompany balances between Tenaris’s subsidiaries

may

generate financial gains (losses) to the extent that functional currencies differ.

The value of Tenaris’s financial assets and liabilities is subject to changes arising from the variation of foreign currency exchange rates. The following table provides a breakdown of Tenaris’s main financial assets and liabilities (including foreign exchange derivative contracts) which impact the Company’s profit and loss as of

December 31, 2018

and

2017:

All amounts Long / (Short) in thousands of U.S. dollars	As of December 31,
Currency Exposure / Functional currency	2018			2017
Argentine Peso / U.S. Dollar		(186,867	)		(64,482	)
Euro / U.S. Dollar		(175,419	)		(365,926	)

The main relevant exposures correspond to:

Argentine Peso / U.S. dollar

As of

December 31, 2018

and

2017

consisting primarily of Argentine Peso-denominated financial, trade, social and fiscal payables at certain Argentine

subsidiaries whose functional currency is the U.S. dollar. A change of

in the ARS/USD exchange rate would have generated a pre-tax gain / loss of

$1.9

million and

$0.6

million as of

December 31, 2018

and

2017

respectively.

Euro / U.S. dollar

As of

December 31, 2018

and

2017,

consisting primarily of Euro-denominated intercompany liabilities at certain subsidiaries

whose

functional currency is the U.S. dollar. A change of

in the EUR/USD exchange rate would have generated a pre-tax gain / loss of

$1.3

million and

$3.7

million as of

December 31, 2018

and

2017,

respectively, which would have been to a large extent offset by changes in currency translation adjustment included in Tenaris’s net equity position.

A. Financial Risk Factors (Cont.)

(ii)

Foreign exchange risk (Cont.)

Considering the balances held as of

December 31, 2018

on financial assets and liabilities exposed to foreign exchange rate fluctuations, Tenaris estimates that the impact of a simultaneous

appreciation / depreciation movement in the levels of foreign currencies exchange rates relative to the U.S. dollar, would be a pre-tax gain / loss of

$3.6

million (including a loss / gain of

$2.3

million due to foreign exchange derivative contracts), which would be partially offset by changes to Tenaris’s net equity position of

$1.9

million. For balances held as of

December 31, 2017,

a simultaneous

favorable / unfavorable movement in the foreign currencies exchange rates relative to the U.S. dollar, would have generated a pre-tax gain / loss of

$5.3

million (including a loss / gain of

$6.7

million due to foreign exchange derivative contracts), which would have been partially offset by changes to Tenaris’s net equity position of

$3.4

million.

The Company entered into foreign exchange derivative contracts to mitigate the exposure to fluctuations in exchange rates.

(iii)

Interest rate risk

Tenaris is subject to interest rate risk on its investment portfolio and its debt. The Company uses a mix of variable and fixed rate debt in combination with its investment portfolio strategy. The Company

may

choose to enter into interest rate swaps to mitigate the exposure to changes in the interest rates.

The following table summarizes the proportions of variable-rate and fixed-rate debt as of each year end.

	As of December 31,
	2018				2017
	Amount in thousands of U.S. dollars		%		Amount in thousands of U.S. dollars		%
Fixed rate (*)		520,471		97%		946,215		98%
Variable rate		18,536		3%		19,644		2%
Total		539,007				965,859

(*) Out of the

$520

million fixed rate borrowings

$493

million are short-term.

The Company estimates that, if market interest rates applicable to Tenaris’s borrowings had been

100

basis points higher, then the additional pre-tax loss would have been

$8.2

million in

2018

and

$8.0

million in

2017.

(iv)

Credit risk

Credit risk arises from cash and cash equivalents, deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. The Company also actively monitors the creditworthiness of its treasury, derivative and insurance counterparties in order to minimize its credit risk.

There is

significant concentration of credit risk from customers.

single customer comprised more than

10%

of Tenaris’s net sales in

2018,

2017

and

2016.

Tenaris’s credit policies related to sales of products and services are designed to identify customers with acceptable credit history and to allow Tenaris to require the use of credit insurance, letters of credit and other instruments designed to minimize credit risks

whenever deemed necessary. Tenaris maintains allowances for impairment for potential credit losses

(See Section II J).

As of

December 31, 2018

and

2017

trade receivables amount to

$1,737.4

million and

$1,214.1

million respectively. Trade receivables have guarantees under credit insurance of

$181.7

million and

$190.7

million, letter of credit and other bank guarantees of

$62.3

million and

$42.2

million, and other guarantees of

$42.2

million and

$14.1

million as of

December 31, 2018

and

2017

respectively.

As of

December 31, 2018

and

2017

past due trade receivables amounted to

$368.4

million and

$230.9

million, respectively. The amount of past due trade receivables up to

days amounted to

$139

million and

$50

million respectively. Consequently the past due trade receivables over

days amounted to

$229.4

million and

$180.9

million. As of

December 31, 2018

and

2017,

guaranteed trade receivables amounted to

$31.5

million and

$27.3

million while

$66.5

million and

$78.4

million are included in the allowance for doubtful accounts. Both the allowance for doubtful accounts and the existing guarantees are sufficient to cover doubtful trade receivables.

A. Financial Risk Factors (Cont.)

(v)

Counterparty risk

Tenaris has investment guidelines with specific parameters to limit issuer risk on marketable securities. Counterparties for derivatives and cash transactions are limited to high credit quality financial institutions, normally investment grade.

Approximately

83%

of Tenaris’s liquid financial assets correspond to Investment Grade-rated instruments as of

December 31, 2018,

in comparison with approximately

71%

as of

December 31, 2017.

(vi)

Liquidity risk

Tenaris financing strategy aims to maintain adequate financial resources and access to additional liquidity. During

2018,

Tenaris has counted on cash flows from operations as well as additional bank financing to fund its transactions.

Management maintains sufficient cash and marketable securities to finance normal operations and believes that Tenaris also has appropriate access to market for short-term working capital needs.

Liquid financial assets as a whole (comprising cash and cash equivalents and other investments) were

of total assets at the end of

2018

compared to

11%

at the end of

2017.

Tenaris has a conservative approach to the management of its liquidity, which consists of i) cash and cash equivalents (cash in banks, liquidity funds and investments with a maturity of less than

three

months at the date of purchase), and ii) Other Investments (fixed income securities, time deposits, and fund investments).

Tenaris holds primarily investments in money market funds and variable or fixed-rate securities from investment grade issuers. As of

December 31, 2018

and

2017,

Tenaris does

not

have direct exposure to financial instruments issued by European sovereign counterparties.

Tenaris holds its investments primarily in U.S. dollars. As of

December 31, 2018

and

2017,

U.S. dollar denominated liquid assets represented approximately

95%

and

93%

of total liquid financial assets respectively.

(vii)

Commodity price risk

In the ordinary course of its operations, Tenaris purchases commodities and raw materials that are subject to price volatility caused by supply conditions, political and economic variables and other factors. As a consequence, Tenaris is exposed to risk resulting from fluctuations in the prices of these commodities and raw materials. Tenaris fixes the prices of such raw materials and commodities for short-term periods, typically

not

in excess of

one

year, in general Tenaris does

not

hedge this risk.

B. Category of financial instruments and classification within the fair value hierarchy

As mentioned in note II.A, the Company classifies its financial instruments in the following measurement categories: amortized cost, fair value through other comprehensive income (“FVOCI”) and fair value through profit and loss (“FVPL”).For financial instruments that are measured in the statement of financial position at fair value, IFRS

13,

“Fair value measurement” requires a disclosure of fair value measurements by level according to the following fair value measurement hierarchy:

Level

- Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level

- Inputs other than quoted prices included within Level

that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices).

Level

- Inputs for the asset or liability that are

not

based on observable market data (that is, unobservable inputs).

B. Category of financial instruments and classification within the fair value hierarchy (Cont.)

The following tables present the financial instruments by category and levels as of

December 31, 2018

and

2017.


			Measurement Categories								At Fair Value
December 31, 2018	Carrying amount		Amortized Cost		FVOCI		FVPL		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents		428,361		268,163		-		160,198		160,198		-		-
Other investments		487,734		300,410		166,094		21,230		168,165		19,159		-
Fixed income (time-deposit, zero coupon bonds, commercial papers)		300,410		300,410		-		-		-		-		-
Certificates of deposits		198,912		198,912		-		-		-		-		-
Commercial papers		9,932		9,932		-		-		-		-		-
Other notes		91,566		91,566		-		-		-		-		-
Bonds and other fixed income		187,324		-		166,094		21,230		168,165		19,159		-
U.S. government securities		1,077		-		1,077		-		1,077		-		-
Non - U.S. government securities		24,912		-		24,912		-		24,912		-		-
Corporates securities		142,176		-		140,105		2,071		142,176		-		-
Structured notes		19,159		-		-		19,159		-		19,159		-
Derivative financial instruments		9,173		-		-		9,173		-		9,173		-
Other Investments Non-current		118,155		-		113,830		4,326		113,830		-		4,326
Bonds and other fixed income		113,830		-		113,830		-		113,830		-		-
Other investments		4,326		-		-		4,326		-		-		4,326
Trade receivables		1,737,366		1,737,366		-		-		-		-		-
Receivables C and NC (*)		307,790		139,474		48,711		-		-		52		48,659
Other receivables		188,185		139,474		48,711		-		-		52		48,659
Other receivables (non-financial)		119,605		-		-		-		-		-		-
Total				2,445,413		328,635		194,927		442,193		28,384		52,985
Liabilities
Borrowings C and NC		539,007		539,007		-		-		-		-		-
Trade payables		693,673		693,673		-		-		-		-		-
Derivative financial instruments		11,978		-		-		11,978		-		11,978		-
Total				1,232,680		-		11,978		-		11,978		-

(*) Includes balances related to interest in our Venezuelan companies, see Note

30.


			Measurement Categories								At Fair Value
December 31, 2017	Carrying Amount		Loans & Receivables		Held to Maturity		Available for sale		Fair value through profit and loss		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents		330,221		150,948		-		-		179,273		179,273		-		-
Cash at banks		150,948		150,948		-		-		-		-		-		-
Liquidity funds		66,033		-		-		-		66,033		66,033		-		-
Short – term investments		113,240		-		-		-		113,240		113,240		-		-
Other investments		1,192,306		-		220,838		-		971,468		459,476		511,992		-
Fixed income (time-deposit, zero coupon bonds, commercial papers)		437,406		-		-		-		437,406		9,943		427,463		-
Certificates of deposits		297,788		-		-		-		297,788		-		297,788		-
Commercial papers		9,943		-		-		-		9,943		9,943		-		-
Other notes		129,675		-		-		-		129,675		-		129,675		-
Bonds and other fixed income		754,800		-		220,838		-		533,962		449,533		84,429		-
U.S. government securities		130,477		-		-		-		130,477		130,477		-		-
Non - U.S. government securities		161,063		-		36,283		-		124,780		124,780		-		-
Corporates securities		378,831		-		184,555		-		194,276		194,276		-		-
Structured notes		68,044		-		-		-		68,044		-		68,044		-
Mortgage and asset-backed securities		16,385		-		-		-		16,385		-		16,385		-
Others		100		-		-		-		100		-		100		-
Other Investments Non- current		128,335		-		123,498		-		4,837		-		-		4,837
Bonds and other fixed income		123,498		-		123,498		-		-		-		-		-
Other investments		4,837		-		-		-		4,837		-		-		4,837
Trade receivables		1,214,060		1,214,060		-		-		-		-		-		-
Receivables C and NC		327,258		176,716		-		-		8,230		-		8,230		-
Foreign exchange derivatives contracts		8,230		-		-		-		8,230		-		8,230		-
Other receivables		176,716		176,716		-		-		-		-		-		-
Other receivables (non-financial)		142,312		-		-		-		-		-		-		-
Available for sale assets		21,572		-		-		21,572		-		-		-		21,572
Total				1,541,724		344,336		21,572		1,163,808		638,749		520,222		26,409
Liabilities
Borrowings C and NC		965,859		965,859		-		-		-		-		-		-
Trade payables		750,739		750,739		-		-		-		-		-		-
Other liabilities		197,504		-		-		-		39,799		-		39,799		-
Foreign exchange derivatives contracts		39,799		-		-		-		39,799		-		39,799		-
Other liabilities (non-financial)		157,705		-		-		-		-		-		-		-
Total				1,716,598		-		-		39,799		-		39,799		-

There were

transfers between levels during the year.

The fair value of financial instruments traded in active markets is based on quoted market prices at the reporting date. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service, or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. The quoted market price used for financial assets held by Tenaris is the current bid price. These instruments are included in Level

and comprise primarily corporate and sovereign debt securities.

B. Category of financial instruments and classification within the fair value hierarchy (Cont.)

The fair value of financial instruments that are

not

traded in an active market (such as certain debt securities, certificates of deposits with original maturity of more than

three

months, forward and interest rate derivative instruments) is determined by using valuation techniques which maximize the use of observable market data when available and rely as little as possible on entity specific estimates. If all significant inputs required to value an instrument are observable, the instrument is included in Level

Tenaris values its assets and liabilities included in this level using bid prices, interest rate curves, broker quotations, current exchange rates, forward rates and implied volatilities obtained from market contributors as of the valuation date.

one

or more of the significant inputs are

not

based on observable market data, the instruments are included in Level

Tenaris values its assets and liabilities in this level using observable market inputs and management assumptions which reflect the Company’s best estimate on how market participants would price the asset or liability at measurement date. Main balances included in this level correspond to the Company interest in Venezuelan companies (see Note

The following table presents the changes in Level

assets and liabilities:

	Year ended December 31,
	2018			2017
	Assets / Liabilities
At the beginning of the year		26,409			23,242
Addition / (Decrease)		26,768			3,117
Currency translation adjustment and others		(192	)		50
At the end of the year		52,985			26,409

C. Fair value estimation

Financial assets or liabilities classified at fair value through profit or loss are measured under the framework established by the IASB accounting guidance for fair value measurements and disclosures.

The fair values of quoted investments are generally based on current bid prices. If the market for a financial asset is

not

active or

market is available, fair values are established using standard valuation techniques.

The fair value of all outstanding derivatives is determined using specific pricing models that include inputs that are observable in the market or can be derived from or corroborated by observable data. The fair value of forward foreign exchange contracts is calculated as the net present value of the estimated future cash flows in each currency, based on observable yield curves, converted into U.S. dollars at the spot rate of the valuation date.

Borrowings are comprised primarily of fixed rate debt and variable rate debt with a short term portion where interest has already been fixed. They are classified under other financial liabilities and measured at their amortized cost. Tenaris estimates that the fair value of its main financial liabilities is approximately

99.3%

of its carrying amount including interests accrued in

2018

as compared with

99.4%

2017.

Fair values were calculated using standard valuation techniques for floating rate instruments and comparable market rates for discounting flows.

The carrying amount of investments valuated at amortized cost approximates its fair value.

D. Accounting for derivative financial instruments and hedging activities

Derivative financial instruments are initially recognized in the statement of financial position at fair value through profit and loss on each date a derivative contract is entered into and are subsequently remeasured at fair value. Specific tools are used for calculation of each instrument’s fair value and these tools are tested for consistency on a monthly basis. Market rates are used for all pricing operations. These include exchange rates, deposit rates and other discount rates matching the nature of each underlying risk.

As a general rule, Tenaris recognizes the full amount related to the change in fair value of derivative financial instruments in

Financial Results

in the Consolidated Income Statement.

D. Accounting for derivative financial instruments and hedging activities (Cont.)

Tenaris designates certain derivatives as hedges of particular risks associated with recognized assets or liabilities or highly probable forecast transactions. These transactions (mainly currency forward contracts on highly probable forecast transactions) are classified as cash flow hedges. The effective portion of the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. Amounts accumulated in equity are then recognized in the income statement in the same period as the offsetting losses and gains on the hedged item. The gain or loss relating to the ineffective portion is recognized immediately in the income statement. The fair value of Tenaris’s derivative financial instruments (assets or liabilities) continues to be reflected in the statement of financial position. The full fair value of a hedging derivative is classified as a current or non-current asset or liability according to its expiry date.

For transactions designated and qualifying for hedge accounting, Tenaris documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedge transactions. Tenaris also documents its assessment on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flow of hedged items. At

December 31, 2018

and

2017,

the effective portion of designated cash flow hedges which is included in

Other Reserves

in equity amounts to

$0.9

million and

$0.2

million debit respectively (see Note

Derivative financial instruments).

The fair values of various derivative instruments used for hedging purposes and the movements of the hedging reserve included within

Other Reserves

in equity are disclosed in Note

23.