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Leveraging Trade Finance for Working Capital Optimisation Industry: Mining & Metallurgy Reducing the overall working capital requirement is a priority for Ruukki - a leading international provider of energy-efficient steel solutions - so that the company can maximise investment in the business. Featuring comment from PwC's Director of Working Capital.

Industry: Mining & Metallurgy

Leveraging Trade Finance for Working Capital Optimisation

by Markku Honkasalo, Chief Financial Officer, Rautaruukki Corporation

As a diverse business with three distinct business segments, Ruukki has different capital profiles and working capital requirements in each case. The business is capital-intensive, particularly Ruukki Metals, and we have around €2bn capital employed, of which €1.5bn is required by the metals division. Our total working capital is around €700m. Consequently reducing the overall working capital requirement is a priority for Ruukki so that we can maximise investment in the business.

We recently changed our operating model in the Metals division, so we now operate an efficient organisational structure, with a principal company in Finland, and subsidiaries operate as agents, which enables us to reduce working capital requirements by owning inventory centrally. However, in addition to structuring the business appropriately, we needed to be proactive in optimising the elements that contribute to working capital. We have therefore embarked on a variety of working capital initiatives to improve the ratio of working capital to net sales.

A key strategic partnership

SEB has been a core bank for Ruukki for a number of years, and our relationship extends to a variety of areas, including both trade finance and cash management. Consequently, the bank takes a major strategic role in helping us to meet our financial objectives in areas such as working capital. One of the initiatives that we have worked on together was to go through SEB’s Corporate Financial Value Chain™ (CFVC) programme, a structured way of identifying and addressing points of weakness in the financial supply chain. Based on this analysis, we identified a variety of areas in which we recognised scope for improvement, which has been highly beneficial for our business.

Improving purchasing power

Reducing days sales outstanding (DSO) is an essential element in managing working capital, and this is a major area in which we have been supported by SEB. We purchase our primary raw materials, such as coking coal, through the global markets, particularly from Australia, United States and Canada. SEB has helped us to optimise our commercial position without compromising our working capital objectives through the use of trade finance instruments.

Mitigating risk in emerging markets

Conversely, as we continue to enter new markets as part of our speciality steel strategy, SEB is supporting us in reducing our counterparty risk through the use of trade finance instruments such as letters of credit. This is a relatively new development for our organisation, so SEB has been instrumental in helping to educate our team, identifying the most appropriate instruments and processes, and building our internal systems. Leveraging our bank’s expertise and knowledge of industry best practices has been very helpful in helping to streamline processes and reduce errors that could otherwise delay trade settlement and result in reputational damage. Implementing efficient, consistent processes across 30 countries can be very challenging, due to the diversity of language, cultural backgrounds and expertise that exists, so we have appreciated SEB’s support across the countries in which we operate.

Measuring the business impact

We have reduced our working capital requirement substantially, and we are also able to mitigate our counterparty risk and forecast cash flow more effectively, which again contributes to more efficient use of working capital.

Maximising success in a new world

Looking ahead, we are seeking to expand our market share in emerging markets, which currently comprise around one third of our revenues. To achieve this business growth, whilst managing our risk and minimising working capital requirements, our relationship with SEB to provide trade finance instruments will become even more important. While there was formerly a trend towards the use of open account transactions, the world has changed, and risk, liquidity and working capital are priorities for our business just as they are for many others, and the use of trade finance tools enables us to achieve our business and financial objectives.

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