Individual Risks
Sectoral risks
Based on macroeconomic changes in the international markets, the development of the following factors
are of special significance for the Salzgitter Group:
- prices in sales and procurement markets,
- the exchange rates (especially USD/EUR) and
- energy prices.
In order to minimize the associated business risks, we monitor the relevant trends and take account of
them in risk forecasts. This is also valid for potential restrictions resulting from financial or political measures
affecting international business.
Along with efforts to set in place healthy sales structures with sectoral and geographical diversification,
we are committed to optimizing manufacturing processes and promoting the targeted growth of our
Group.
We view a diversified holdings portfolio as instrumental in reducing our dependency on the strongly cyclical
nature of the steel industry. We limit risks from changes in the steel and tubes markets by having a
decentralized Group structure enabling swift decision-making processes which allow us to adapt rapidly
to new market conditions. From today’s standpoint, there are no risks identifiable from developments in
the relevant sectors which could constitute a threat to Salzgitter AG as a going concern. With regard to
risks arising from the current discussions on climate and energy policy, we make reference to the section
entitled “
Environmental Protection”.
Price risks of purchasing essential raw materials
The procurement prices of raw materials, especially iron ore and coking coal, are extremely volatile.
The highest and lowest price of fine ore in 2011, for instance, was 193 USD/t and 120 USD/t respectively.
Coking coal spot market prices also displayed considerable fluctuation ranging between 228 USD/t and
350 USD/t, particularly at the start of the year when prices were exacerbated by flooding in Australia as
the main supplier country.
The Salzgitter Group’s fundamental approach is to pass on price fluctuations to customers through a
form of natural hedging. On the procurement side, supply contracts concluded on an annual basis serve
to cushion a significant part of the impact of ore initially sourced; pricing on a quarterly or monthly basis,
however, predominates. The Group uses a permanent system of monitoring sales and procurement to
ensure that there is congruence between the fixed-price sales and the fixed-price procurement of raw
materials. This system enables changes to be recognized at an early stage so that resulting risk can be
dealt with in time.
Procurement risks
We counteract the fundamental risk from supply shortfalls of raw materials (iron ore, coal) and energy
(electricity, gas) by safeguarding their procurement, firstly by way of long-term framework contracts, and
secondly through ensuring our supply from several regions and/or a number of suppliers. In addition, we
also operate an appropriate inventory management. The assessment of our supply sources confirms our
opinion that the medium-term availability of these raw materials in the desired quantity and quality is
ensured. We procure our electricity mainly on a contractually secured basis if our needs exceed our own
generating capacity. In order to minimize the risks of further electricity price hikes, two new 105 megawatt
power-generating units have been built at the Salzgitter location and will largely serve to cover the
future electrical power requirements of Salzgitter Flachstahl GmbH (SZFG). The commissioning of these
new units took place in December 2010. For the reasons cited above, we believe that supply bottlenecks
are unlikely, and no adverse effects are therefore anticipated.
The scheduled and punctual rail transport of iron or and coal from our overseas port in Hamburg to the
Salzgitter site is also important. Our contractual partner in guaranteeing this logistics task is DB Schenker
Rail Deutschland AG, the freight subsidiary of Deutsche Bahn AG. We have developed a detailed contingency
plan to deal with any adverse effects, such as strikes. This plan includes foresighted stockholding
and intensive coordination between DB Schenker and ourselves to keep train transport running regularly
to the greatest possible extent. Another viable alternative is the more intensive use of the railway facilities
owned by the Group, as well as resorting to inland waterways to transport partial shipments.
Selling risks
A risk typical of our business may also result from the sharp fluctuation in prices and volumes in our target
markets. With regard to the current economic environment, we refer to the outlook for the financial year
2012 under the section entitled “
Significant Events after the Reporting Date and Forecast”.
We counteract the general risk to our company as a going concern by maintaining a diversified portfolio
of products, customer sectors and regional sales market.
As the effects of the economic situation on various divisions differ and therefore even partly compensate
for one another, we achieve a certain balance in our risk portfolio. Thanks to our broad-based business
position and flexible organization, we are also able to implement countermeasures tailored to the specific
situation swiftly and effectively.
Production downtime risks
We counteract the risk of unscheduled, protracted downtime of our key plant components through regular
plant and facility checks, a program of preventive maintenance measures, as well as a continuous
process of modernization and investment. In order to contain other potential loss or damage, with the
associated production downtime, as well as other conceivable compensation and liabilities claims, the
Group has concluded insurance policies which guarantee that the potential financial consequences are
curtailed, if not fully excluded. The scope and content of insurance cover is reviewed on an ongoing basis
and adjusted, if necessary. We consider the probability of events occurring that are not covered by appropriate
insurance – and the associated potential loss – to be low.
Legal risks
In order to exclude potential risks arising from a breach of the manifold fiscal, environmental, competition-
related rules and regulations and other legal provisions we require our employees’ strict compliance.
We seek extensive legal advice from our experts as well as, on a case-by-case basis, from qualified external
specialists.
To coordinate the Group’s initiatives with respect to policies relating to the steel industry and its associations,
as well as to ensure that these initiatives are pursued on a systematic basis, we have set up an international
affairs contact desk within the Group.
In our opinion, there are no discernible material legal risks.
Financial risks
The coordination of funding and the management of interest rate and currency risks of companies financially
integrated into the Group, a task assigned to Salzgitter Mannesmann GmbH (SMG), will now be performed
by Salzgitter Klöckner-Werke GmbH (SKWG) from January 1, 2012, onwards. The risk horizon which
has proven to be expedient is a rolling three-year period aligned to a planning framework. The guidelines
issued require all companies belonging to the group of consolidated companies to hedge against financial
risks at the time when they arise. For instance, risk-bearing open positions or financing in international
trading must be reported to SMG/SKWG by the respective subsidiaries. SMG/SKWG respectively
then decides on hedging measures, taking account of the Group’s exposure at the time. On principle, we
permit financial and currency risks only in conjunction with processes typical to steel production and
trading (please also see the sections on “Currency risks” and “ Interest rate risks”).
In relation to the operating risks, the financial risks are of lesser importance.
Currency risks
Our procurement and sales transactions in foreign currencies naturally harbor currency risks. The development
of the dollar, for instance, exerts a major influence on the cost of procuring raw materials and energy,
as well as on selling prices in the tubes segment or in mechanical engineering, for example. Although the
effects are mutually counteracting, the need for dollars for procurement activities predominates owing to
the business volumes that vary greatly. We generally set off all EUR–USD denominated cash flows within
the consolidated group, a process known as netting, and thereby minimize the risk potential.
To limit the volatility of financial risks, we conclude derivative financial instruments with terms whose
value develops counter to our operational business. The development of the market value of all derivative
financial instruments is ascertained on a monthly basis. Moreover, for the purpose of the annual financial
statements, we simulate the sensitivity of these instruments in accordance with the standards laid down
under IFRS 7 (see the section entitled “
Notes to the Consolidated Financial Statements”).
Default risks
We counter risks from our receivables by practicing stringent internal exposure management. We limit
around two thirds of these risks through trade credit insurance and other collateral. As opposed to the
notable curtailment of limits or even full retraction of cover by trade credit insurers two years ago, measures
that, from our perspective, first and foremost affected the automotive supplier sector and customers
in Eastern Europe, granting cover returned to normal levels over the course of the financial year ended.
We nonetheless observe and assess the development of unsecured positions with the utmost caution and
take this into account in our business.
We do not hedge translation risks arising from the converting of positions held in a foreign currency into
the reporting currency, as these are of secondary importance in relation to the consolidated balance
sheet. More information on this topic has been included in the Notes to the Annual Financial Statements
at company and at Group level. As a result of the preventative measures, we believe that currency risks do
not constitute a threat to the company as a going concern.
Liquidity risks
The management holding company monitors the liquidity situation within the Group by operating a central
cash and interest management system for all the companies that are financially integrated into the
Group. This system defines internal credit lines for the subsidiaries. If subsidiaries have their own credit
lines, they are responsible for minimizing the associated risk themselves and for reporting on potential
risks in the context of the Group management and controlling structures. Risks may also arise from the
necessary capital and liquidity measures taken on behalf of the subsidiaries and holdings if their business
should develop unsatisfactorily in the longer term. We do not, however, anticipate any burdens from this area of risk which could constitute a going concern risk. We counteract this risk by way of rolling financial planning. In view of the cash and credit lines available, we see no danger to our Group as a going concern at this time.
Interest rate risks
The cash and cash equivalents item, significant in relation to the balance sheet total, is exposed to interest
rate risk. Our investment policy is oriented to the greatest extent possible towards low risk investment
categories with a top credit rating while, at the same time, ensuring the availability of positions. In order
to keep a check on the interest rate risk, we regularly conduct interest rate analyses, the results of which
are directly incorporated into investment decisions. Long-term structural interest rate risk may arise from
a persistent gap between the deposit interest rate and interest- and income-induced developments in
pension obligations. This type of risk is currently not discernible; if – unexpectedly from today’s standpoint
– it should arise, the Group’s robust balance sheet constitutes a good basis for corrective measures.
Tax risks
The recording and documenting of tax risks are carried out by the companies integrated into the tax
group in close coordination with the holding company’s tax department. Salzgitter AG, SMG and SKWG are
responsible for provisioning, for example, in respect of the risks inherent in audits conducted on their tax
group. Companies with independent tax liability are responsible for their own provisioning.
In the context of former government aid to border regions, the EU Commission requires Salzgitter AG to
make back payments of € 17.8 million (including interest) on – from our standpoint – the legal and legitimate
tax advantages accruing prior to 1995. In 2008, the European Court of Justice made a decision which
went largely against the company in the second instance, but has nonetheless referred the case back to
the court of first instance. The verdict of this court is anticipated in 2012. We have already remitted payment
of the amount claimed by the Commission in order to avoid further interest accruing – contingent
on the success of the legal action.
Personnel risks
Salzgitter AG actively competes on the market to attract qualified specialists and managers. The company
counters the risk of fluctuation and the associated loss of knowledge by means of broad-based measures
designed to develop its personnel. To this end, specialist career paths have been explicitly introduced with
the aim of creating appropriate career prospects for our specialists. In our knowledge transfer, which is
applied groupwide, we have developed an instrument that, in the case of successor staff, ensures continuity
in the transfer of all knowledge-based information, contact and business connections pertaining to the
respective professional activity. Moreover, we also offer attractive company pension schemes that, given
the dwindling benefits under the state pension scheme, are becoming increasingly important.
We initiated the “GO – Generation Campaign 2025 of Salzgitter AG” back in 2005 against the backdrop of
demographic developments with the aim of responding in good time to the impact of these developments
on our Group, thereby securing our innovative strength and competitiveness also in the long term. The
project is focused on the systematic preparation of all employees for a longer working life. Given our manifold
measures, we believe that we are well prepared in this area of risk (see the section on “
Employees”).
Product and environmental risks
We meet the challenge of product and environmental risks with a multitude of measures aimed at securing
quality. Examples include:
- certification in accordance with international standards,
- continuous modernization of plants,
- ongoing development of our products and
- extensive environmental management.
More information, for instance on the legal provisions concerning energy and climate policies, can be
found in the section on “
Environmental Protection”.
An environmental officer appointed for the Group is tasked with centralizing and coordinating environmental
and energy policy issues that affect all companies, to represent the Group externally in matters
relating to the environment and energy policies and to manage individual projects affecting the whole
Group.
Risks from owning land and property may arise, particularly from inherited contamination. We counteract
this risk, for instance, by fulfilling our clean-up duties. In terms of financial precautions, an appropriate
amount of provisions are formed. To our knowledge there are no unmanageable circumstances arising
from this type of risk.
Information technology risks
We contain the risks arising in the field of information technology (IT) by developing and maintaining a
knowledge base within the Group in the form of IT services in our subsidiaries. This ensures that we always
remain at the forefront of technological progress.
The authority and competence granted to Group IT in matters of general policy in this area ensure the
ongoing development of our groupwide IT systems and form the basis for the economic deployment of
the required investment funds.
The consistent replacement of our hard- and software resources in line with the latest technology ensures
that availability, maintenance and IT security are kept at the highest level. The historically evolved, heterogeneous
IT structures in the Group are being gradually streamlined. The risks from this area are deemed
manageable, and we estimate the probability of an adverse event occurring to be low.
Corporate strategy risks
To secure our future earnings strength, we have been investing considerable sums in recent years, especially
at our Group locations in Salzgitter and Peine. In KHS GmbH, we have acquired the world’s number
three for beverage filling machinery. This addition to our portfolio will enable us to reduce our dependency
on the “typical” steel cycle in the future.
More detailed information can be found in the sections on “
Management and Control of the Company,
Goals and Strategy” and “
Investments”.
We limit the risks arising from joint ventures in which we do not hold a majority stake by way of appropriate
reporting and consultation structures, through participation in supervisory committees and through
contractual arrangements. Members of Salzgitter AG’s Executive Board are, for instance, represented on
the supervisory board of EUROPIPE GmbH (EP) in order to ensure the transparency of our 50 % joint venture.
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