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Salzgitter AG / Investor Relations / Corporate Governance / Risk Management

Risk Management

We comment on expectations of the medium-term development of the economy and the potential impact on our company, while taking account of the opportunities and risks, in the section on “Overall Statement on Anticipated Group Performance” of the Annual Report 2015.

Differentiation between risk and opportunity management

We treat risk and opportunity management separately as a matter of principle. A separate reporting system documents and supports the monitoring of risks. By contrast, the recording and communication of opportunities forms an integral part of the management and controlling system that operates between our subsidiaries/associated companies and the holding company. The identification, analysis and implementation of operational opportunities are incumbent on the management of the individual companies. Together with the holding company of the Group, goal-oriented measures are devised to reinforce strengths and to tap strategic growth potential. The Group has a series of instruments at its disposal for this purpose. These instruments are described under the section entitled “Management and control instruments”.

Opportunities and opportunity management

The ongoing monitoring and analysis of the relevant developments affecting the products, technology, markets and competition in the Group’s environment are an integral part of opportunity management dedicated to the identification, seizing and realization of opportunities.

The implementation of the “Salzgitter AG 2015” program enabled us to complete a fundamental change in the Group’s organization and management structure in 2014. The new organization allows us to shape structures and workflows to make them more efficient and effective. The challenging and dynamic environment harbors market opportunities that we are now able to seize more swiftly and in a more selective way. Combined with a comprehensive package of measures to enhance process efficiency, the “Salzgitter AG 2015” program serves to strengthen our competitiveness, while forming an important basis for rigorously leveraging potential.

The development of the business units is clearly aligned to customer and market requirements and geared to premium, innovative products as well as to ensuring the broadest base possible for the Group’s business. Business opportunities are to be specifically used under the aspect of sustainable profitability. Alongside measures to promote organic growth, we also screen external options with regard to their potential contribution to securing the Salzgitter Group’s success. More information can be found in the sections entitled “Management and Control of the Company, Goals and Strategy”.

Extensive investments in recent financial years have bolstered the expansion of our production program, thereby setting in place the prerequisites for us to make even better use of market opportunities in the future. Plant productivity and efficient resource deployment as well as the continuous optimization of product quality are also components that are critical to our Group’s success. More detailed explanations can be found in the section on “Investments”.

Opportunities arise most notably from our numerous and diverse research and development activities. Information on projects currently under way has been included in the section on “Research and Development”.

Risks and risk management

In the past year our risk management system has proven its worth and effectiveness, also in the light of the impact of the financial, debt and European steel crisis.

Business activity as defined by our Articles of Incorporation makes risk-taking unavoidable in many instances, as this is frequently a precondition for exploiting opportunities. As far as possible, all relevant risks must therefore be containable and kept within certain limits by the management of the company. For this reason, foresighted and effective risk management is an important and value-creating component of management that is geared toward safeguarding the company as a going concern, along with our investors’ capital and jobs.

Qualified top-down set of rules and regulations

It is the task of the management holding company to put guidelines in place to form the basis on which a uniform and adequate consideration and communication of risks can be ensured throughout the Group. We communicate the relevant concept to our subsidiaries and associated companies with the aid of a risk policy that sets out principles concerning the

  • identification,
  • assessment,
  • management,
  • communication and
  • documentation

of the risks based upon which the groupwide risk inventory is standardized, with the ultimate aim of guaranteeing the informative value for the entire Group. We develop our risk management system on a steady basis in response to requirements.

Identification

With risk management within the Salzgitter Group in mind, we identify situations in the business units that we have yet incorporated – or been able to incorporate – into our planning or in our forecast. The damage or the amount of loss is based on the potential divergence from our forecast or our anticipation of the result. The risk coordinators in the companies ensure that this is a continuous process. We have drawn up a checklist that can be used to identify risks. At the same time, the various situations are assigned to risk types. The categorization of the different types of risks in the Salzgitter Group consists of the following four main groups:

  • general external risks,
  • performance risks,
  • financial risks and
  • general internal risks.

In order to ensure a fundamental methodology, we record and monitor mandatory risks for a series of risks in our inventory – irrespective of the amount of loss – such as performance risks, for instance, arising from sales, procurement, stocks and production downtime. External risks comprise environmental protection risks relating to the operation of our plants as well as, more recently, also risks inherent in environmental and energy policies that are particularly significant for our Group. Examples of the financial component include rolling, short-term liquidity planning, and, in the case of internal risks, evaluating information technology. Experience has shown that this selection covers the main risks in our Group’s risk portfolio.

Assessment

We generally document the quantitative extent of the potential calculated loss or damage in the light of all influencing factors in order to track and assess the risks. In this process, provisions and impairment are deducted from the amount of loss, which is noted in the risk documentation.

Risks from fire damage, operational downtime and other damage and liabilities claims covered by our insurance policies are not recorded. Severe loss incurred by the aforementioned risks is passed to our insurance providers, with the exception of any excess. We continuously review the scope and content and make adjustments whenever necessary to ensure that our insurance cover always reflects the status quo.

With regard to the extent of loss or damage, we distinguish between major risks in excess of a gross amount of at least € 25 million and other risks involving loss or damage of less than a gross amount of € 25 million.

In deriving net loss from gross loss we take account of all measures to contain loss.

We make a distinction between five categories based on the likelihood of their occurrence: three “unlikely” and two “likely”. Risks in the “unlikely” categories are events that, after careful commercial, technical and legal consideration, are deemed unlikely to occur. In the case of risks in the “likely” categories, loss accruing to the company from an undesirable event can no longer be ruled out.

Dealing with risk

Measures that would need to be taken for evaluating and overcoming each respective risk are documented and reported as described below.

Communication and documentation

Measures that would need to be taken for evaluating and overcoming each respective risk are documented and reported as described below.

We include risks as an integral part of our intra-year forecasting, medium-term planning and strategy discussions. We have defined a set of different procedures, rules, regulations and tools with the aim of avoiding potential risks and of controlling and managing the risks that arise and taking preventive measures. Our internal control system that incorporates the principles of the COSO model is an integral instrument in minimizing risk. The COSO model is based on the “Internal Control – Integrated Framework” published by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of the high degree of transparency achieved with regard to developments that involve risk, we as a Group are able to take appropriate countermeasures and implement them in a targeted manner at an early stage. The conditions that must be fulfilled for these measures to be effective are documented, periodically examined and updated if necessary.

We use our groupwide reporting system to ensure that Group management is provided with the necessary and pertinent information. The Group companies report on the risk situation in accordance with reporting thresholds in monthly controlling reports or ad hoc, which they do directly to the Executive Board. We analyze and assess the risks at Group level, monitor them punctiliously and align them to our overall business situation.

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 SZAG’s Executive Board are, for instance, represented on the Supervisory Board of EUROPIPE GmbH (EP), a joint venture, and Hüttenwerke Krupp Mannesmann GmbH (HKM) in order to ensure the transparency. Moreover, two Executive Board members of our company serve on the Supervisory Board of Aurubis AG (NAAG), one of our participations.

For its part, the Executive Board reports to the Supervisory Board on the risk position of the Group as well as – where appropriate – on the status of individual risks. The Supervisory Board has formed an Audit Committee that is tasked with addressing issues relating to risk management in its regular meetings.

Get more information about the operations of the shareholders group "Freundeskreis der Aktionäre" of Salzgitter AG (This page is only available in German). » read more

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