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 /  /  / Risk Management

Opportunity and 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” within the Annual Report 2019

Differentiation between risk and opportunity management

We treat risk and opportunity management separately as a matter of principle. A separate reporting system documents the risks and facilitates the relevant monitoring activities. By contrast, recording and communicating 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 directly 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.

Opportunities and opportunities management

The ongoing monitoring and analysis of the relevant developments affecting the products, technology, markets and competition in the environment of the Group companies are an integral part of opportunity management dedicated to ensuring that we can identify, seize and realize opportunities.

Our group and management structure that is aligned to efficient and effective structures and workflows forms an important basis for the consistent leveraging of potential. This allows us to seize market opportunities more swiftly and in a more selective manner against the backdrop of a challenging and dynamic environment.

Business opportunities are to be specifically used under the aspect of sustainable profitability. We are concerned not only with measures to promote organic growth but also with investigating new business models, and we screen external options with regard to their potential contribution to securing the Salzgitter Group’s success. Plant productivity and efficient resource deployment, as well as the clear alignment of our products and services to reflect customer and market requirements, are also components that are critical to our Group’s success.

Opportunities arise most notably from our numerous and diverse research and development activities. More information on projects currently under way has been included in the section on “Research and Development”. The SALCOS® (Salzgitter Low CO2 Steelmaking) project is our own specific climate strategy aimed at sustainable, reduced CO2 steel production. Information on SALCOS® and the associated future opportunities and preconditions can be found in the section on https://salcos.salzgitter-ag.com/en

Risks and risk management

In the past year, our risk management system has delivered proof of its worth and effectiveness.

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 contribution 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 to put guidelines in place that constitute 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,
  • dealing with risk,
  • communication and
  • documentation

of the risks based upon which the groupwide risk inventory is standardized, with the ultimate 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 not 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 the forecast or 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 and risks relating to the operation of our plants as well as the 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

In order to understand the risks, we generally assess the threat scenario and recognize all influencing factors. In the event, provisions and valuation allowances reduce 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. Our insurance providers are responsible for any severe loss incurred by the aforementioned risks, with the exception of any excess. We continuously review the scope and content of our cover and make adjustments whenever necessary to ensure that it 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 that are assigned a probability of occurrence in the following, 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.

With respect to the probability of occurrence, we distinguish between five categories based on the likelihood of their occurrence: “very unlikely”, “unlikely”, “rather unlikely”, “likely”, and “very likely”. Risks in the first three categories are events that, after careful commercial, technical and legal consideration, are deemed unlikely to occur. In the case of risks in the risk categories above these, loss accruing to the company from an undesirable event can no longer be ruled out. 

Dealing with risk

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

Communication and documentation

We generally include all the consolidated companies of our business units in our risk management.

We incorporate risks as an integral part of our intra-year forecasting and the medium-term planning. 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, especially in the case of risks necessitating urgent action, align them to our overall business situation.

We regard risks entailing a loss of at least € 25 million and categorized as “likely” or “very likely” in terms of their probability of occurrence as significant. For reasons of caution, we also include risks that are “rather unlikely” in these considerations.

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 the Executive Board of Salzgitter AG (SZAG) are, for instance, represented on the Supervisory Board of EUROPIPE GmbH, a joint venture, and Hüttenwerke Krupp Mannesmann GmbH in order to ensure the transparency. Moreover, on the reporting date, one Executive Board member of our company served on the Supervisory Board of Aurubis AG, a participating investment of ours.

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.

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