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 “Opportunities and Risk Report, Guidance” of our  Annual Report 2022.

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.

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.

As part of developing the “Salzgitter AG 2030” strategy, opportunities were identified for the Group and integrated into the corporate strategy as Strategic goals for all business units. We see opportunities particularly in the fields described in the following.

Business activity 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.

It is the task of the management holding company to put guidelines in place to form the basis on which a uniform and adequate handling 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. This policy sets out principles concerning the

• identification,
• assessment,
• dealing with risk,
• communication and
• documentation

of the risks in order to standardize them for the throughout the Group and to guarantee the informative value for the entire Group. We develop our risk management system (RMS) on a steady basis in response to requirements. Against the backdrop of the growing significance of ESG risks, we expanded our governance risk management in the reporting year. ESG risks are initially measured qualitatively with the aid of the ESG Risk Committee and the risk owners in the holding company and Group companies regarding probability of occurrence and amount of loss or damage. Physical risks are analyzed by Central Risk Management across all the companies. At the time when the Non-Financial Report 2022 was being drawn up, the Salzgitter Group had not identified any material non-financial risks. For more information on ESG risks, we make reference to our Integrated Risk Management in the Non-Financial Report.

We generally include all the consolidated companies of our business units in our risk management. 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 are, for instance, represented on the Supervisory Board of EUROPIPE GmbH, a joint venture, and Hüttenwerke Krupp Mannesmann GmbH. Moreover, on the reporting date, one Executive Board member of our company served on the Supervisory Board of Aurubis AG (NAAG), a participating investment of ours

A risk within the meaning of risk management in the Salzgitter Group is defined as potential damage that has not yet occurred, and has not been factored into a Group company’s planning or forecast. With risk management within the Salzgitter Group in mind, we analyze situations in the business units that we have not yet incorporated – or been able to incorporate – into our planning or in our forecast. We have drawn up a checklist that can be used to identify risks. The companies’ risk managers appointed by the respective senior management teams ensure an ongoing process by incorporating the respective risk owners. At the same time, the various situations are assigned to risk types. In the Salzgitter Group we categorize the risk types as follows:

• strategic
• political risks,
• performance risks,
• financial risks and
• general risks.

In terms of the strategic / political risks, the focus is placed on risks for our Group that are inherent in environmental and energy policies.

The area of performance risks within the Salzgitter Group primarily addresses the main price and procurement risks from the raw materials and energy required, above all in the Steel Production and Steel Processing business units. This group of risks also includes production downtime risks relating essentially to key plant equipment and machinery such as the rolling mills.

The economic risks for companies belonging to the corporate finance and fiscal group are coordinated and controlled by the management holding across all business units. In order to ensure a fundamental methodology, we record and monitor mandatory risks for a series of risks – irrespective of the amount of loss – such as performance risks, for instance, arising from sales, procurement, stocks and production downtime. Experience has shown that this selection covers the main risks in our Group’s risk portfolio.

So as to be able to assess the risks, we generally evaluate the threat scenario, while taking into account all factors of influence. Assessing the individual specific risks is the responsibility of the risk owner in consultation with the risk manager. All risks identified are reviewed at least once a year in terms of their potential loss and loss amount – defined as the divergence from the forecast or anticipation of the result – and the probability of their occurrence. We assign the probability of occurrence to five categories:

• 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.

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. We consider this categorization as suitable since, in the recent past, we have also reported financial years with pre-tax results around breakeven. With a view to consistent application, these figures will be retained. In the case of major risks, risks of particular significance exist for the Salzgitter Group. Such risks include development of prices in the sales and procurement markets, of freight rates, along with energy prices and exchange rates (above all, USD/EUR). Owing to their significance, these risks are monitored at short intervals and are therefore consistently integrated into the forecasts.

Risks from loss or damage and liabilities claims, for example, fire and operational downtime, covered by our insurance policies are not recorded.

In deriving net loss from gross loss we take account of all measures to contain loss. In the event, provisions and valuation allowances reduce the amount of loss, which is noted in the risk documentation.

For the Salzgitter Group, we regard 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 incorporate risks as an integral part of our intra-year forecasting as well as our 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. A critical component for risk mitigation is our Internal control system. 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.