voestalpine AG first established risk policy guidelines for the Group around 10 years ago. The risk management system, which has been in place since the business year 2000/01 in the form of operating procedures for the entire Group, serves both to secure the long-term existence of the Company and to increase its value, and is thus a key factor in the success of the Company.
In accordance with the Austrian Company Law Amendment Act (Unternehmensrechtsänderungsgesetz), an Audit Committee has been established within voestalpine AG which continuously deals with, amongst others, matters concerning risk management and the internal control system (ICS). Both risk management and the ICS are integral components of the existing management systems within the voestalpine Group. The Internal Audit department is an independent internal company unit which monitors operating and business processes as well as the ICS, and has full discretion when reporting and assessing audit results.
Risk management covers both strategic and operative levels and is therefore a significant element in enduring success. Strategic risk management serves to evaluate and safeguard strategic planning for the future. Strategies are examined to ensure conformity with systems of objectives in order to guarantee growth in value through the optimum allocation of resources. Operative risk management is based on a revolving procedure run at least once a year. The identified risks are evaluated according to an evaluation matrix which judges potential loss and probability of occurrence. Essentially it is the operational, environmental, technological, financial and IT risks which are documented, and this process is supported by a special web-based IT system.
Measures taken within the voestalpine Group to avoid, minimize and transfer risk include:
Raw materials availability and price hedging
For several years the Company has followed a procurement strategy targeted at establishing close and long-term relationships with suppliers, the expansion of the supplier portfolio and increased self-sufficiency. In view of the increased volatility expected in the raw materials markets, these objectives will become increasingly important. As a result of this focused approach, when increasing shortfalls in supply emerged worldwide, the Group was continually able to secure sufficient supplies of all necessary raw materials right through to the end of the business year 2009/10.
Due to the extensive withdrawal from traditional benchmark systems (see “Raw materials” section), corresponding adaptions of contracts are currently negotiated with the Group’s customers, in order to accommodate changes in general conditions, especially in terms of risk factors.
In order to evaluate the risks arising from the volatility in raw materials prices we have a risk management tool for calculating cash flow @ risk. Under consideration of the ability to pass on price changes, the size of the evaluated risk and the individual peculiarities of each raw material, prices are secured by agreeing supply contracts with fixed-price agreements or via derivative financial contracts. An internal guideline regulates the procedure within the Group.
Failure of IT systems
Servicing of business and production processes which are largely based on complex information technologies is carried out by a specialist IT company which is 100% owned by voestalpine AG.
Due to the importance of IT security, and in order to further minimize potential IT security risks, minimum security standards for data processing were drawn up in the past and adherence to these standards is audited annually.
Production facilities
In order to minimize the risk of breakdowns at critical facilities we have undertaken comprehensive, targeted investment in the technical optimization of sensitive units. Continual, preventative servicing, a risk-oriented storage of spare parts and employee training are further measures.
Employees
Challenging projects to sustainably secure knowledge and prevent the loss of know-how were initiated in the past and are being consistently updated. The existing series of planned measures for implementation in the event of a pandemic are reviewed annually to ensure complete functionality, should they be required.
CO2 risks
Risks related to CO2 are covered in the “Environment” section in this Annual Report.
Risks in the financial area
With respect to guidelines competence, the setting of strategy and the definition of targets, financial risk management is centrally organized. The existing body of regulation includes targets, principles, tasks and competencies, both for the Group treasury and for the financial sector of each Group company. Financial risks are constantly monitored, quantified and, where appropriate, secured. The strategy aims to reduce fluctuations in cash flow and income. Market risks are largely secured through the use of derivative financial instruments.
Financing risks are secured through the measures detailed below:
Liquidity risk
Liquidity risk refers to the ability to raise funds at any time to settle incurred liabilities. The primary instrument for controlling liquidity risk is a precise financial plan that is submitted quarterly by the operating entities directly to the Group treasury of voestalpine AG. The requirements on financing and bank credit lines are determined from the consolidated results.
Credit risk
Credit risk refers to financial losses that may occur through non-fulfillment of contractual obligations by business partners. The credit risk of the underlying transactions is kept low by precise management of receivables. A high percentage of delivery transactions are covered by credit insurance. Bankable security is also provided, such as guarantees and letters of credit. As of March 31, 2010, 77% of receivables from deliveries and services were covered by credit insurance.
Currency risk
An initial hedge is provided by naturally covered items where, for example, trade receivables in USD are offset by liabilities for the purchase of raw materials (USD netting). Hedging can also be achieved through the use of derivative hedging instruments.
Interest rate risk
An evaluation of interest rate risk differentiates between the cash flow risk (the risk that interest expenses or interest income will undergo a detrimental change) for variable-interest financial instruments and present value risk for fixed-interest financial instruments. The strategy of the Group is to reduce interest rate volatility through the use of the portfolio effect and interest hedges.
Economic and financial crisis
Measures were introduced during the previous year to counteract the effects of the global economic and financial crisis on the voestalpine Group, and these measures continued to be implemented during the business year 2009/10.
The measures were targeted at
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keeping the negative effects of the economic recession on the Company to a minimum,
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maintaining high levels of production quality whilst simultaneously reducing costs,
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being able to make available sufficient financial liquidity, and
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securing the know-how within the Group with a view to continuing the long-term expansion of our leadership in quality and technology.
Tangible measures were developed and implemented to minimize or eliminate risks identified within the Group in the past, thereby continuing the trend of reducing the potential for risk. The measures which were developed were targeted at reducing the extent of potential loss and/or minimizing the likelihood of these risks occurring.
In conclusion, the risks faced by the voestalpine Group are limited and manageable and do not endanger the survival of the Group. Nor are there any identifiable risks to the future existence of the Company.
