Risk management

The voestalpine AG risk management system has been in place since the business year 2000/01. It takes the form of general operating procedures for the entire Group and is updated and expanded on a regular basis.

Risk management, as understood and applied within the voestalpine 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.

With the the Austrian Company Law Amendment Act (Unternehmensrechtsänderungsgesetz) enacted in 2008, the importance of the internal control system (ICS) and its monitoring as well as the risk management system as a whole has continued to grow.

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 both operating and business processes and the ICS and has full discretion when reporting and assessing audit results.

A systematic risk management process is an integral component of the Company’s business processes, enabling risks to be quickly identified and the appropriate measures taken to avert them. Risk management covers both strategic and operational levels and is therefore a significant element in the Company’s 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.

Operational 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, and IT risks that are documented, and this process is supported by a special web-based IT system.

Measures taken in the following key areas of risk include:

Raw materials availability

Securing the long-term availability of the required volume and quality of raw materials and energy is a particular challenge, especially for an industrial enterprise. For several years, the voestalpine Group has followed a diversified procurement strategy designed to reflect increased risks. Close and long-term relationships with suppliers on the one hand, and the expansion of the supplier portfolio and increased self-sufficiency on the other, are the core elements which, in view of current volatility in the raw materials markets, are becoming increasingly important (this is examined in greater detail in the section on “Raw materials” in this Annual Report).

Guidelines on hedging raw materials price risk

In order to evaluate the risks arising from the volatility in raw materials prices, the voestalpine Group has a risk management tool for calculating cash flow at 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 on supply contracts with fixed-price agreements or via derivative financial contracts. An internal guideline regulates the procedure within the Group.

CO₂ issues

Risks related to CO₂ are covered in the “Environment” section in this Annual Report.

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 (the voestalpine group-IT GmbH) 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. Penetration tests are also carried out periodically to further reduce the risk of unauthorized access to IT systems and applications.

Failure of 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, risk-oriented storage of spare parts, and employee training are further measures.

Knowledge management

In order to sustainably secure knowledge, and especially to guarantee against the loss of know-how, available knowledge is documented on an ongoing basis while new findings from key projects as well as lessons learned as the result of unplanned events are processed and incorporated accordingly.

Risks in the financial sector

With respect to policy-making responsibility, 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. 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 risks generally consist of a company being potentially unable to raise the funds necessary to clear liabilities incurred in combination with financial instruments. Existing liquidity reserves enable the company to meet its obligations within the prescribed period. The primary instrument for controlling liquidity risk is a precise financial plan drawn up quarterly on a revolving basis. The requirements on financing and bank credit lines are determined from the consolidated results by the central Group Treasury.

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 minimized as far as possible through credit insurance and bankable securities (guarantees, letters of credit). Based above all on our experiences during crises, the risk of default for our own remaining risk is judged to be minimal. 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, 2011, 75% of trade receivables were covered by credit insurance.

Currency risk

The Group implements an initial hedge centrally by means of derivative hedging instruments with the Group Treasury. voestalpine AG hedges for the budgeted foreign currency payment flows (net) for the next twelve months. Longer-term hedging is only carried out for contracted projects, with hedging ratios of between 50% and 100%.

Interest rate risk

Interest rate risk assessment is centrally organized in voestalpine AG for the entire Group. Essentially, a distinction is made between cash flow risk (the risk that interest expenses or interest income will undergo a detrimental change) for variable-interest financial instruments and present value for fixed-interest financial instruments. The strategy is to reduce interest rate volatility through the use of the portfolio effect and interest hedges. As of March 31, 2011, the balance of variable-interest liabilities amounted to EUR 640 million.

Price risk

voestalpine AG also assesses price risk, using the value at risk concept to quantify interest and currency risk. The maximum potential for loss within the next business day and within a year can be ascertained with a 95% degree of probability. This takes into account the correlations between the individual currencies. The present value basis point method is also applied in the interest management process.

Economic and financial crisis

Based on the knowledge gained as a result of the global economic and financial crisis of 2008 and 2009 and its effect on the voestalpine Group, during the past business year, additional, primarily corporate measures were taken to minimize risk, and these measures will continue to be followed consistently in the coming years.

These measures are targeted in particular at