The material fields of risk and associated preventive measures that were presented in the previous business year’s Consolidated Management Report remain valid.
Ukraine war/geopolitical conflicts and their impact
The company has been and is continuously monitoring the Ukraine war and geopolitical developments so that it can counteract any effects thereof on the voestalpine Group as effectively as possible in the future, too. For example, alternative suppliers and transport routes were identified and activated upon the outbreak of the Ukraine war to secure supplies of relevant raw materials (e.g., iron ore, iron ore pellets, pulverized coal injection (PCI) coal, alloys) to the Group’s production plants (particularly its steelworks in Austria). Moreover, raw material stockpiles (especially of iron ore and coal) were put in place at short notice at the start of the war. To ensure natural gas supplies (especially at its Austrian facilities), in May 2022 the voestalpine Group also contractually secured natural gas storage facilities for its own use. In an emergency involving the complete loss of external supplies, existing reserves of 1.5 TWh of natural gas would enable the Group to maintain full operations for a period of three months or limited operations for a longer period, depending on the production process. The Group has also been working with both existing and new suppliers on expanding its natural gas sources. As a result, deliveries of natural gas are already being transported from overseas through Italy (using LNG terminals) to Austria; these supplies are being used to maintain current operations. In addition, a potential natural gas bottleneck would trigger existing emergency plans, whereby production could be incrementally adjusted to the energy supplies actually available. The Group would be able to offset production bottlenecks to some extent, not least thanks to its international orientation, which means it can rely on 500 companies and facilities worldwide—including numerous sites outside of Europe that would not be affected. Rapid adjustments to the supply and logistics processes in light of the new challenges presented made it possible to avoid bottlenecks. Developments regarding supplies of energy (particularly natural gas) and raw materials are monitored on an ongoing basis and evaluated in regular exchanges between experts and the Management Board.
COVID-19 Pandemic
In the business year just ended, the Group-wide crisis management comprising crisis teams at three decision-making levels (Group, divisions, companies) again took steps to counteract the COVID-19 pandemic and its ramifications as effectively as possible. The maintenance or situational adjustment of the precautionary measures that were already put in place at the onset of the pandemic (e.g., hygiene and protective measures, remote working) and of the activities initiated to supplement them (e.g., regular exchanges of information with key customers and suppliers, adjustment of production activities in line with supply chain constraints, liquidity safeguards) also helped to ensure the organization’s stability as far as possible. Given ensuing developments worldwide and the incremental reversal of the legislative measures that various countries had put in place, the Group’s crisis management was put on hold at the end of January 2023. We continue to monitor developments related to the pandemic so that we will be able to reactivate the Group-wide crisis management process if required. Emergency and crisis plans that were implemented, along with previously established measures, were evaluated at regular intervals and adjusted and/or expanded as necessary in light of new information.
Availability of raw materials and energy supplies
To ensure the supply of raw materials and energy in the required quality and quantities over the long term, the voestalpine Group has already been pursuing a diversified procurement strategy appropriate to the heightened political and economic risks of this globalized market for some years. This approach is being intensified in response to the current Ukraine conflict, geopolitical developments, and various decarbonization activities. The core elements of this strategy—long-term supply relationships, continued expansion of the supplier portfolio, and development of the Group’s energy self-sufficiency—have become yet more important, given the current geopolitical events as well as the ongoing volatility of the raw materials markets (for details, see the “Raw Materials” chapter of this Consolidated Management Report).
As far as energy supplies are concerned, the Group is continually researching and pushing the development of alternative energy resources. This is motivated not only by the Ukraine war and our associated activities aimed at strengthening the Group’s resilience, but also by the changes in our energy needs arising from our decarbonization activities. Over and above the consistent expansion of our own renewables capacity, our focus in this respect is on numerous research and demonstration projects related to hydrogen, biogas, and biomass along with projects pertaining to alternative iron and steel manufacturing technologies such as the H2FUTURE hydrogen pilot plant in Linz, Austria, the Hydrogen-Based Fine Ore Reduction (“Hyfor”) project, and the Sustainable Steelmaking (“SuSteel”) project in Donawitz, Austria.
Hedging raw materials prices
An internal guideline defines objectives, principles, and responsibilities as well as methodologies, procedures, and decision-making processes in connection with the management of raw material price risks. Based thereon and taking into account individual specificities of the respective Group company’s business model, prices are hedged by means of short-term delivery contracts containing fixed price agreements or by means of derivative financial instruments. Depending on the business model of the Group company in question, changes in the prices of energy and raw materials may be passed on to customers to some extent and/or after some time. In this case, risk management aims to secure the previously determined contribution margins under the sales contracts. Iron ore, coke, coking coal, zinc, nickel, CO2, cobalt, and all sources of energy are subject to raw materials risk management. The section titled “Availability of Raw Materials and Energy Supplies” already addresses issues related to the security of supplies (procurement risk).
Disruptions in logistics and supply chains
Generally, global supply chains may be undermined, or even interrupted, by events such as a pandemic and, in particular, geopolitical conflicts such as the current Ukraine war. This may trigger restrictions that arise from suppliers, from customers, from disrupted transportation routes, and from potential sanctions and/or embargoes. Our simultaneous focus on less vulnerable supply chains and on expanding logistical options has substantially boosted reliability (e.g., of raw materials deliveries), both in the past and during current crises.
Failure of production facilities
Targeted and comprehensive investments serving to optimize sensitive units technologically have been and are being carried out to minimize the risk of critical facilities breaking down. Necessary investments in modernization and replacements are also planned for the long term. Additional supplementary measures include consistent, systematic, and preventive maintenance; risk-oriented storage of critical spare parts; and appropriate employee training.
Emergency generators are available to protect critical facilities and processes at key plants in case of sudden, unplanned power interruptions (i.e., blackouts). These generators can be used to power limited partial operations, emergency operations and, in extreme cases, controlled plant shutdowns. Furthermore, the Linz facility, for example, has a captive power plant with black start capacity and special internal grids (i.e., self-contained, segregated areas). Regular run-throughs of a range of scenarios are carried out (e.g., tests of the emergency generators and the emergency and communications plans) to ensure that the facilities are ideally prepared for adverse events.
IT, failure of IT systems
At most of the Group’s plants, business and production processes that are largely based on complex information technology (IT) systems are serviced by wholly-owned subsidiaries of voestalpine AG specialized in IT—specifically, voestalpine group-IT GmbH in Austria along with its four sister entities in Germany, Sweden, Brazil, and China. Given the major significance of IT security and in order to continue mitigating possible IT breakdown and security risks, minimum IT security standards that include guidance on business continuity management are available. They are regularly adapted to current events, and compliance with the relevant requirements is reviewed annually by means of internal and external audits. voestalpine’s highly qualified Security Operation Center (SOC) continuously ensures avoidance, identification, and mitigation of security-related incidents. Additional periodic penetration tests are carried out to further reduce the risk of unauthorized access to IT systems and applications. Broad online campaigns aimed at making the Group’s employees aware of security issues—especially potential risks in connection with remote working—and increasing this awareness were carried out yet again in the business year just ended. Evidence of cyber fraud attacks (e.g., social engineering, CEO fraud, man-in-the-middle attacks related to payments and deliveries, phishing) is compiled by an internal working group, preventive measures are developed, and existing measures are reviewed as to their efficacy and adjusted as necessary. To avert potential cyber fraud attacks, appropriate online campaigns (including simulated phishing awareness programs) are conducted as previously on these issues, too. Employees also regularly complete special e-learning modules that help to raise their awareness of the issues concerned.
Knowledge management/project management
Complex projects that were initiated in the past are consistently refined and/or adjusted in order to sustainably safeguard the Group’s knowledge—especially to prevent the loss of its expertise. Besides permanently documenting all available knowledge, new findings from key projects as well as lessons learned as a result of unplanned events are incorporated as appropriate. Detailed process documentation, especially in IT-supported areas, also contributes to securing the available knowledge.
A highly diverse range of project management tools and suitable project monitoring are used to counteract any project risks arising, for example, from major projects, the project business, and investments. In particular, this also concerns any risks associated with ramp-ups and/or cost increases. Insights gained from earlier activities are also compiled in the sense of lessons learned and form the basis of ongoing enhancements of already available tools to ensure that they are consistently applied in future projects.
Compliance risks
Compliance violations (e.g., antitrust and corruption violations) represent a significant risk and may have adverse effects in that they may trigger financial losses and damage the Group’s reputation. A Group-wide Compliance management system is designed to counteract these risks, particularly antitrust and corruption violations. In-person training focused on particular topics is part and parcel of this system, along with e-learning programs.
Risks of noncompliance with data protection requirements
Violations of requirements under data protection laws may have adverse financial effects and lead to reputational damage. A data protection unit was established pursuant to the data protection requirements that apply throughout the Group. It helps Group company managers carry out their responsibilities regarding compliance with statutory and intra-Group data protection requirements. Topic-focused e-learning is offered as a supplementary measure.
Risks from natural disasters
Suitable proactive measures to deal with risks, if any, from natural disasters such as fires, floods, low or fluctuating water levels, heavy snowfall, droughts, storms, or temperature fluctuations are in place. These include construction measures, fire alarms, sprinkler systems, flood protection, and/or adjustments to logistics in the event of low water levels, for example. As part of regular run-throughs, tests of existing emergency plans, and physical inspections and risk surveys conducted in cooperation with insurance companies, existing preventive measures are not only evaluated to ensure that they are up to date and/or complete, but are also adjusted or expanded as necessary in light of changed circumstances. The Group’s existing insurance policies for natural disasters and other risks are regularly reviewed as to their current appropriateness in cooperation with voestalpine Insurance Services GmbH (the Group’s internal insurer).
Sustainability risks
Potential risks pertaining to sustainability and associated issues such as climate action and environmental protection (particularly CO2-related topics such as decarbonization), social and personnel issues, respect for human rights, and the fight against corruption are considered in terms of their impact at all levels, in compliance with the Group’s sustainability strategy.
- For more information on the impact of the climate and energy policies on the voestalpine Group, including its decarbonization strategy, please see the explanations under item B “Summary of Accounting Policies” in the Notes.
- Sustainability issues—chief among them climate action and risk management—are also addressed in a separate, annually published Sustainability Report. This Corporate Responsibility Report is prepared in accordance with the international standards of the Global Reporting Initiative (GRI). In addition, the “Environment” chapter of the Group Management Report contains greater detail on the CO2 issue.
The Group has also launched activities required under the Austrian Supply Chain Due Diligence Act, the development of which is continually being monitored and evaluated.
Risks from the financial sector
Financial risk management is organized centrally with respect to policy-making power, strategy determination, and target definition. The existing policies include targets, principles, duties, and responsibilities that apply to both Group Treasury and the finance departments of individual Group companies. Financial risks are monitored continuously and hedged where feasible. Our strategy for managing foreign currency risks is aimed, in particular, at creating natural hedges. The management of other risks (interest rates and raw materials) serves to reduce fluctuations in both cash flows and income and to safeguard contribution margins. Market risks are largely hedged through derivative financial instruments that are used exclusively in connection with an underlying transaction.
Specifically, financing risks are hedged using the following measures:
Liquidity risk
Liquidity risks generally arise when a company is potentially unable to raise the funds necessary to meet its financial obligations. Existing liquidity reserves enable the company to meet its obligations when due, even in times of crisis. Over and above the liquidity reserve, a precise financial plan that is prepared on a revolving, quarterly basis is the Group’s primary instrument for controlling liquidity risk. Group Treasury centrally determines the need for new funding and bank credit lines based on the consolidated operating results. The intention is to ensure that the liquidity reserve covers the Group’s planned liquidity needs for the next 12 months. As far as banking policies are concerned, care is taken to avoid cluster risks by diversifying the financial partners. Particular attention was and still is paid to boosting the company’s internal funding capacity.
Credit risk
Credit risk refers to financial losses that may occur due to non-fulfillment of contractual obligations by individual business partners. The credit risk of the underlying transactions is minimized as far as possible through a large number of credit insurances and bankable securities (guarantees, letters of credit). The default risk related to the Group’s remaining own risk is managed by way of defined credit assessment, risk evaluation, risk classification, and credit monitoring processes. To date, neither the COVID-19 pandemic nor the current Ukraine war have caused loan insurers to significantly tighten credit limits in individual customer segments, nor have these events led to greater receivable charge-offs. Counterparty credit risk in financial contracts is managed through daily monitoring of the counterparties’ credit ratings and any changes in their credit default swap (CDS) levels. Investment limits weighted by the probability of default (PD) are allocated on that basis.
Foreign currency risk
Foreign currency risk management aims primarily to create a natural hedge (cross-currency netting) within the Group by combining the cash flows. In this respect, hedges are implemented centrally by Group Treasury based on derivative hedging instruments. voestalpine AG hedges the budgeted (net) foreign currency payment streams for up to 12 months. Longer-term hedging is carried out only in connection with contracted project business. While the hedging ratio is between 25% and 100% of the budgeted cash flows for the next 12 months, it declines through to maturity.
Interest rate risk
voestalpine AG conducts interest rate risk assessments centrally for the entire Group. In particular, this entails managing cash flow risks (i.e., the risk that interest expense or interest income may undergo an adverse change). As of the March 31, 2023, reporting date, any increase in the interest rate by one percentage point would increase the net interest expense associated with bank loans and capital market indebtedness in the subsequent business year by EUR 2.6 million. However, this is a reporting date assessment that may be subject to fluctuations over time.
Price risk
voestalpine AG also assesses price risk. Mainly scenario analyses are used to quantify interest and currency risks.
- From investing activities: outflow/inflow of liquid assets from investments/disinvestments;
- From operating activities: outflow/inflow of liquid assets not affected by investment, disinvestment, or financing activities.
- From financing activities: outflow/inflow of liquid assets from capital expenditures and capital contributions.
