Severstal Annual Report 2015 Home > Governance > Risk management framework

Risk management framework

Severstal’s operations are subject to certain risks. Effective risk management is an essential element of our operations and strategy. The accurate and timely identification, assessment and management of risks supports our decision making at all management levels and ensures that we achieve our strategic goals and meet our KPIs.

Our risk management framework is designed to identify, manage and mitigate the risk of any failure to achieve business objectives. Executive management, managers and employees at all levels participate in the process of managing risk on a continuing basis, and perform duties assigned to them within the risk management process. The Board of Directors and all employees of Severstal are obliged to adhere to the company’s risk policies and standards at all times during their work.

There is a formalised management structure in place, with clear delineation of roles, responsibilities and accountabilities for the Board, Audit Committee, Executive Committee and Risk Management function.

The Board of Directors is ultimately responsible for maintaining a sound risk management and internal control system. The Audit Committee closely monitors the effectiveness of the risk management system and internal audit function and obtains regular risk reports from management.

Our risk management structure includes a Risk Management Committee that is responsible for implementing our risk management policy and monitoring the effectiveness of controls that support the company’s business objectives. This committee meets several times a year and can meet more frequently if required. The committee comprises key Vice Presidents, the CEOs of our production facilities, and the head of our risk management function. Risk reports are compiled and submitted at each Risk Management Committee meeting, after which material risks are reported to the Audit Committee.

The Risk Management function is responsible for coordinating risk identification and assessment processes, implementing risk management best practice, and internal and external reporting, and organises and coordinates Severstal’s insurance program.

BoardAssures shareholders that the company has identified key risks and is successfully managing them
Audit CommitteeMonitors the overall effectiveness of the risk management system and internal audit function
Risk Management CommitteeMonitors performance of the risk management system and key risks;
Promotes communication between managers and between management and the Board;
Preliminarily approves risk management policies and procedures;
Reviews and approves external and internal risk reports
Risk Management functionCoordinates risk identification, assessment and mitigation measures;
Accumulates and processes risk assessment data;
Generates consolidated risk reports
Risk ownersIdentify specific risks and initiate risk management measures

The key risk factors which are likely to affect our business, financial position and operational performance as well as mitigation measures are described below1.

Group of risks Risk category Description of risk and potential impact Mitigation strategies Likelihood of materialisation probability (high, medium, low)
Market risks Changes in demand Domestic demand depends on the state of the national economy. Investments in fixed capital, construction and industrial production in Russia are still exposed to the risks of further contraction due to low oil prices and high degree of uncertainty. A potential reduction in domestic demand would require Severstal to increase its export sales, which are less profitable.
The demand in the international markets is affected by China, which is exposed to the risk of reduction in domestic demand if the economic stimulus proves to be insufficient. Russian steelmaking is highly competitive and allows for unlimited export potential, however the profitability of export sales may suffer from weak global demand.
Focus on customer orientation in sales;
Optimisation of sales geography;
Search for new sales markets;
Focus on the more stable segments.
Fluctuation of product prices Our export prices are at a risk of going down due to existing overcapacity issues, introduction of new protectionism measures and deterioration of the global economic outlook.
Our domestic prices are driven by the premium over export prices, which may reduce if domestic demand shrinks.
Customer orientation;
Use of long-term contracts.
Competition risks Low capacity utilisation across the world creates a highly competitive environment. There is a risk of the introduction of new protections in international markets.
Significant additions of new capacity that would fundamentally redraw the competitive landscape are not expected. As we are very competitive on costs, we are less exposed to competition risks.
Cost management and product quality improvement initiatives. low
Fluctuations in the prices of raw materials, energy and services Raw material prices in the global market may fluctuate in line with stock replenishment cycles in China that are intensified by seasonal peaks and troughs in the construction industry. We expect much less new capacity in iron ore than in 2015. Raw material prices are affected by the exchange rates of Australian Dollar, Brazilian Real and Canadian Dollar to U.S. dollar. A potential Federal Reserve rate hike may decrease the value of these currencies, thus reducing raw material production costs.
Inflation in Russia depends on the foreign exchange rate and may grow if oil prices go down and the rouble loses value. The rates for utilities are likely to show steady increases as they are regulated by the state.
If the exchange rate goes lower due to increasing oil prices, our dollar costs may increase.  
Streamlined planning and purchasing of raw materials, including scrap;
More efficient use of raw materials.
Credit risks Credit risks of our customers If the risk of customer non-payment materialises, Severstal will suffer losses equivalent to the cost of product manufacturing and delivery. Our corporate lending process is governed by our Group Corporate Lending Policy that includes a procedure for transaction approval by the Lending Committee and provisions for continuous monitoring of our customers’ credit standing. When necessary, we use collateralisation or risk transfer arrangements (for example, bank guarantees from approved institutions, letters of credit, or credit insurance). We can only ship products to our key customers on a pay after delivery basis without guarantees, with prior approval from the Lending Committee. medium
Credit risks of financial institutions The bankruptcy or insolvency of major banks we work with could adversely affect our business. Another banking crisis or the bankruptcy or insolvency of any major banks with which we hold funds could result in a loss of income for several days, or affect our ability to complete banking transactions. Furthermore, any shortages of funds or other banking disruptions experienced by our major bank partners could have a material adverse effect on our ability to execute planned developments or to obtain the financing required for our planned growth. Centralised bank risk management procedures;
Liquid assets are held in several internally approved world class banks under flexible conditions with the right of early withdrawal;
Regular monitoring of the financial standing of banks and the overall financial environment to help to foresee defaults and minimise the potential negative impact.
Investing risks Increases in costs of large-scale investment projects, project slippage and failure to achieve expected outcomes. Management and mitigation of these risks in the course of investment projects. medium
Foreign currency exchange rate fluctuations Severstal is exposed to translation and transactional foreign currency exchange rate risks. Translation risks arise when assets and liabilities are translated into currencies other than US dollar amounts for financial reporting purposes. Transaction risks arise as a result of payments we make or receive in foreign currencies. Existing natural hedge of export sales against financing in US dollars and internal rouble revenues against rouble costs fully covers existing rouble-dollar exposure of operations. medium
Interest rate fluctuations Financial market volatility and low economic recovery rates could limit Severstal’s access to external creditors, which could affect current debt refinancing and operational activity financing. Increased liabilities on loans could negatively affect Severstal’s financial indicators and decrease cost efficiency. Our debt financing interest rates are either fixed or variable, with a fixed spread over LIBOR, EURIBOR or MOSPRIME. Diversified debt portfolio minimises the potential adverse effects of interest rate fluctuations.
Severstal can use available tools to convert variable rates to fixed in its loan agreements. Severstal proactively reduced its debt level during 2015 by partial or full prepayment of some loan agreements including but not limited to Eurobonds and bilateral bank facilities.
Legislative and regulatory risks Legal risks associated with the changes in tax legislation Despite an almost complete codification, the provisions of Russian tax laws constantly change. A whole range of new tax provisions and amendments to previous regulations is enacted every year. Some of the changes are favourable to the taxpayer, while some are unfavourable. Severstal works both on domestic and international markets in full compliance with applicable tax, customs, foreign currency and other regulations, responding in a timely manner to all changes and trying to maintain a productive discussion with regulatory authorities on matters of the interpretation of law.
In general, Russian tax legislation offers a series of generally efficient tools to protect the rights and interests of taxpayers, and Severstal is actively using them.
Legal risks associated with changes in customs controls and tariffs The conduct of international business by Severstal, most importantly its export operations, exposes Severstal to certain risks associated with the changes in existing or the introduction of new trade restrictions against import from Russia, such as changes in tariffs or duties, imposition of new requirements to finished goods, etc., in countries to which Severstal exports its products, with consideration to Russia’s WTO membership. Severstal works both on domestic and international markets in full compliance with applicable tax, customs, foreign currency and other regulations, timely responding to all changes and trying to maintain a productive discussion with regulatory authorities on the matters of interpretation of laws. medium
Social risks Social risks Our business depends on good relations with employees.
A break-down in these relations, or labour and employment laws, could have a material adverse effect on our operations.
We devote significant attention to staff support and development programmes. We undertake sociological surveys (employee satisfaction), create conditions for the development and fulfilment of employee working potential, and implement social assistance programmes.
Employee benefit programmes in different parts of our business include employee healthcare programs, maternity and childcare support, catering and the organisation of recreational activities, social assistance for retired staff and veterans, staff education and development, and social benefits for outstanding employees.  
Political risks Political risks Severstal’s activities are primarily concentrated in Russia and the CIS and with small additional operations in Europe. We also have licenses for iron ore deposit development in Africa. Severstal has legal entities registered in various jurisdictions and the overall political climates in the countries of our operation differ significantly, as do limitations on business activities and assets expropriation; confiscation rules; monetary systems and their potential for negative change; and potential crisis factors. In addition, governments may establish new trade barriers, which could have a negative impact on our export or import operations. Other political risks that could affect our operations include potential conflicts, terrorist acts, social unrest, and the introduction of a state of emergency. The majority of our production facilities and business operations are located in regions and countries with stable political and social systems.
Severstal’s business structure has become leaner and less diversified post the divestment of the US steel and coking coal assets in 2014. Severstal’s investment policy considers regional political risks.
Operational activity and investment decisions involve proper on-going risk assessment and monitoring. In those countries experiencing political instability, additional risk mitigation measures are undertaken, including specialised types of insurance against political risks.
Health, safety and environmental risks Health, safety and environmental risks Severstal operates industrial facilities that hold heavy metals or hazardous substances which could present significant risks to the health or safety of local communities and the environment. In this respect, we have in the past, and may in the future, incur liability for having caused injury or damage to persons or property, or for polluting the environment.
The competent authorities have imposed, are imposing and may in the future impose specific requirements for Severstal to reduce our environmental footprint. These may include cleaning up and rehabilitating industrial sites, reducing emissions, and controlling the emissions at sites where we currently operate or have operated in the past. Introduction of new or stricter environmental rules and regulations may significantly increase the cost of compliance.
Our steelmaking plants and mining operations may negatively affect and harm the environment, including pollutant emissions as well as the storage and disposal of waste and other hazardous materials.
Severstal has a unified Health, Safety and Environment Policy. Severstal’s environmental commitments are integrated in the Corporate Environmental Protection Policy of Severstal.
Health, Safety and Environment protection systems and standards set specific goals and objectives in identification, assessment and mitigation of dangers and risks.
Severstal is implementing mechanisms in order to ensure this type risks being below industry average level.

1 This chapter presents only key risks and does not give an exhaustive account of all risks facing the Company.


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