ANNUAL REPORT 2016

Risk Management

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.

Risk Management Framework

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 Board discusses the risks facing the business on a regular basis. 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 Board.

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 programme.

Risk identification and assessment

Severstal’s risk landscape covers all risks that could affect the business, customers, supply chain and communities. We have a formal risk identification and management process to ensure that risks from our day-to-day operations and from the general economy and our sector, are continually identified, evaluated and where possible mitigated throughout our operations.

Risk appetite

Overall, Severstal has a balanced approach to risk taking, although the Board seeks to minimise health, safety and reputational risks. The Board recognises that it is not possible or necessarily desirable to eliminate some of the risks inherent in our activities, and some of the risks facing the business are not capable of being readily controlled, particularly as far as market risk is concerned.

Assessment of principal risks

The risk management system of the Group works effectively and has supported a robust assessment by the Directors of the principal risks facing the Group. The principal risks are reviewed throughout the year and these are discussed formally at the Board at least twice a year.

Principal risks

Our principal risk categories have been defined as: market; health safety and environmental; and legislative and regulatory. The table below lists the principal risks as determined by the Board that may affect the Group and highlights the mitigating activities. The contents of the table, however, is not intended to be an exhaustive list of all the risks and uncertainties that may arise.

Assessment of the Group’s prospects

Severstal operates an annual planning process which includes short-term (one year) financial forecasts and longer term (five year) financial forecasts, based on inputs from each of the businesses. These plans and risks to their achievement are reviewed by the Board as part of its strategy review and budget approval processes. The processes for identifying and managing the principal risks are described above.

Going Concern

The going concern assessment considers whether it is appropriate to prepare the financial statements on a going concern basis.

The Directors have reviewed the Group’s budgeted cash flows and related assumptions including appropriate stress testing of risks (being primarily steel demand and prices) and taken into account undrawn credit facilities and debt maturities. As a result, the Directors have a reasonable expectation that the Group has adequate resources to continue its operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the consolidated financial statements (in accordance with the ‘Guidance on Risk Management, Internal Control and Related Financial and Business Reporting’ issued by the UK Financial Reporting Council).

Viability statement

The viability assessment considers solvency and the liquidity over a longer period than for the purposes of the going concern assessment above. Inevitably the degree of certainty reduces over this longer period.

The Board has assessed the viability of the Group over a three-year period. This period is within the Group’s established business planning and forecasting processes and is a cycle which is subject to review and approval each year by the Board. It also considers the capital expenditure planning cycle.

In making the assessment, severe, but plausible scenarios have been considered that estimate the potential impact of each of the principal risks that could arise in the assessment period, for example, a prolonged downturn in the price and demand for steel; a significant rise in protectionism such that Severstal finds it more difficult to export steel profitably; and a period of instability in the Russian economy, which results in a reduced demand for steel. The principal risks with a direct link to the viability statement have been indicated in the table of principal risks above. The scenarios assume an appropriate management response. The impacts of these scenarios were overlain on the longer term financial forecasts to assess how the Group’s liquidity and solvency would be affected. The assessment took account of the Group’s current funding, forecast requirements and existing committed borrowing facilities.

Based on the above, the Board confirms that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due in the period to 31 December 2019.

In making this statement the Directors have made the following assumptions:

  • the Group currently has access to global debt markets and expects to be able to finance facilities as necessary. The Group’s five year forecasts are not designed to allow for a prolonged period of limited access to global debt markets or a sustained period of adverse conditions in these markets.
  • that in the event of multiple risks occurring and having a particularly severe effect on the Group, all actions such as constraining capital expenditure and reducing or suspending payments to shareholders would be taken on a timely basis. The business believes it has the processes to identify the need for such actions, as necessary.
  • that implausible scenarios, such as multiple risks occurring at the same time, or the impact of individual risks occurring that cannot be mitigated by management actions to the degree assumed do not occur, for example, Severstal being barred from all export markets.