Risk Report
Our extensive risk management system proved its worth even in the difficult economic climate of the past fiscal year. The transparent presentation of individual risks allows us to manage our risk situation appropriately. From the present perspective all risks are contained and manageable. The future existence of the company is secured.
- Risk policy as part of corporate strategy
- Risk management system established in the Group
- Financial risks
- Risks associated with acquisitions, disposals and restructurings
- General economic risks
Risk policy as part of corporate strategy
Formed on the basis of our corporate strategy, the risk policy at ThyssenKrupp is directed at safeguarding the existence of the company and continuously increasing its value.
Our risk strategy takes into account the risks and the opportunities associated with them. In areas where the Group has core competencies, we consciously take on manageable and controllable risks if they are expected to deliver an appropriate reward. Risks in other areas, however, are transferred where appropriate to other risk carriers. Beyond this we avoid risks wherever possible. Overall we ensure that the Group can cover in full any risks taken.
ThyssenKrupp has documented the framework conditions for orderly and forward-looking risk management in its risk management principles and –Group Risk Management– manual. These contain binding specifications and rules for the identification and management of risks. For example, conduct towards suppliers, customers and other business partners must be fair and responsible. Speculative transactions or other measures of a speculative nature are inadmissible. We check whether these principles are being observed by carrying out regular control measures. In addition, numerous and regular training programs help ensure that all employees are constantly aware of the rules.
Risk management system established in the Group
The risk management system introduced by the Executive Board of ThyssenKrupp AG for the Group has proven itself to be efficient. All employees of the Group are required to be aware of the risks in their area of responsibility. Direct responsibility for early identification and management of risks lies with the operating managers. The next organization level up in each case is responsible for risk control.
In a well-established bottom-up process, the Group companies report on the status of major risks using risk maps with tiered threshold values. The risks are evaluated and classified according to probability of occurrence and loss amounts. For each risk, risk reduction measures are reported; the early warning indicators are regularly updated and discussed with the responsible officers. The information on material risks to the Group is communicated in a systematic and transparent report to the Executive Board of ThyssenKrupp AG. The current risk situation is on the agenda of the Executive Board's bi-weekly meetings. In urgent cases, ad hoc risks and losses incurred are communicated directly outside the normal reporting channels.
In the past fiscal year we again conducted internal audits in Germany and abroad to check compliance with the rules of the risk management system at the Group subsidiaries. The findings from these internal audits helped further improve the early identification and management of risks. In addition, we continuously enhance the tools and methods for identifying and managing risks. This allows us to manage risks in the Group on a more standardized and structured basis, reduce the number of manual activities in the risk management process and enhance the quality of the information generated. The decision made in connection with the reorganization of the Group to allocate centralized risk management to Corporate Center Controlling at ThyssenKrupp AG will permit closer interaction with the planning and reporting processes.
Financial risks
Central responsibilities of ThyssenKrupp AG as parent company include the coordination and management of financial requirements within the Group and securing the financial independence of the Group. To this end we optimize Group financing and limit the financial risks. Risks in the individual financial risk areas are minimized through an ongoing process of monitoring and intensive controls.
Credit risk (default risk): We conclude financial instrument transactions in the financing area only with counterparties who have a very high credit standing and/or are covered by a deposit guarantee fund. To further minimize risks, transactions are concluded only within specified counterparty risk limits. Outstanding receivables and default risks are constantly monitored by the Group subsidiaries; in some cases they are additionally insured under commercial credit policies. The credit standing of key account customers is monitored particularly closely.
Liquidity risk: To secure the solvency and financial flexibility of the Group at all times, we maintain long-term credit facilities and cash funds on the basis of a multi-year financial planning system and a liquidity planning system on a rolling monthly basis. The cash pooling system and external financings are concentrated mainly on ThyssenKrupp AG and specific financing companies. We use the cash pooling system to allocate resources to Group subsidiaries internally according to requirements.
Market risk: Various measures are used to mitigate or eliminate the risk of fluctuations in the fair values or future cash flows from non-derivative or derivative financial instruments due to market changes. These mainly include off-exchange-traded foreign currency forward contracts, interest rate/ foreign currency derivatives and commodity forward contracts with banks and commercial partners. To hedge against commodity price risks we also use exchange-traded futures. The use of derivative financial instruments is extensively monitored, with checks being carried out on the basis of policies in the framework of regular reporting.
Currency risk: To contain the risks of the numerous payment flows in different currencies - in particular in US dollars - we have developed Groupwide policies for foreign currency management. All companies of the Group are required to hedge foreign currency positions at the time of their inception; companies based in the euro zone are required to hedge via our central clearing office. Translation risks arising from the conversion of foreign currency positions are generally not hedged.
Interest rate risk: As in previous years, we procured funds in 2008 / 2009 on the international money and capital markets in different currencies - predominantly in euros and US dollars - and with various maturities. The resulting financial liabilities and our financial investments are partially exposed to risks from changing interest rates. To manage these risks, regular interest rate risk analyses are prepared, the results of which are used in our risk management system.
Commodity price risk: Depending on the market situation, purchasing prices for raw materials and energy can fluctuate significantly. We minimize this price risk firstly through long-term supply contracts - e.g. for ore, coal and coke. Secondly, some Group companies use derivative financial instruments – mainly commodity forward contracts – to hedge against the risk of commodity price fluctuations, in particular for nickel and copper. Hedging via such financial instruments is subject to strict guidelines.
Risks associated with acquisitions, disposals and restructurings
Risks may arise from restructuring programs as well as from the disposal or acquisition of real estate, companies or other business activities. Where the occurrence of risks is probable, we have made adequate provision in the balance sheet.
General economic risks
The global economy will stabilize only gradually. After a 1.4% fall in global GDP in 2009, we expect growth of only 2.7% in 2010. This forecast is based on a number of assumptions – for example that the geopolitical situation remains largely stable and the risks arising out of the international financial crisis do not grow more severe but gradually recede.
However, economic downside risks remain. Unless the financial crisis is overcome to a large extent in 2010, there could be a negative rebound. With the monetary and fiscal latitude having been narrowed, there is less scope for further government stimulus programs. The assumed low-level economic recovery would also be at risk if key countries were to initiate fiscal consolidation too quickly. Tax increases, premature interest rate increases by the central banks and stronger than expected rises in unemployment could also strongly impact growth prospects.
For 2010 we expect a largely stable euro exchange rate and only moderate increases in energy and raw material prices. However, the balance of payments deficit in the US harbors the risk of an increasingly weak US dollar/strong euro, which could curb export opportunities in particular for German industry. A weaker US dollar could lead to a surge in prices on the energy and raw materials markets.
Source: Annual Report 2008/2009, p. 155-157 and p. 161-162
For more details, please turn to the Corporate Governance Report Page.