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Risk Report

Our systematic risk management system increases the value of the Company and safeguards its existence by ensuring the appropriate management and transparent communication of individual risks. In the reporting year, all risks were contained and manageable. The future existence of the company is secured. In the event that all the risks we know about but cannot yet fully judge are realized, the financial crisis will have a major impact on the Group's earnings situation.

As part of corporate strategy, our risk policy is directed at safeguarding the existence of the Company and systematically and continuously increasing its value.

The risk strategy is based on an evaluation of the risks and the opportunities associated with them. In the Group's core competency areas we consciously take on reasonable, manageable and controllable risks if they are expected to deliver an appropriate reward. Risks in support processes are transferred where appropriate to other risk carriers. Other risks not connected with core and/or support processes are avoided to ensure that the aggregate risk volume does not exceed the risk coverage potential available at ThyssenKrupp AG.

ThyssenKrupp has set out the framework conditions for orderly and forward-looking risk management in its risk management policies. The "Risk Management" manual specifies the processes for risk management. The Group has issued binding principles for dealing with risks. For example, speculative transactions or other measures of a speculative nature are inadmissible. Conduct towards suppliers, customers and other business partners must be fair and responsible at all times. Regular training programs and control measures help ensure that these principles are observed.

The risk management system installed by the Executive Board of ThyssenKrupp AG has proven itself to be efficient. All employees of the Group - regardless of their position in the hierarchy - 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.

Within the framework of risk inventories (risk maps) the Group companies report on the status of major risks to their segment holding companies using tiered threshold values. The risks are evaluated and classified according to probability of occurrence and loss amounts, and the risk reduction measures and early warning indicators are regularly updated. The segment holding companies provide the Executive Board of ThyssenKrupp AG with a summary of the current risk situation under a fixed agenda item in the bi-weekly Executive Board reports. In urgent cases, ad hoc risks are communicated directly outside the normal reporting channels.

Once again in 2007/2008 we examined whether the rules of the risk management system are being observed in Germany and abroad. The findings from these internal audits helped further improve the early identification and management of risks. In addition, we have continuously enhanced the tools for identifying and managing risks in the Group. Cross-segment software is currently being developed with which we will be able to manage risks in the Group on a standardized and structured basis, reduce the number of manual activities in the risk management process, and further enhance the quality of the information generated.

Opportunities and risks in balance

All risks taken by us are balanced by appropriate opportunities which we systematically identify, evaluate, manage and control. More details can be found in our opportunities report in "Subsequent events, opportunities and outlook".

Risk transfer by central service provider

As central service provider, ThyssenKrupp Risk and Insurance Services handled the transfer of risks to insurers through the conclusion of Group insurance policies in 2007/2008, as in previous years. Regular loss analyses are carried out to evaluate the potential risks and the insurance cover is determined on this basis. Under property and business interruption policies significant deductibles exist for some production units of the Steel and Stainless segments, so that there is a risk that one or more claims on these policies could materially impair the Group's assets, liabilities, financial position and results of operations. The transfer of risk to insurers could be negatively impacted by the current financial crisis if insurers collapse. This risk is considerably reduced because ThyssenKrupp Risk and Insurance Services spreads the risk over numerous insurers and only selects insurers with a rating of at least A-.

Several working groups have developed joint binding standards for risk prevention. Compliance with the standards as part of a property insurance risk management system was monitored regularly by internal and external audits. In addition, a new Group policy requires that a business recovery plan be drawn up in case of business interruptions for risks from property and business interruption insurance.


Financial risks are contained

Central responsibilities of ThyssenKrupp AG include the coordination and management of financial requirements within the Group and securing the financial independence of the Group. In this connection, Group financing is optimized and financial risks controlled. Risks in the individual financial risk areas are minimized through an ongoing process of monitoring and intensive controls.

Credit risk (default risk): Financial instrument transactions in the financing area are only concluded with counterparties of very high credit standing. 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 measures are mainly traded outside the stock exchange and include 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 futures traded on the stock exchange. 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 our Group are required to hedge foreign currency positions at the time of their inception; companies based in the EMU 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 2007/2008 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 regular communication of the results of the interest rate analyses is part of 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 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. Commodity forward contracts and options are used.

Details of these risk areas are provided under Note 30.

The financial crisis and its potential impact on the real economy will result in a global economic slowdown which could have a negative impact on the Group's operating cash flow. The financial crisis has generally hindered access to the money and capital markets. Against this background, ThyssenKrupp has made sufficient provision to maintain liquidity.

Risks associated with acquisitions, disposals and restructurings

Risks may arise from the disposal or acquisition of real estate, companies or other business activities and from restructuring programs in the Group. Where the occurrence of a risk is probable, adequate provision has been made in the balance sheet.

Risks associated with information security

The information technologies used in the Group are continually reviewed to assess whether they guarantee secure handling of IT-supported business processes; if necessary they are updated. We continually update our systems because information security is one of our key priorities. We have set up a cross-segment Information Security Forum to serve as a coordination platform. At some companies business processes and data centers have security certification. The IT-based integration of business processes is subject to the condition that the risks involved for our Group companies and also for our customers, suppliers and other business partners are minimized.

Risks associated with pensions and healthcare obligations

The fund assets used to finance pension liabilities are exposed to capital market risks. To minimize these risks, the individual investment forms are selected and weighted on the basis of asset liability studies by independent experts. The aim is to adjust the investments to ensure that the associated pension liabilities are permanently fulfilled in respect of the current and future income from the investments. Pension obligations are subject to risks from increased life expectancies of beneficiaries and from obligations to adjust pension amounts on a regular basis. In addition, the cost of healthcare obligations in the USA and Canada may increase. Furthermore, in some countries there is a risk of significantly higher payments having to be made to finance pension plans in the future due to stricter statutory requirements. In individual cases, the premature cancellation of a pension plan may necessitate an additional allocation.

More details are provided in Note 23.

Legal risks result from claims made against ThyssenKrupp or individual Group companies. These can relate to antitrust law, environmental law or claims for damages under product liability law.

In addition, customers, consortium partners and subcontractors have lodged claims against ThyssenKrupp under plant construction, supply and service contracts. Where it is probable that individual claims will lead to payment obligations, we have made provision.

A report on pending litigation and claims for damages can be found in Note 29.

Regulatory risks

Changes to the legal framework can have an unfavorable effect on our business. Tighter liability or environmental legislation could increase our costs and reduce our sales volumes. Changes to competition rules could bring disadvantages for us. In addition, higher social insurance contributions and other mandatory non-wage labor costs would mean cost increases for us. We endeavor to reduce the costs through close working relations with the institutions responsible for developing the statutory framework.

Environmental risks

Process-related risks of air and water pollution exist in some of our production operations. We therefore take extensive measures to minimize environmental impact and conserve resources. This includes the use of modern facilities which are environmentally friendly and also reduce charges and energy costs. The increasing number of Group companies with certified environmental management systems has reduced the risk of environmental risks occurring. We consistently comply with all statutory environmental requirements. More details on environmental protection at ThyssenKrupp are provided in "Commitment, sustainability and environment protection".

Some of our real estate is subject to risks from past pollution and mining subsidence. These risks are managed and reduced by preventive measures and scheduled remediation work. Landfills on our real estate are monitored and secured on an ongoing basis. Once again in 2007/2008, adequate liabilities were recognized.

Emission allowance risks from EU proposals

The plans of the European Commission to cease free allocation and introduce auctioning of all CO2 emission allowances from 2013 pose significant risks specifically for our production costs. As an energy-intensive industrial and services group operating in a competitive international market, we would likely be unable to pass on all or any of the additional costs from auctioning to our customers. This would have a corresponding negative impact on the earnings situation.

Procurement risks

On the procurement side, ThyssenKrupp is mainly affected by the possibility of rising prices. We counter the associated risks in the procurement of raw materials, in particular ore and coal, by passing on the higher prices in our product prices as far as possible. In addition, we are constantly searching for alternative low-cost suppliers worldwide. In purchasing energy, we limit the risks with a structured procurement policy on the electricity market and long-term natural gas contracts.

To limit the risks of supply failures, we select our suppliers carefully. The geographical distribution of orders in our segments makes us independent of regional supply bottlenecks and helps us find alternative sources in the event of local supply problems. More details on our procurement management can be found in the "Group review".

Sales risks from global activities

As a globally active group, ThyssenKrupp is particularly exposed to risks associated with the global economy. We closely monitor the economic trend in individual countries and trade flows in order to minimize sales risks. Our international presence also makes us largely independent of regional crises. Furthermore, our widely differentiated product and customer structure reduces our sales risks.

The weakening of the automotive industry being observed worldwide also affects our Group and is being closely monitored. The reduced credit rating of key account customers harbors the risk of bad debt, which we are countering with effective receivables management. The sales risks of our segments are described in detail in "Decentralized management of segment-specific risks".

We minimize quality and delivery schedule risks by continuously optimizing our value chains. Preventive maintenance and modernization counters the risk of an unscheduled shutdown of production units.

Personnel risks and personnel policy

Committed and competent staff and managers are a central factor in the success of ThyssenKrupp. There is therefore a risk that key personnel cannot be found to fill vacancies in our Group or that they cannot be retained. That is why we position ourselves as an attractive employer and promote the long-term retention of employees in the Group. Systematic management development includes offering executives career prospects and attractive incentive systems. It also includes targeted mentoring to promote identification with the Company at all levels.

We secure the young talent we need for our workforces by addressing potential employees at an early stage and providing a high-quality training system. In intensive cooperation with key universities, we establish contact with talented students. The 2008 Ideas Park in Stuttgart also played a major role in promoting ThyssenKrupp as an attractive employer for young engineers. We pay special attention to women with children who wish to work: Wherever possible, we help them balance career and family.

More information on these matters is provided in the section entitled "Employees".


Global economic growth will slow. We forecast growth of 3.7% in 2008 and less than 3% in 2009. The world economy is therefore in recession. These forecasts are based on a series of assumptions. It is assumed that the geopolitical situation will remain largely stable. The assessment is also based on the uncertain assumption that the problems triggered by the international financial crisis will not dramatically escalate.

The international financial crisis precipitated by the problems on the US mortgage market has already impacted the economy in particular in the USA and other industrialized countries. In 2009, too, the financial crisis is expected to have negative knock-on effects on the market for goods and services. If the economic and financial measures introduced by governments fail to help gradually restore confidence in the financial market, this will increase the risk of an even deeper and longer recession. Liquidity problems at the banks will then further restrict lending, investment will decrease further, and economic prospects - also in emerging economies - will be dampened by higher unemployment and falling consumption.

The expected global recession should help ease the price situation for energy and raw materials. For companies in the euro zone, however, these effects may be offset by a stronger dollar. In addition to this exchange rate risk, there is a risk that supplies of raw materials in particular will be further restricted by government intervention or other anticompetitive measures. Prices are affected by taxes on raw material exports and other export restrictions as well as any further limiting of competitive structures as a result of takeovers.


Steel: Innovation strategy reduces market risks

Risks in the Steel segment include in particular risks on the sales and procurement markets, risks from exchange rate fluctuations and emissions trading as well as production losses and increased maintenance expenditures due to plant stoppages. In addition, the major investment projects in Brazil and the USA will increase capacity, which can also lead to risks on the sales and procurement markets.

From the viewpoint of the global steel market there is a general risk that overcapacities will be created, especially in China, which will lead to an imbalance on the world markets and could negatively impact the profitability of the Steel segment.

The segment counters the risks associated with steel industry cycles through cost optimization, prompt production adjustments and a concentration on high-end market segments subject to less cyclicality. To reduce the risk of limited traditional markets, Steel is globalizing its production – among other things by building production capacities in Brazil and the USA – and increasing its international sales. To contain the sales risks associated with the major projects, we began work on establishing and expanding a customer base from an early stage. However, we see only minor market and competitive risks with regard to the NAFTA market entry by the new plant in Alabama/USA. Extensive and successful customer relations work is already being carried out to support this process.

The segment successfully counters the high competitive intensity on the market for carbon steel flat-rolled products with an innovation strategy which allows competitive advantages to be achieved at least temporarily.

Major risks exist on the sales side in connection with implementing price increases. Disproportionate rises in raw material and energy prices represent risks on the cost side for Steel. For this reason we constantly monitor developments and key factors to ensure we can introduce any necessary changes at an early stage. To mitigate these risks, Steel is adjusting contracts with customers so that they more closely match the periods agreed in the purchasing contracts for raw materials.

Risks continue to exist in connection with possible losses within the deductibles agreed with insurers. To alleviate these, organizational and technical measures are carried out and optimized on an ongoing basis. For example, the Steel segment has integrated a business and technical risk controlling system into its risk management process and further optimized its fire prevention program by implementing best practice guidelines for the entire segment.

In close cooperation with its suppliers, Steel is trying to minimize the risks from managing the major projects in Brazil and the USA. These include in particular construction delays, equipment supplier delivery problems and exchange rate changes. In cooperation with project teams and external advisers, a complete system has therefore been set up encompassing the analysis of weaknesses, development of countermeasures and systematic risk management.

Despite the Groupwide emissions trading strategy, the segment may face volume and price risks in connection with emission allowances in the second trading period from 2008 to 2012.

Stainless: Extensive measures to counter market risks

In addition to the usual cyclical risks the Stainless segment faces risks associated with the way the markets respond to existing or anticipated overcapacities at stainless producers in Asia. The supply and demand situation in China in particular represents a risk.

Numerous measures are in place to counter these risks. We have extended our value chain towards the higher-margin end-customer business, further intensified customer relationships, expanded our custom services, and improved our quality and delivery performance. We are also countering increasing competitive pressure by developing new applications for stainless steels and nickel alloys, by developing innovative products made from these materials and by using modern, cost-saving process technologies.

In the construction of the stainless steelmaking and processing plant in Alabama, USA, the costs are being strictly controlled to prevent further schedule delays and budget overruns. The implementation of this project will also help increase our market penetration in the USA.

The risks associated with the availability and prices of raw materials, particularly nickel, chromium and alloyed scrap, are minimized by corresponding contracts and hedging mechanisms. The Stainless group is preparing for the risk of substitution of stainless flat-rolled products in response to high alloying element prices by developing alternative material concepts. In addition, the continuous development and introduction of technical and organizational measures ensures that potential sources of risks in the production process are eliminated or reduced.

In view of the risk of fire and natural phenomena such as storms, hail and flooding, the segment significantly expanded its risk management activities in the area of property insurance. In cooperation with the insurance companies, joint, binding risk provision standards were drawn up, compliance with which is reviewed in regular audits. We developed measures to minimize the risk of fire in cooperation with the insurance companies and external experts. The implementation of these measures is under way.

On November 20, 2007, the EU Commission ruled that a law adopted by the Republic of Italy in 2005 granting ThyssenKrupp Acciai Speciali Terni among other companies certain benefits in the purchase of electricity was inadmissible state aid. Together with the Republic of Italy we filed a complaint against this decision with the court of first instance. It is not yet possible to judge whether and in what amount possible repayment demands may be made by the Italian state or claims by ThyssenKrupp Acciai Speciali Terni settled by Italy.

Technologies: Close project controls

With its global activities, the Technologies segment is exposed to risks in various business areas. In addition to the global economic downturn, these include above all political imponderables and order deferrals in the project business, for example due to the situation in the Middle East.

The specific risks associated with large long-term contracts and technically complex orders are contained through close project controls and increased use of project management measures. In addition, further individual measures are in place to enhance efficiency including controlling and to optimize processes. In the civilian shipbuilding sector competitive disadvantages versus Asian competitors are offset by intensive programs to improve performance and reduce costs.

The ruling by the EU Commission in the Hellenic Shipyards state aid case that some undertakings of the Greek government do not comply with the requirements of EU state aid law has given rise to a risk in the Marine Systems business unit. The state aid was granted until 2002 partly in connection with the privatization of the formerly nationalized shipyard before Hellenic Shipyards belonged to the ThyssenKrupp Group through Howaldtswerke-Deutsche Werft. It is not yet possible to assess whether and in what amount costs from this will be incurred by Hellenic Shipyards. More details can be found under Note 29.

Our automotive operations continue to face a variety of market risks. Rising prices for steel and other starting materials, which experience shows cannot be passed onto customers in full or without some delay, represent a major risk to earnings. Extensive cost reduction programs are being implemented to offset rising cost pressure on the procurement side and increasing price pressure from auto manufacturers on the selling side. To counter the risk associated with falling demand in its traditional markets, the Mechanical Components business unit is building or expanding production capacities in growth regions such as India and China. We are currently planning the construction of a crankshaft factory in China. Following the ending of the Transrapid project in Munich, the existing operations were restructured and adjusted in line with the reduced marketing and planning activities. In addition, the deferral of the planned airport link project in Shanghai may lead to restructuring expenditures.

Elevator: Regional risks largely balanced

In the Elevator segment, the risks vary significantly between the different regions and market segments. However, as an international company Elevator succeeds in largely balancing the regional market risks as the individual markets are in different cyclical phases.

The new installations business is strongly influenced by activity in the building industry and can therefore be subject to volatility. The targeted use of project management measures helps contain risks in the processing of major orders. Since rising material prices cannot always be passed onto customers, it is especially important to continuously improve efficiency in production and optimize purchasing on an ongoing basis.

By contrast, the service and modernization business is comparatively unaffected by cyclical risks in the industry. Instead, customer retention is particularly important here. Continuous efficiency improvements help counteract cost increases such as higher fuel prices.

Due to the segment's global presence, the management of exchange rate changes is a key priority. Suitable financial hedges are in place in the Group to limit the influence of currency risks. In addition, exchange rate risks are minimized by the fact that sales and costs in Elevator's various markets are largely in the same currency.

Services: Package of measures to counter price risks

The Services segment is mainly engaged in materials trading and services. In the reporting year it encountered the associated price risks on the procurement and selling side with an extensive action program. Logistics and management tools were systematically improved. This included in particular the expansion of the central warehouse concept to optimize inventories. At the same time, expanding the service business, which is independent of material prices, makes the segment less sensitive to cyclical price movements.

The significant general economic risks and risks in various market segments are reduced by the segment's worldwide presence, broad customer base and high degree of diversification. The resultant wide spread of risks also applies to the bad debt risk, which is additionally limited by the use of hedging instruments.

The Industrial Services business unit faces risks from significant competition and price pressure. We counter these by means of continuous capacity adjustments and new sector- and customer-specific service offerings and sales initiatives.

Corporate: Risk management through project controls and compliance

In addition to risks from the past industrial use of real estate, Corporate also faces risks from the construction of the new ThyssenKrupp Quarter in Essen. We systematically and continuously observe and analyze potential risks from building cost increases and schedule delays in a project control and compliance system. Potential savings are identified and implemented as quickly as possible.


Overall, the risk situation at ThyssenKrupp continues to be manageable. There is no threat to the existence of the Company. Alongside the general economic risks from the global economic downturn triggered by the financial crisis, the main individual risks relate to the handling of major projects. In addition, procurement and sales risks are important. However, since an efficient risk management system is in place in all areas, the risks in the Group are contained and manageable overall.