Opportunities and Risk Management System

Our risk management has proven its worth and effectiveness also in light of the severe economic downturn we have just put behind us, persistent turbulence in the financial markets, a far greater degree of volatility in the goods industry and a recovery fraught by uncertainties.

While taking account of the opportunities and risks, we comment on expectations on the mediumterm development of the economy and their potential impact on our company in the section on “Significant Events after the Reporting Date and Forecast” starting on page 148.

Business activity as defined by the Articles of Incorporation makes risk taking unavoidable in many instances, as this is frequently a precondition for exploiting opportunities. All risks must, however, be manageable and kept within limits by the management of the company. For our Group, foresighted and effective risk management is therefore an important and value-creating component of management which is geared towards safeguarding the company as a going concern, along with capital invested and jobs.

We treat risk and opportunity management separately as a matter of principle. A separate reporting system maps, tracks and supports the monitoring of risks. By contrast, the recording and communication of opportunities forms an integral part of the management and controlling system that operates between our subsidiaries and associated companies and the holding company. Identification, analysis and the implementation of operational opportunities is incumbent on the management of the individual companies. Goal-oriented measures are devised to reinforce our strengths and to tap strategic growth potential in cooperation with the holding of the Group. To this end, the Group has a series of instruments at its disposal which are described under Section “Management and Control of the Company, Goals and Strategy” from page 62.

All fully consolidated companies in the Steel, Trading and Services divisions and, in addition, a number of non-consolidated companies incorporated on principle into our risk management. Alongside the fully consolidated companies combined under the Tubes Division, jointly held EUROPIPE GmbH (EP) and its subsidiaries have been integrated in accordance with Salzgitter AG’s guidelines. This is also the case with RSE Grundbesitz und Beteiligungs-Aktiengesellschaft (RSE), a company belonging to the Technology Division that is also integrated into our risk management. In the reporting year 2010, we fulfilled our risk management duties in respect of the listed company Klöckner-Werke AG (KWAG) as part of the control functions exercised by the Supervisory Board of KWAG. KWAG’s Supervisory Board has set up an Audit Committee on which Salzgitter AG is represented. One of the core tasks of the Audit Committee is to monitor risk management and material risks. The Committee meets regularly.

Our subsidiaries and associated companies apply the risk management system autonomously. It is the task of the management holding company to put guidelines in place that constitute the basis on which a uniform and adequate consideration and communication of risks can be ensured throughout the Group. We convey the concept to the companies through risk guidelines. These guidelines lay down the principles through which we harmonize groupwide risk inventories and ensure the informative value for our Group. We will continue to develop our risk management system in line with requirements on an ongoing basis.

We include risks as an integral part of our intra-year forecasting, medium-term planning and strategy discussions. With the aim of avoiding potential risks, controlling, managing, mastering them and taking the relevant preventive measures, we have defined a set of various procedures, rules, regulations and tools. As a result of the high degree of transparency achieved with regard to developments that involve risk, we are able to take appropriate countermeasures and implement them at an early stage.

At Salzgitter AG there is a clear demarcation between risk management and controlling that complement one another. Actual risks can therefore be handled either through the medium of controlling (for example, by way of provisioning), or through the risk management system (by taking action to overcome the risk), or by using both approaches, each augmenting the other.

We use our groupwide reporting system to ensure that management is provided with all the necessary and pertinent information. The Group companies report on the risk situation in monthly controlling reports or ad hoc directly to the Executive Board. Almost all companies subject to reporting requirements use the Group database developed specially to facilitate the effective handling of data. We analyze and assess the risks at Group level, monitor them punctiliously, allocate them to risk categories and align them to our overall business situation.

For its part, the Executive Board reports to the Supervisory Board on the risk position of the Group as well as – where appropriate – on the status of individual risks. The Supervisory Board has formed an Audit Committee that is tasked with addressing issues relating to risk management in its regular meetings.

A distinction is drawn between improbable and probable risks determined by the likelihood of their occurrence. Improbable risks are events that, after careful commercial, technical and legal consideration of the circumstances, are deemed unlikely to occur. The conditions that must be fulfilled for this judgment to stand are documented, periodically examined and updated if necessary. It is the task of controlling and internal auditing at Salzgitter AG to monitor observance of the criteria established. In the case of probable risks, loss accruing to the company from an undesirable event can no longer be ruled out. We document the quantitative extent of the calculated loss or damage in the light of all influencing factors in order to track and assess the risks.

In the derivation of net loss from gross loss we take account of all measures to contain loss. Provisions and impairments are handled by our Controlling, and the gross loss is reduced accordingly, a measure to which we make specific reference in our risk documentation.

With regard to the extent of loss or damage, we distinguish between major risks in excess of a gross amount of at least € 25 million and other risks involving loss or damage of less than a gross amount of € 25 million.

Risks are recorded in the internal planning and controlling system of the respective companies and communicated to Group management in accordance with the specific company reporting thresholds.

It is evident that, even if a number of major risks of € 25 million each were to occur simultaneously, the Group would not be endangered as a going concern.