and uncertainties and also has access to opportunities across its global presence. The Group’s performance, future prospects and cash fl ow generation could be materially impacted by any of these risks or opportunities.
Tata Steel follows the Enterprise Risk Management (ERM) framework to manage these risks which is primarily based on the integrated framework for enterprise risk management and internal controls developed and published by the Committee
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Management Discussion and Analysis 2014-15 of Sponsoring Organizations of the Treadway Commission
along with inputs from other standards and practices.
The risk management process typically involves identifying particular risk events or circumstances relevant to the organisation's objectives (risks and opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response strategy, and monitoring them on a regular basis.
The Risk Management Process in Tata Steel is supported by a well-defi ned governance framework which includes a Risk Management Committee of Board and various other review forums. The Committee reviews the key risks, mitigation plans and progress of the ERM process at regular intervals. By identifying and proactively addressing risks and opportunities, the objective is to build and maintain sustainable, robust business models and to protect and create value for all the stakeholders, including shareholders, employees, customers, regulators, and the community.
Risks related to Tata Steel Group and our responses to mitigate them are discussed below.
Strategic risks
Strategic risks relate to Tata Steel Group’s long-term strategy and plans, including risks associated with macro environment in which the Company operates, global steel industry, growth projects and competitiveness of our operations.
Macro environment and global steel over capacity impact our operating markets
Tata Steel’s operations in India, UK, mainland Europe and South-East Asia are aff ected by local demand environment as well as global competition. Steel demand in these operating markets is levered to economic environment and the regional steel prices have linkages to global steel prices.
Overcapacity in global steel markets continues to plague steel prices. In addition, weak domestic demand in China, led to increased Chinese exports which ultimately led to a steep drop in regional steel prices last year. All our operating markets were severely aff ected. However, the Company employed a focussed approach of cost reduction and improved product mix to mitigate the risk.
In India, the Company is focussed on developing value added products, introducing new brands, diversifying and deepening the customer base apart from several cost reduction initiatives. In Europe, the Company accelerated commercial and operational improvement initiatives, further rationalisation and fi nally in South-East Asia, focussed on improving the product mix and increasing exports to growth markets. The Company understands risks to macro environment and global steel markets can disrupt operations and financial performance and is committed to mitigating it in part or as a whole.
Long-term growth dependent on the success of capacity expansion projects, restructuring
Tata Steel’s growth strategy is hinged upon servicing the potential market opportunities. Capacity expansion particularly in India and restructuring of assets and businesses help the Company better align itself towards its long-term growth objectives. Currently, work continues on the Company's greenfi eld steel plant in the state of Odisha in India. Phase 1 (3 mtpa) is expected to commence production in the middle of Financial Year 2015-16. The Company is also setting up a 55,000 tonne per annum ferro-chrome project at Gopalpur, Odisha. With regard to Europe and South-East Asia, Tata Steel’s installed capacity is suffi cient to address the regional demand.
The execution of these growth projects though involves uncertainty in terms of required approvals, commissioning and local community relationships. Risk, as a result, exists that the Company might not achieve desired outcome. Tata Steel understands that the risks are inherent to the business and leveraging its project management expertise, the Company has deployed processes to manage these risks.
Operational risks
Operational risks relate to those impacting Tata Steel Group’s operations. It includes but is not limited to supply chain, employee productivity, health and safety of employees and environmental impact.
Operations – Risks to business reputation, fi nancial position and results
The Tata Steel Group is exposed to various risks which impact Company’s reputation and fi nancial performance like labour relations, product mix, innovations and eff ective deployment of technology. For example, the Company's intent to improve product mix and ensure quality standards could be impacted by process failure, intentional acts or cyber acts. Tata Steel understands this and employs crisis management or business continuity plans and is committed to servicing customers and stakeholders eff ectively.
Supply chain disruptions could increase our operating costs
A key operational component is supply chain of raw materials and the costs associated with it. Raw material accounts for 60-70% of the cost of steel and disruption in supply and volatility in the prices of raw materials poses a signifi cant risk to operations and operating costs.
Currently, the Group’s Indian operations have 100% integration in iron ore and around 50% integration in metallurgical coal. The mining sector in India has been under severe regulatory scrutiny, especially, states like Odisha and Jharkhand, where the Group has signifi cant mining operations. The Company faced challenges last year in operating its existing mines due to regulatory interventions which led to temporary stoppages at some of its iron ore mines. As a result, the Company had to
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Management Discussion and Analysis 2014-15procure iron ore from external sources during this period which aff ected its profi tability. The MMDR Amendment Act, 2015, has provided regulatory clarity to its mining operations, albeit at increased royalty and related costs.
A key strategic objective of the Group has been to achieve greater raw material integrations. The Company is thus, pursuing various growth projects in Africa, Canada and India to achieve this endeavour. Tata Steel also maintains strong supplier relationships and fl exible sourcing through centralised procurement of raw materials. The Company also continues to closely monitor market conditions and seeks to put in place contractual arrangements to ensure security of critical supplies.
Tata Steel is committed to Employee Health and Safety and believes employee productivity is one of the key factors to be competitive in the industry.
The steel industry is an inherently hazardous industry as it requires handling liquid hot metal, hazardous industrial gases and entails other mechanical hazards typical to a large manufacturing fi rm. The risk of unsafe incidents and accidents during construction and operations is not uncommon in the steel industry.
Tata Steel understands this and the Company’s Board and executive management have a strong commitment towards creating and providing a safe working environment for all its employees and other stakeholders. The Company has a clear ambition to be the benchmark on this front within our industry. Tata Steel has made excellent progress in Europe and is working on similar achievements in India. The Company has launched a “Committed to Zero” programme in India to help achieve this endeavour.
The Tata Steel Group also believes employee productivity is one of the key factors to be competitive in the industry. Employee skill development via learning, technology etc., is believed to not only help the Company withstand change in a volatile operating environment but also help it grow in the future and emerge as a global leader. The Company’s key focus is to retain talent while undertaking multiple initiatives to facilitate cross geography knowledge transfer and improve productivity.
Tata Steel’s endeavor is to balance economic value as well as ecological and societal value
Tata Steel Group is always focussed on responsible environmental practices and has always believed in improving the quality of life in communities it serves globally.
It believes that reduction of environmental impact over the lifecycle of products and resource effi ciency will result in a sustainable world. The Company has already halved the amount of energy needed to make a tonne of steel over the last 40 years. Further, the Company continues to invest in energy effi ciency improvement, reduction of CO2 emissions and frequent monitoring of dust and other emission levels to ensure that they stay within permissible limits. Extra eff orts are
also being taken to ensure workplace safety in mines, collieries and construction sites in India. In Europe, environmental matters extend into the EU ETS, which is currently in Phase 3. A priority for the Company has been to improve the quality of life of people in and around the places in which it operates. To meet this objective, the Company engages in various community development programmes that drive the socio- economic empowerment of the local community. Towards this, in India, the Company has pursued numerous activities such as providing basic healthcare, promoting education, developing skills among youth through training programmes and generating employment.
Financial risks
Financial risks relate to Tata Steel’s ability to meet fi nancial obligations and lessen the impact of various factors like interest rates, foreign currency exchange rates, credit rating etc. It also includes any risk to servicing pension obligations and to fi nancial ratios due to impairment.
Adverse movements in credit rating and level of indebtedness could aff ect our fi nancial fl exibility
The major debt rating agencies routinely evaluate the Company's debt. This evaluation is based on a number of factors, which include fi nancial strength as well as transparency with rating agencies and timeliness of fi nancial reporting. There can be no assurance that the Company will be able to maintain its credit ratings and failure to do so could adversely aff ect the cost of funds and related margins, liquidity, competitive position and access to capital markets.
The Company has signifi cant level of indebtedness and in an adverse environment, cash may be diverted from operations to pay debts and thus, reduce the availability of cash for capital expenditure, acquisitions etc. In addition it could impact the ability to increase funds for working capital, to raise new debt or to refi nance existing debt on favourable terms.
The Company has an impeccable credit history with the lending community. To manage its fi nancial fl exibility, the Company regularly refi nances its debt in advance. Earlier this year, the Group refi nanced a signifi cant part of its overseas debt, well ahead of schedule and further lengthened the maturity profi le of its indebtedness.
Social costs like pension defi cit could impact our fi nancial performance
Tata Steel’s assumptions while estimating pension funding are subject to capital market and actuarial risks and any shortfall could put pressure on fi nancial performance. For example, Tata Steel Europe provides substantial retirement benefi ts to all its employees; including a defi ned benefi t scheme. The market value of pension assets and liabilities is signifi cantly greater than the net assets of the Company and, therefore, any change can have a material impact on the Company’s fi nancial statements.
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Management Discussion and Analysis 2014-15 The Company has thus, put in place a framework to manage
pension risks and also works with schemes’ trustees to ensure that obligations remain aff ordable and sustainable. A range of measures have already been adopted by the principal schemes in the Company to manage liabilities and to protect against investment market risk exposure, whilst maintaining asset performance. Further actions will be considered as and when appropriate to mitigate part or the whole risk.
Impairment of tangible and intangible assets
The Company reviews the carrying amounts of its tangible and intangible assets (including investments) to determine whether the amount is recoverable through continuing use. The impairment review so undertaken as per Company policy, involves a number of signifi cant assumptions and estimates by the Company, including in the estimation of the net present value of future cash fl ows attributable to assets or cash generating units. Risk to underlying assumptions exists due to the dynamic market environment. While the decrease in recoverable amount of assets due to adverse factors is not conclusively indicative of a long-term diminution in value of the assets, it does immediately have a material impact on the Company’s fi nancial results or on key fi nancial ratios. This could have an impact on credit rating and on funding costs.
Foreign exchange rate volatility aff ects outcome of commercial transactions
The Tata Steel Group has a global footprint and transacts in various currencies. Hence, volatility in the currency markets can adversely aff ect the outcome of commercial transactions. The Company, therefore, has foreign exchange hedging policies in place to protect its margins against rapid and signifi cant foreign exchange movements.
Legal and Compliance risks
Legal and compliance risks relate to risks arising from outcome of legal proceedings, government action, regulatory action, which could result in additional costs.
Regulatory Environment and Compliance
The Company is subject to numerous laws, regulations and contractual commitments in the various countries in which it operates. The risk of substantial costs, liabilities and damage to reputation related to non-compliance of these laws and regulations are inherent to the Company’s business.
Tata Steel has policies, systems and procedures in place aimed at ensuring substantial compliance and there is a strong commitment from the Board and the Executive Committee to enforce compliance.
Legal proceedings
The Company is a defendant in legal proceedings related to its business and operations and these legal proceedings are pending at diff erent levels of adjudication before various courts and tribunals in diff erent jurisdictions. The proceedings
may be decided adversely against the Company, or that any new developments may arise, such as a change in Indian law or rulings against the Company by appellate courts or tribunals. This could require the Group to make provisions in its fi nancial statements, which could have a material adverse eff ect on its fi nancial position and on the Company’s business. The Company understands this and has strategically deployed legal resources across geographies to mitigate the risk.