Risk management

Risk identification, management and mitigation are fundamental to sustainable business activities. Our risk management process at Scaw accordingly underpins our day-to-day operational management and our Board’s execution of our strategy.

We have a robust, scalable risk management framework in place that entrenches world-class risk management processes across the group. Over the last three years we have significantly enhanced this and during the year developed a comprehensive corporate risk register.

Our progress:

FY14

  • Developed the ERM framework
  • Tabled a high level overview of the top 20 risks

FY15/16

  • Enhanced the risk overview to build a corporate risk register encompassing the top 50 risks
  • Identified KPIs, key controls and management action plans
  • Developed a risk appetite framework with defined levels
  • Developed individual business unit risk registers for key businesses
  • Developed a combined assurance framework

FY16/17

  • Roll out the combined assurance framework
  • Risk register to be developed for two further business units

Ongoing improvement of our risk management framework and processes continued in the year, marked by a number of milestone developments. Our key focus in terms of formal risk assessment was advancing the corporate risk register. This now includes key risk indicators, risk appetite levels, controls and management action plans, as well as ongoing status tracking. We further developed risk registers for the following individual business units: Grinding Media, Rolled Products, Supply Chain Management and two more to be completed by year-end.

The combined assurance framework was approved by the Audit and Risk Committee, and comprehensive implementation of the framework will take place in FY17. In the interim, a working model is in place. A second line of defence will be put in place – in functions such as SHE, QA and compliance – to facilitate the roll out of the combined assurance model.

Group-wide risk is monitored by a central risk management team who works closely with our external and internal audit teams to ensure high-risk areas are covered.

The table below sets out the most material risks identified in our risk management process based on an inherent risk rating.

Risk name Risk description Aligned strategic
objective
Risk mitigations

External factors

Macro-economic cycle
  • Protracted economic downturn negatively impacting the sustainability of the organisation
  • Slow economic recovery placing strain on market demand for products
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Review product mix and performance
  • Expansion into rest of Africa
  • Growing export sales
  • Securing strategic tenders and long-term contracts
  • Defensive price strategy

Increased competition (locally and internationally)

  • New entrants in the local and international market in direct competition with Scaw
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Review product mix
  • Product improvement
  • Defensive pricing strategy
  • Improved product quality
  • Cost reduction and operational efficiency plan
  • Diversification strategy
Economic/industrial policy
  • Changes in industrial/economic policy which may place additional pressure on costs, margins and profitability
  • Removing import tariff barriers (10% increase announced in the year – not significant enough to materially impact the steel industry), imposing export tariffs on scrap and introduction of carbon tax, etc
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Engaging the dti through SEIFSA on tariffs on export scrap and carbon tax
  • Monitoring tariffs
Fast changing industry dynamics
  • Not keeping pace with industry developments, eg advancements in technology lagging the industry
  • Negative industry trends affecting product demand
  • Resourcing challenges (eg in the technical unit) hampering advancements in technology
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Review product mix
  • Product improvement
  • Proactive resource planning
  • Issue-based technical task teams

Strategy

Balance sheet restructuring
  • High gearing
  • Limited access to capital
  • Interest burden on short and long-term debt
  • Limit on strategic capex
  Be globally competitive
  • Restructuring of the balance sheet with shareholders
  • Ongoing restructuring of debt and shareholder funds
  • Working capital management
  • Market diversification
  • Corporate restructure

Finance

Financial sustainability
  • Balance sheet and income statement ratios negatively impacted
  • Strength of the order book
  • Success of tender processes
  • Working capital management
  • Financial management
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Securing strategic tenders and long-term contracts
  • Synergy with junior iron ore mining players
  • Inventory reduction initiatives
  • Exploring further backward integration
  • Supplier agreements with scrap generators
  • Production incentives
  • Cost containment programme
Funding/liquidity challenges
  • Working capital conversion cycle
  • Inability to secure finance at a competitive rate due to the balance sheet
  • Interest burden on short and long-term debt
  • Dated plant, machinery and equipment
  • Increased credit risk resulting in supplier guarantees and upfront payments
  Be globally competitive
  Portfolio alignment
  • Inventory optimisation programme
  • Procurement management
  • Migrating scrap customers to terms
  • Increasing efficiencies with more utilisation of scrap compared to iron ore
High input costs
  • Increased raw material, scrap, electricity and labour costs (overtime)
  • Concentration of supply
  • Scaw being in some instances a “price taker”
  • Increased competition
  • Cheap subsidised Chinese imports
  • Volatility in the exchange rate
  • Commodity price fluctuations
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  • Cost containment programme
  • Renegotiating supplier contracts
  • Continual engagement with unions with the object of improving productivity and reducing labour stoppages

Operations

Customer service
  • Product quality/liability risk
  • Late delivery
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  Acting responsibly
  • Embedding of quality systems and processes
  • Specification and technical testing for all products
  • Additional design recommendations to client where appropriate
  • Senior management oversee customer complaint resolution processes
  • Training and development
Production inefficiencies (including wastage)
  • High costs and lower volumes due to inefficient and outdated production processes, old and outdated plant and equipment, and labour productivity challenges
  • High scrap rates in certain business units
  • s189 process impacting production inefficiencies given uncertainty among the workforce
  • Poor plant throughput
  Be globally competitive
  Portfolio alignment
  Adding value beyond products
  Acting responsibly
  • Investment in infrastructure
  • Proactive resource planning
  • Proactive communication and engagement with staff
  • Training and development
  • Performance management
  • Compliance with ISO 9000

People

Attraction and retention of skills
  • Failure to attract and retain key skills critical to Scaw achieving its strategic objectives
  • Inadequate succession planning and slow progress on existing succession plans
  • Dependence on critical/rare skills
  • Information technology (IT) skills shortages threatening Scaw’s ability to grow and innovate
  • Inability to attract youth to Scaw
  • Potentially not achieving transformation targets
  Be globally competitive
  Unlocking potential
  • Employee retention scheme
  • Accelerated development programme for high-potential employees
  • Individual development plans
  • Internship and apprenticeship programmes

Governance

Availability, reliability and suitability of IT infrastructure
  • Ageing IT infrastructure leading to system downtime and affecting future scalability for growth
  • Numerous single points of failure in the current infrastructure
  • Non-performance of service providers
  • Misalignment of IT, the business and strategy
  • IT skills shortages threatening Scaw’s ability to grow and innovate
  Be globally competitive
  Acting responsibly
  • Strategy in place for replacement of infrastructure
  • Formulation of standards and architecture
  • Redundant technology for larger sites
  • Backup equipment in the event our current equipment fails
  • Conduct business impact analysis
  • Managing third-party contracts and SLAs
B-BBEE
  • Maintaining B-BBEE rating – supply and enterprise development
  • Effect of s189 process on the rating
  • Changes in the rating are new codes compromising Scaw’s competitiveness
  • Compliance and implementation of employment equity legislation requirements
  • Slowdown in internal training as a result of s189
  • Constraints around spend and general financial constraints
  Be globally competitive
  Acting responsibly
  • Accelerated development programme for high-potential employees
  • Individual development plans
  • Procurement Committee established
  • Improved contract coverage
  • More emphasis on enterprise and supplier development
  • More emphasis on vendor audits overseen by Transformation Committee