RISK MANAGEMENT
Analysing potential threats and mitigation efforts
As a large-scale organisation, we operate in an environment that is subject to constant change and, subsequently, newer risks. A prudent risk management framework that considers our strategic ambitions while maintaining ample caution has held and continue to hold us in good stead.
Our Enterprise Risk Management (ERM) is based on the globally recognised ‘COSO’ framework. It brings together the understanding of the potential upside and downside of all factors that can affect the organisation with an objective to add maximum sustainable value to all the activities of the organisation and to various stakeholders.
- Protect our shareholders and other stakeholders' interest
- Achieve our business objective
- Enable sustainable growth
Pursuant to the requirement of Regulation 21 of the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 and Companies Act, 2013, we have a risk management framework in place.
We have constituted a sub-committee of Directors to oversee the ERM framework to ensure resilience such that:
Intended risks, say growth, are taken prudently so as to plan for the best and be prepared for the worst
Execution of decided strategies and plan with focus on action
Unintended risks such as performance, incident, process and transaction risks are avoided, mitigated, transferred (as in insurance) or shared (like through sub-contracting). The probability or impact thereof is reduced through tactical and executive management, policies, processes, inbuilt systems controls, MIS, internal audit reviews, etc.
Strategic risks
These risks pertain to challenges that may arise while pursuing our six strategic objectives
Type
Response
Cyclical nature of the steel industry
The steel industry, like most capital-intensive commodity industries, is impacted by supply-demand dynamics, which has a strong correlation with the macroeconomic environment.
- Our primary operations are in India and we sell majority of the products to the domestic Indian market, which has significant growth potential.
- India’s per capita steel consumption is 69 kg as against the global average of 208 kg. The National Steel Policy (NSP) aims to increase per capita consumption to 160 kg by FY 2030-31. The NSP has set a target of achieving 300 MnT of steel production by FY 2030-31.
- Continued focus on cost made JSW Steel one of the world’s lowest conversion cost producers. Timely response on cost control helps us remain competitive across cycles.
COVID-19 pandemic may adversely impact business profitability
The ongoing global pandemic and the disruptions caused by the various containment measures may have unprecedented adverse consequences on the Company’s business, the jurisdictions in which it operates, the industry and the global economy.
- Focus more on export markets to improve capacity utilisation and generate cash flows; liquidate stocks
- Reduce cost base
- Working on multiple initiatives to boost liquidity through tie-up of additional term debt and short-term loans
Raw material availability and cost
The primary raw materials that are used in the production of steel are iron ore and coal. In addition, our operations require substantial amounts of other raw materials and utilities, including various types of limestone, alloys, refractories, oxygen, fuel and gas.
The price and availability of raw materials may be adversely affected by a number of factors that are beyond our control, including interruptions in production by suppliers, demand for raw materials, supplier allocation to other purchasers, price and currency fluctuations and transport costs, among others.
- Focus on increasing captive sourcing of iron ore. We have secured nine mines, which would cater to 30% of current iron ore requirements of our operations in Karnataka
- Emerged as a preferred bidder for four iron ore mines in Odisha, with total reserves estimated at 1,137 MnT. These mines will cater to the entire iron ore requirements of Dolvi and Salem
- These mines provide strategic long-term raw material security, access to high quality reserves and an advantage of consistency in grade which can bring operational efficiency in steelmaking
- Procurement of coal on Annual Rate Contract where price is linked to TSI and PLATTS indices to ensure parity with market prices
- Plans to ensure availability of coking coal and mitigate the impact of rising prices by diversifying the sources across geographies
- In-house and state-of-the-art blend management system lowers dependence on coking coal
- Develop a coking coal mine in India, which would serve the dual purpose of partial raw material security and cost efficiency
Regulatory and compliance
Our operations are regulated extensively at the central, state and local levels in India as well as in other countries where we operate. Failure to comply with these laws and regulations may result in the suspension or termination of operations and subject the business to administrative, civil and criminal penalties.
- Comprehensive compliance management framework to track compliances, understand changes to regulatory standards in a timely manner and integrate these changes into the business strategy
- Investing in systems and tools to facilitate better compliance with regulatory norms
- Execute capex projects with equipment that meet global safety and emission standards
- Ensure that suppliers, partners and vendors stay compliant
Increasing competition and inability to market increasing volumes
The Indian steel industry is highly competitive. JSW Steel competes at varying degrees with other domestic integrated steel manufacturers.
In the past, domestic steel producers have increased their manufacturing capacity, intensifying competition.
We expect growing competition from international steel producers due to the consolidation in the global steel industry. A number of international competitors may have greater financial and other resources; some have announced plans to establish manufacturing operations in India.
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Domestic market would have the capacity to absorb
additional steel supply due to:
- Government’s focus on infrastructure development, ’Make in India’ initiative
- Acceleration in rural economy
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We expect to expand market share and customer
retention by:
- Developing strong customer relationship and gaining brand equity
- Focus on new product development and value-added special steel segments
- Exports to various countries across various geographies
- Focusing on high potential areas, where presence via our Shoppe Connect can be increased to widen customer base
- Leverage channel financing and micro credits for providing additional liquidity
Foreign exchange and interest rate fluctuations
There has been considerable volatility in foreign exchange rates in recent years. JSW Steel incurs costs in one currency and generates sales in another, thus profit margins may be affected by unfavourable exchange rate movements.
Any increase in the interest rates across key economies across the globe could result in slowdown in foreign currency inflows into the country. This could, in turn, affect the value of the domestic currency and interest rates, adversely impacting our ability to secure financing on favourable terms.
- A robust hedging policy approved by our esteemed Board
- Hedging strategy follows a judicious mix of forwards and options
- Ensure appropriate mix of rupee and foreign currency denominated debt, fixed and floating interest rate and debt of deferral tenure
Declining global liquidity
In the event that the global credit markets worsen or if there is any significant financial disruption, this could have an adverse effect on our ability to borrow, as well as our profitability or business growth, which could have a material adverse effect on the business, future financial performance, financial condition and results of operations.
- A robust system to judiciously allocate capital among various projects across locations
- Calibrate capital expenditure to ensure leverage ratios within acceptable levels
- Raise finance through structured trade solutions to diversify liquidity pool
- Maintain a competitive borrowing rate by adopting appropriate balance between fixed and floating interest rates in addition to diversified sourcing of funds
Mergers & Acquisitions
We may undertake strategic acquisitions in the future, which may require the incurrence of material indebtedness that may be difficult to integrate, and may end up being unsuccessful.
There can be no assurance that such acquisitions will result in a positive outcome or, in certain instances, will not have material adverse effect on our financial position or results of operations.
- Carry out due diligence that mainly includes finance, tax and legal aspects to identify risks and plan strategies for mitigations
- Plan appropriate capital structures for the entity being acquired
- Derive synergies between companies to ensure optimum utilisation of capacities, resources and leverage locational advantage to better serve customers with minimal supply chain costs
- Adopt a very conservative approach to bidding
Infrastructure and logistics
Any congestion or disruption in transportation networks, electricity grid, communication systems or any other public facility could disrupt our normal business activity.
An unforeseen deterioration of physical infrastructure could disrupt the transportation of goods and supplies and add costs to doing business. These could have an adverse effect on the results of operations, financials and cash flows.
Over the years, initiated several strategic measures to ensure seamless operations
Key initiatives include:
- Pipe conveyor system at Vijayanagar for iron ore movement from mines to plant
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Infrastructure development
- Extending internal rail track and rail yard
- Additional storage yards for iron ore fines and coal
- Upgradation of infrastructure facilities at Dharamtar jetty – extended jetty length, dredging for deeper draft, additional barge unloaders – to handle additional volumes
Higher capacity barges [River Sea Vessels (RSVs)] for transportation of inbound raw materials and outbound finished goods
Operational risks
These risks pertain to challenges that may arise while conducting our day-to-day operations
Type
Response
Energy security
A stable supply of electricity in large quantities is essential for continuous production processes. The entire production process may get severely impacted if there is insufficient power or a suspension in power supply.
In the event of any disruption to electricity supply or network bandwidth, due to events beyond our control, such as natural calamities, operations will be affected.
- Substantial portion of the power requirements are increasingly being met through Captive Power Plants (CPPs)
- The power required would be met partly through self-generation from coke oven / blast furnace gases and balance under long-term power purchase agreements through open access
- Enhancing power transmission capacity
Environment protection and climate change
Globally, public interest in environmental protection has increased in recent years, with increasing efforts to combat climate change. However, any drastic change in carbon emission regulations may impact our business and operations.
Compliance with new and more stringent environmental obligations relating to Greenhouse Gas (GHG) emissions may require additional capital expenditures or modifications in operating practices, as well as additional reporting obligations.
For planned capacity expansion projects, there is a need to adhere to legal requirements such as environmental assessments, environmental impact studies and/or plans of development before commencing production activities. Any expiration or delay of approvals could prevent us from carrying out certain aspects of our operations.
- Complying with all applicable norms through use of best-in-class technology
- Selecting the right equipment, technology, processes, inputs and tracking emissions. Additional capex allocation for advanced technologies such as Maximised Emission Reduction of Sintering (MEROS) in sinter to further reduce dust emissions
- Exploring use of steam box ageing technology to treat Basic Oxygen Furnace (BOF) slag that would be generated after proposed expansions at Vijayanagar and Dolvi
- Disclosing information related to carbon emissions under various initiatives such as CDP and Dow Jones Sustainability Index (DJSI), along with public disclosure in our Integrated Report
- Focus on sustainable products that are safe for consumers
- Developed products that are environment-friendly and safe for use such as high-strength, low-carbon, low-thickness steel used in the auto sector for light-weighting vehicles, which helps reduce carbon footprint while increasing passenger safety
Occupational Health & Safety
Steelmaking is an inherently hazardous process. Hazards may include accidents involving moving machinery, on-site transport, forklifts and overhead cranes; explosions, and resulting fires, etc.
These hazards may cause severe damage to and destruction of property and equipment, environmental damage and injury or even fatalities among our personnel, which may result in temporary or lengthy interruptions of operations, damage business reputation and corporate image and result in civil and criminal liabilities.
- Ensure compliance with local and international laws, regulations and standards with primary focus on protecting employees and communities from harm and operations from interruptions
- Engaged renowned consultant DuPont for rolling out their international safety standards across our plant locations
- Periodic safety training and mandatory use of safety gadgets such as safety shoes, helmets, hand gloves and masks on shop floors/plants
- Safety awareness through street plays, dos and don’ts, including travel restrictions
- Launched Employee Assistance Programme (WeCare) in partnership with a leading service provider to provide psychological and emotional counselling support to employees through online self-help tools, e-workshops
- Monthly apex safety meetings held for reviewing safety aspects and fatal/near-miss accidents, if any
- Robust security arrangements such as check-posts, entry passes / identity cards, access
Human resource and talent management
While we consider our current labour relations to be good, there can be no assurance that we will not experience future disruptions in operations due to disputes or other problems with employees.
- Robust HR policies to become a preferred employer
- Robust performance management systems to help attract and retain talent
- Platforms for greater interaction between employees and senior management
- Long-term succession planning through creation of talent pool across bands; groom people for next level roles through specially designed Future-Fit Leadership Development programmes from IIM Ahmedabad, ISB Hyderabad and Cornell University, US
- Enhance gender diversity through the Springboard programme for high- performing female employees to encourage leadership development at IIM Bangalore
- Online learning for employees in collaboration with Skill- soft to develop project management, team building, communication and other skills
Local communities
Public protests could cause operations to slow down, damage the reputation and goodwill with the government or public in the countries and communities in which we operate, or cause damage to our facilities.
- Empowering communities with sustainable livelihoods
- Launched initiatives to improve access to healthcare and nutrition
- Empower women with livelihood opportunities; focus on skill-building and better educational infrastructure and preserve culture and heritage
Cyber security
The Company has undertaken extensive digital projects that may be exposed to a wide array of cyber security risks. Digital security is paramount to ensuring seamless operations, as a potential breach could lead to loss of process control and impact day-to-day functions.
Following the COVID-19 outbreak, we have adopted remote working, which requires close monitoring of remote access tools to pre-empt possible cyber-attacks.
- Periodically assessing current state and prioritising foundational components of cyber security
- Conducting VAPT (Vulnerable Assessment and Penetration Testing) and periodic audits of systems and procedures
- Incorporating cyber security and privacy into everyday business decisions and processes
- Cyber security awareness programme conducted across all locations
- Progress on cyber-security roadmap being tracked periodically
- Monitor threats and respond, investigate and remediate cyber security related incidents and data breaches
