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Hulamin
Integrated Annual Report 2017
 

Risk Management

INTRODUCTION

The employment of an effective risk management process is critical to Hulamin achieving its strategic and operational goals, particularly in the current environment of change and uncertainty. Hulamin recognises that risk is intrinsic to the business and that there is a balance to be struck between managing threats and exploiting opportunities. The group’s possible response to identified risks includes acceptance, avoidance, transfer and mitigation, as informed by the group’s risk appetite and tolerance levels.

It is Hulamin’s policy that risks should be understood and managed through a relevant and formal structure to facilitate the achievement of the business’ long-term objectives, which objectives recognise the interests of all stakeholders in the business.

The formal structure assists in:


Risk management framework

Hulamin’s risk management framework provides the basis for the implementation of a consistent, efficient and economical approach to identify, evaluate and respond to key risks that may impact Hulamin’s objectives. The framework also addresses the specific responsibilities and accountabilities for the Enterprise Risk Management (ERM) process and the reporting of risks and incidents at various levels within Hulamin. Hulamin strategic and business objectives are aligned to the risk management and governance structures.

The adoption of framework, ISO 31000, which is based on the ERM framework published by the International Organisation for Standardisation (ISO) of the Treadway Commission:


linking risk, strategy and governance

The strategic objectives are cascaded to business plan objectives and operational objectives. Risks are reviewed against these objectives in the relevant governance structure.

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Risk management governance review

The Board of Hulamin is ultimately responsible for the governance of risk of the group and assumes overall ownership thereof.

The Board carries out its responsibilities for risk management via the Risk and Safety, Health and Environment (SHE) Committee which has oversight of the group’s enterprise risk management framework, policy and processes.

There is also a Hulamin Risk Management Committee, a sub- committee of the Hulamin Executive Committee, which, together with the Hulamin SHE Committee, is accountable to the Risk and SHE Committee for designing, implementing and monitoring the process of risk management and integrating risk management into the day-to-day activities of the various departments.

The Hulamin Executive Committee, supported by management, supports Hulamin’s risk management philosophy; promotes compliance with the risk appetite; identifies, assesses and manages risks within their spheres of responsibility consistent with risk appetite and tolerances; and manages the implementation of risk reduction actions and appropriate internal controls.

All Hulamin employees are responsible for executing enterprise risk management in accordance with established directives and protocols.

A number of external stakeholders often provide information useful in effecting enterprise risk management, but they are not responsible for the effectiveness of Hulamin’s enterprise risk management.

Various external and internal parties provide risk assurance and compliance.

Principal Risks

The Risk Management Committee conducts a formal review of the most significant risks and the group’s responses to these risks three times a year. These are reviewed by the Risk and SHE Committee three times a year, and at every meeting of the executive committee and Board.

The key strategic risks of the group, extracted from the group risk register, are shown in the table below. These risks have been assessed according to materiality and likelihood on an inherent and residual risk basis.

Internal control and assurance

The Hulamin Board is responsible for establishing and maintaining an effective system of internal control which is designed to provide reasonable assurance that the group’s business objectives will be achieved in accordance with the group’s risk appetite.

A key element of the system of internal control is the review by assurance providers who assess the adequacy and effectiveness of the controls.

The group’s internal audit function is responsible, inter alia, for the following:

Effectiveness of internal financial controls

Internal audit provides a written statement annually to the Audit Committee on the effectiveness of the systems of internal financial control.

Effectiveness of internal controls and risk management

Internal audit provides a written statement annually to the Board on the effectiveness of the systems of internal control and risk management.

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Specialist assurance providers are used to assess the adequacy and effectiveness of controls in certain instances. These include environmental and safety audits. The output of the risk management process, in conjunction with the work of the independent assurance providers, indicates to the directors that the controls in place are adequate and effective. This assurance recognises that the organisation is dynamic and that at any point in time there are new areas of risk exposure which may require management attention. As such, there is a continual focus on ensuring that the control environment is understood and maintained at the required level.

Assurance efforts are documented in the combined assurance plan.

2017 Risk Focus Summary

Reflecting on 2017  Status 
Rolling out technology to simplify risk reporting
and risk administration 
Completed 
Focus in risk culture and embedding risk  In progress 
Risk review session  Completed 
Risk appetite review   Completed 
Operational risk framework  Completed 
Strategic risk framework and risk scenario planning  In progress 
Developed risk procedure and processed  Completed 


2018 Focus

 

Trend/context  Emerging uncertainty/principal risk  Subsidiary risk
(Principal risk consequence)
Risk type  Risk response  Link to strategy  Capital impacted  Risk trend 

Weak economic climate in South Africa.
Political uncertainty, unclear policy direction. 

Sovereign rating downgrade by rating agencies of local-currency denominated debt below investment grade.   Dramatic weakening of currency resulting in
short-term liquidity constraints. 
THREAT 
  • Amend currency hedge programme to reduce cash flow volatility.
  • Committed working capital in place with adequate headroom.
  • Reduce working capital investment by focusing on inventory efficiencies and cash cycle improvements to reduce cash flow volatility.
 
  Financial  Decreasing 
Low growth in the local market.  Low economic growth. Constrained local market demand for aluminium semi-fabricated products.  THREAT 
  • Seek growth opportunities through new products.
  • Shift mix as appropriate to higher value export opportunities.
  • Continue to pursue tariff protection and other barriers in local
    market to protect and grow market share.
  • Develop regional (Africa) growth plan.
 
Financial  Decreasing 
Potential withdrawal of foreign investment. (Key customers withdraw from South Africa).  THREAT 
  • Engagement with multinational customers to promote Hulamin’s value proposition in South Africa.
  • Cooperate with industry and government regarding incentive programmes for industrial development coupled with local sourcing.
 
Financial Social/relationship  Stable 
Reduced investment in and/or failure of infrastructure:

  • Ports
  • Roads
  • Energy
  • Water
 
THREAT 
  • Shift in Hulamin’s product mix to higher value OEM sectors with lower dependence on infrastructural projects.
  • Monitor capability of outgoing logistics; road, rail and port infrastructure.
  • Reduce electricity usage through energy efficiency projects.
  • Reduce water consumption and install backup water reservoirs.
  • Diversify gas supply to limit dependence on a single source.
 
Manufactured Natural  Stable 
Global oversupply of aluminium semifabricated products, driven by continued capacity investments in China

  • Investment in capacity exceeds demand growth, leading to flat/lower utilisation mrates over the next 10 years
 
Increased competition in global and local markets for market share.  Rolling margins in key product categories continue to decline in USD terms.  THREAT 
  • Drive improved product mix, by:
    • Growing proportion of current high value products in overall mix (and reduce low margin export common alloy volumes)
    • Improve routes to market and niche positions in current high value products
    • Develop new, higher value products with focused investments in finishing capability.
  • Monitor competitor actions.
  • Pursue manufacturing excellence and low cost of production.
  • Develop local and regional sales, including the promotion of local market OEM type products.
 
Financial Social/relationship  Increasing 
Increased relevance of access to required technology and skills to develop products of the future.  Inability to develop new high value, niche products to improve business profitability and long-term sustainability.  THREAT 
  • Maintain strong relationships with current technology partners/consultants, industry experts and academic institutions.
  • Develop local R&D network and aluminium technology centre(s)through CSIR/DST and AFSA.
 
Intellectual Human  Stable 
Global oversupply of oil and gas industry persists and local gas opportunities are exploited, leading to a period of low crude oil and gas prices which are supported by local infrastructure investments.  Infrastructure investment in South Africa (distribution pipelines, LNG import terminals) to take advantage of low cost energy.  Significantly lower cost of energy to Hulamin through natural gas pipeline supply.  OPPORTUNITY 
  • Engagement at all levels of government, Transnet and other stakeholders to secure piped gas infrastructure to Pietermaritzburg.
 
Manufactured Financial  Increasing 
Growing trend in protectionist trade policies around the world and support to local manufacturing industries

Chinese aluminium producers get closed out of key markets such USA through punitive tariff protection measures  Hulamin gains an advantage over Chinese competitors to supply key markets such as USA. OPPORTUNITY Grow sales of high value products in key developed markets such
as USA.
Financial Manufactured Increasing 
Competition in South Africa from low cost countries increases substantially. THREAT 
  • Focus on developing OEM market sectors in South Africa.
  • Enhance non-tariff barriers where possible.
  • Pursue tariff protection where necessary.
Financial  Manufactured Increasing 
South Africa’s preferential trade access into key developed markets is reviewed. Loss of competitive advantage relative to other exporters into developed markets.   THREAT
  • Engage with DTI and international trade authorities to understand and influence direction of trade policies.
  • Focused product/market development programme to grow high value product sales in a variety of domestic, regional and export markets.
  • Focus on product development and innovation with key OEM
    customers.
   Social/ relationship Financial   Increasing
Economic activity curtailed by energy scarcity due to delayed investment in infrastructure and production/conversion capacity:

  • Electricity generating capacity in SA now has headroom, a result of poor demand and new power stations coming on line and planned to come on line
  • The risk is that Eskom does not reduce/contain internal costs and becomes an unsustainable entity
 
Energy scarcity in South Africa  Inconsistent supply of and increasing cost of electricity. THREAT   
  • Develop demand reduction operating plan to minimise production losses.
  • Work closely with Eskom to ensure Hulamin has as few disruptions as possible.
  • Install backup generators to mitigate impact of load shedding/curtailment.
  • Work with Energy Intensive Users Group (EIUG) to lobby Nersa for “reasonable” electricity cost escalations.
Manufactured
Natural
Stable 
Uncertainty in sustainability of Hillside smelter. THREAT
  • Develop alternative metal sourcing options.
  • Engage government, South 32 and other stakeholders to ensure
    support for domestic aluminium industry.
Financial Social/ relationship Stable
Accelerating impact of climate change, and
increasing global environment regulations.
Local and international resolve towards low-carbon economy  Introduction of Carbon Tax in
South Africa.
THREAT 
  • Engagement with government through AFSA regarding an appropriate approach to the levying of carbon tax on the aluminium industry.
  • Ongoing efforts to reduce Hulamin’s electricity and gas consumption.

Natural Financial Stable 
Water scarcity     Disruption to manufacturing operations. THREAT 
  • Projects to reduce water consumption.
  • Increase the water storage capacity on site.
  • Investigation in the use of recycled water on all manufacturing
    sites.
  • Ongoing engagement with the municipality regarding water supply.
Manufactured
Natural 
Stable 
Loss of confidence in US authorities ability to deliver growth-boosting fiscal policies result in a weaker US Dollar. At the same time South African political stability improves, supports foreign investment and growth resulting in a stronger Rand. South African Rand strengthens against the US Dollar and remains at stronger level for an extended period  Significantly stronger Rand results in major
negative impact on Hulamin’s EBIT.
THREAT 
  • Ongoing focus on improving rolling margins and sustainably reducing costs – thereby reducing break-even levels.
  • Delay non-urgent capex. Improve prioritisation of capex.
  • Continue to maximise production within a stable plant.
  • Reduce working capital – increase inventory efficiencies, negotiate longer credit terms with suppliers and reduced terms with customers.
  • Review hedging strategy to change Hulamin risk profile.
  • Sell non-core assets/other business units.
  • Maintaining suitable borrowing facilities and headroom.
 
  Financial  Increasing 
New and increasing use of digital activities and technologies to improve business value. An opportunity arises as to how these new technologies will be used to achieve business strategy objectives  Leverage product and process know-how,
achieve production efficiencies and cost
reduction, improved agility and closer
customer collaboration and service
improvements.
OPPORTUNITY 
  • Develop digitalisation roadmap and strategy.
 
Manufactured
Intellectual
Human
Increasing 

 

  Strengthen the core (of the business) to compete
  Increase rolling margins
  Investing in the assets of tomorrow