Risk Management
 

Risk Management

To improve the Company’s ability to address the increasingly complex internal and external legal issues and potential business, in 2008 PT Krakatau Steel (“The Company”) began to apply the concept of risk management. Through risk management, the Company expects to proactively identify potential critical problems for the Company’s business and is able to perform mitigation measures that are considered the most optimal. To conduct these functions, the Company established the Risk Management Unit (UPMR), which will henceforth be written as the Risk Management Division.

As the framework for risk management, PT Krakatau Steel (Persero) Tbk. has established the implementation of a risk management manual that is prepared with reference to the rules and standards of the Committee of Sponsoring Organization of the Treadway Commission (COSO), which is currently in the process for implementation of Risk Management according to ISO31000 standards. The socialization phase has been implemented for the managerial level staff through in-house training, internal seminars, implementation mentoring, dissemination through the media intranet, and other activities. To facilitate its application in the field, a risk management handbook has been formulated and distributed to the leadership ranks of PT Krakatau Steel (Persero) Tbk at the Superintendent level and above, or to Key Persons that have been authorized to manage risk in their respective units. A risk is a potential event that negatively affects the achievement of the vision, mission, goals and targets of the Company or organizational unit. Risk Management is an attempt to minimize the negative effects from the various sources of risks facing the Company’s business activities so that objectives can be achieved optimally. The Risk Management Division is responsible for ensuring that analysis and management of risk have been conducted for all units of the organization and to ensure that the analysis and management of risk have been implemented in an effective, efficient and consistent manner at each operational unit.

To ensure that the implementation of Risk Management in the Company has been conducted according to the standards set by the GCG & Risk Management Division, Work Instructions (WI) has been issued. These include the: Analysis and Risk Management WI, the Monitoring WI and the Risk Reporting WI.

To support the implementation of Risk Management in all operational units, the GCG&RM Division has prepared the infrastructure as a means to guide/train, socialize and mentor through very competent instructors.

To date, 741 risk factors have been identified, which are spread throughout almost all work units the risks identified are recorded in a database of existing risks in the PT Krakatau Steel (Persero) Tbk. Risk Management Information System (SIMARIS).

In 2009, the Company merged the functions of Corporate Governance and Risk Management into a single structural division, which is the Division of Corporate Governance & Risk Management. Merging these two functions resulted in further integrating risk management as one of the important pillars of good corporate governance practices of the Company.

The implementations of risk management in the Company, among others, are done through the following activities:

  • The dissemination of risk management implementation internally in the Company, including the PT Krakatau Steel (Persero) Tbk. Group’s subsidiaries have been conducted. Monthly meeting forums are conducted regularly by the PT Krakatau Steel (Persero) Tbk. Group Risk Management to further accelerate risk management implementation in the Group,
  • Risk analysis for unit and corporate risks are conducted as a representation of the Company risk reporting and as a base for strategic decisions by Management which is included in the annual Work Plan and Budget (WPB) material.
  • Through mentoring the preparation of risk analysis by prioritizing the main activities of the Company.
  • Though preparation of the Company’s risk database (System Information Risk Management PTKS - SIMARIS).
  • Through risk analysis of strategic Company projects (blast furnace project, SAP, Revitalization, etc.).
  • Through spot risk analysis associated with the actual conditions facing the Company.
  • Conducting risk analysis of environmental, health and occupational health aspects.
  • Implementing an Integrated Management System (IMS) by completing the Key Performance Indicators (KPI) for the Unit Work Targets with Key Risk Indicators (KRI) in order to mitigate the performance achievements.

 

The business risks faced by PT Krakatau Steel (Persero) Tbk. as an integrated steel company are classified into four types of risk, these are:

  1. Strategic risks, i.e. risks that are strategic for the development of the company, such as technology development, government policies, investment plans, new product development, etc.
  2. Operational Risk, the risk of loss due to the failure or inadequacy of the quality control of business processes.
  3. Financial risk, i.e. risk that directly or indirectly lead to financial losses.
  4. Environmental risk, i.e. risk that impacts on environmental degradation, environmental pollution, social disruption, the company’s reputation, etc.

 According to the source, risks can be derived from outside (external) or inside (internal) factors of the Company. In summary, these risks are:

 External Risks

  • Economic Risk

The steel industry is an industry that produces raw materials to meet the needs of basic steel for downstream industries, particularly for the infrastructure, property, automotive, various machinery and equipment industries. Therefore, the performance of PT Krakatau Steel is strongly influenced by general economic growth. To anticipate the economic turmoil as what happened in 1997, the Company has taken strategic steps to anticipate various scenarios of events that could adversely affect the Company’s business continuity.

  • Raw Materials Scarcity Risks

Most of the major raw materials of PT Krakatau Steel namely iron ore and scrap, still come from imports so that there is the risk of shortages of raw materials for production. The efforts by the Company to minimize the negative impact of the risk of scarcity of raw materials, include among others:

o   Synergize with other state-owned enterprises in building a local raw material processing plant in South Kalimantan (PT Meratus Jaya Iron & Steel).

o   In 2012 PT Krakatau Steel, established a subsidiary, PT Krakatau Natural Resources (PT KNR), as a strategic move to support the Company in securing the supply and procurement of raw materials so as to ensure production continuity, especially for availability of raw materials.

o   Encourage the establishment of a local scrap processor to support the needs of scrap raw materials.

o   Working closely with university research institutes and the private sector in research to maximize the utilization of local raw materials.

o   Expand the network of suppliers for Long term supply of raw materials.

o   Improving the database and evaluating the performance of suppliers.

o   Establish incentives for loyal suppliers who have proven track records in supporting the Company’s business activities.

  • Energy Scarcity Risks (Gas and Electricity)

Energy is a major raw material requirement of the steel industry. In order to minimize the negative impacts of the risk of energy shortages, the Company has initiated the following:

o   Preparation, assessment and intensive communications with PT Pertamina, PT PGN (as a supplier of oil and gas) and PT PLN (the electricity supplier) to get the LTA/MOU for the needs of the Company.

o   Promote an internal program for energy efficiency through efficiency programs in all operational areas.

o   Assess the possibility of alternative technologies that are non oil-gas based.

  • Risk of Damage and Loss of Assets

To control the risk of damage and loss of assets, the Company has initiated the following:

o   Develop the Company Management Security System (SMP-KS) as prevention and protection against damage or loss of the Company’s assets.

o   Insure all assets and property of the Company, which are exposed to the risk of loss due to damage, fire, loss and other possible causes are insured.

o   Insure all goods (cargo) that are in transit (transport) with respect to the agreed terms of delivery by the seller or buyer.

o   Insure all contracted construction and erection projects undertaken by contractors.

o   Insure all possible losses that might occur to the assets themselves and third parties who are located at the office and factory areas owned by the Company.

 

  • Risk of Exchange Rate Fluctuations

The floating exchange rate system that is implemented by the Government since August 1997 made the Rupiah exchange rate movements against foreign currencies, including U.S. dollars, difficult to predict. The possibility of the Rupiah depreciating against the dollar or other hard foreign currencies is very real. For the Company, the depreciation of the rupiah will greatly affect the cost structure, given its substantial dependence on imported raw materials. To control this risk, the Company initiated the following efforts:

o   Established a hedging policy, particularly for trade transactions.

o   Established sale prices adjusted for exchange rate changes.

 

  • Business Competition Risk

Indonesia’s steel industry is relatively open. Demand does not make significant restrictions on imports of steel products so that the national steel market is very open to international the steel supply. To control this risk, the Company initiated the following:

o   Improve cost competitiveness in all areas.

o   Ensure accuracy and speed in handling consumer claims.

o   Meet on time delivery and quality demands.

o   Establish a network of distributors.

o   Conduct annual customer gatherings to strengthen the Company’s relationships with customers, while also enhancing customer loyalty.

o   Conduct annual customer satisfaction surveys to determine the level of customer satisfaction with the Company’s products, and to determine aspects that need to be improved on an on-going basis.

 

  • International Regulatory Risk

Globalization, among others, is marked by an increasing role of the World Trade Organization (WTO), giving birth to a variety of new regulations, which makes business competition in the entire production chain, from raw materials procurement to distribution and sale of products increasingly stringent. To minimize the adverse effects of market liberalization, the Company initiated the following efforts:

o   Regularly assessing the impact of international regulations on the Company.

o   Propose solutions to the minister and the ministries concerned to protect the interests of the national steel industry.

 

  • Risk of Government Policy

Trends in world trade liberalization, together with domestic macro socio-economic conditions influence government policy, such as the privatization of State Owned Enterprises (SOEs). As a precaution against possible negative impacts, the Company initiated a variety of efforts including:

o   Studying the impact of government policies against the Company and act follow up on these studies.

o   Propose solutions to the minister and the relevant Technical Department to protect the interests of the national industry.

 

Internal Risk

  • Operation Risk Factory

To control the risk of possible disruption of plant operations, the Company has conducted the following actions:

o   Implemented predictive programs and preventive maintenance consistently.

o   Conducting daily, weekly and monthly studies on the operating performance of its production facilities.

o   Assess and implement the revitalization program to ensure reliable operation of production facilities.

 

  • Employee Risk

Risks associated with personnel issues are very broad, including accidents, health, pension plans, retirement, termination of employment, and more. To minimize such risks, the Company has initiated the following steps:

o   Involve all employees in the Workers Social Security program (Social Security) which includes insurance for Accidents (JKK) Death Benefits (JK) and Pension Plans (JHT) through the Body for the Implementation of the Labor Social Security Program in accordance with the legislations in force.

o   Providing health care to employees and their families.

o   Organizing Pension Plans and Old Age Retirement Programs.

o   Provide and grant the rights of employees in accordance with the Collective Labor agreement (CBA) between the Company and Labor Unions.

 

  • Environmental Impact Risk

Environmental pollution, for any reason, can have a negative impact on the work environment, employee health, and safety of workplace equipment and also create lawsuits. As evidence of the Company’s commitment to environmental protection, the Company has commissioned a unit specifically tasked with managing Safety, Health and Environment (K3LH). The Company has consistently and dutifully also implemented rules and regulations, including those set out in the Environmental Management System (ISO 14000) and Occupational Health Safety Management system (SMK3). The Company has always encouraged the implementation of being a Green Company by taking the motto “Go Green” among others, with the “One Man One Tree” reforestation act by planting mangrove trees on the coast involving high school students, the community, the caretakers and congregation of mosques in a tree planting program in the environment around the company site.

 

Risk Based Audit

Along with the change in status of the company into a public company in which the elements of transparency and accountability become the spotlight and focus the attention of investors, PT Krakatau Steel has started a new pattern in the internal audit activity, which is the implementation of the Risk Based Audit in 2011. The principle is the use of Risk Based Audit Unit procedures as one of the cornerstones in the conduct of the audit. Extreme and high priority risks are identified in the audit.

Some of the benefits gained from this process include:

  1. The internal audit process becomes more focused more on areas of Extreme/High priority risk level.
  2. Encourage the process of risk analysis, mitigation plans and periodic re-assessment by the entire operating unit (ERM application acceleration).
  3. Accelerating risk maturity/capability across organizational units.
  4. Allows more efficient use of resources (human, time).
  5. International best practice. Standard processes utilize appropriate tested and comparable role models.
  6. More focus on prevention of problems.