Outokumpu operates in accordance with the risk management policy approved by its Board of Directors. This policy defines the objectives, approaches and areas of responsibility in risk management. Risk management supports the Group’s strategy and also helps in defining a balanced risk profile from the perspective of shareholders as well as other stakeholders such as customers, suppliers, personnel and lenders. Outokumpu has defined risk as being anything that could have an adverse impact on activities that the company has undertaken to achieve its objectives. Risks can thus be threats, uncertainties or lost opportunities relating to present or future operations.
The Group's Executive Committee reviewed and updated key risks to the Group at a workshop held during the second half of 2008. The results of this review were presented to both the Audit Committee and to the Board of Directors in the fourth quarter. In 2008, the realized, most significant risks were related to structural issues in stainless steel markets and to the global financial turmoil, which had an impact on steel markets, the availability of finance and also on the Group’s ability to implement its planned investment projects. There were no significant fires, other damage to property or business interruption in 2008, which had a major impact on Outokumpu's operations.
Strategic and business risks
The most important strategic and business risks to Outokumpu’s operations have been identified as structural overcapacity in stainless steel production, competition in stainless steel markets and Eurocentricity. New stainless steel production capacity being built in China has led to overcapacity in cold rolled stainless production. To mitigate risks related to structural overcapacity and fierce competition in stainless steel markets, Outokumpu aims to maintain the cost efficiency of its operations, broaden the Group's product offering and increase sales to end-users by, for example, developing distribution channels. This strategy is supported by the Group's new organization which ensures that customers are served in an optimal way. Eurocentricity in Group operations and sales is considered a risk to Outokumpu's growth and success. To mitigate any possible impacts, Outokumpu is also aiming to grow outside Europe.
Operational risks
Operational risks arise as a consequence of inadequate or failed internal processes, employee actions, systematic or other events such as natural catastrophes, misconduct or crime. Key operational risks include a major fire or accident, variations in production performance, failures in project implementation and the inability to achieve a strong corporate culture and a onecompany approach.
To minimize damage to property and business interruptions that could be caused by fire at some of the Group’s major production sites, Outokumpu has systematic fire and security audit programs in place. Part of this type of risk is covered by insurance. Some 40 security and fire safety audits were carried out in 2008 with the Group's own resources, often jointly with technical experts provided by our insurers. A large part of the Group-wide instructions on security and crisis management were reviewed and updated during the year.
While Outokumpu has been systematically developing the Group's operational performance through excellence initiatives, risks associated with excessive variations in performance between different production processes can have a serious impact on the business. Outokumpu is mitigating these types of risk by expanding its Operational Excellence programs and building on strong Group-level functions such as Supply Chain Management and Group Sales and Marketing, thus enhancing strategy implementation.
Outokumpu's aim is to achieve a strong and unified corporate culture throughout its organization. The approach for all personnel is the creation of “One Outokumpu”, but significant cultural change can take time. The Group has taken some actions to strengthen leadership skills and the sharing of common values to create a unified corporate culture.
The Group's planned and announced major investment program was postponed almost entirely because of the financial market turmoil and the weakened stainless steel market at the end of the year. Some investments such as service center expansion in Willich, Germany and the establishment of a new plate service center in China are however being finalized. In preparation for the years ahead, Outokumpu is aiming to support the implementation of future investment projects and manage risks related to the Group's project portfolio by further developing our methods of project management.
Financial risks
Financial risks of the Group include exposure to market prices, the ability to maintain adequate liquidity and exposure to the risk of default. The most important financial risks are variations in the price of nickel, variations in the exchange rate between the Swedish krona and the euro, and the value of the us dollar. Outokumpu also has significant exposure to equity and loan security prices. Part of the Group's market risk is mitigated through the use of financial derivative contracts. In 2008, Outokumpu changed its approach to the management of nickel price risk and consequent hedging of nickel in the supply chain led to a significant positive impact on earnings in the second half of the year.
Liquidity and refinancing risks are taken into account in capital management decisions and, when necessary, in making investment and other business decisions. Outokumpu's aim is to mitigate a significant proportion of the Group's credit risk through insurance and other arrangements and in 2008 most commercial receivables were either insured or secured in other ways. In addition to commercial receivables, Outokumpu is exposed to credit risk in connection with loan receivables, which may be subject to negative impact if the turmoil in the financial markets continues. It is not typical for loan receivables to be insured or otherwise secured.