PRICE RISK MANAGEMENT

Steel prices are inherently volatile, making business planning a complicated and risky exercise. The introduction of steel futures at the London Metal Exchange and other futures exchanges provides a neutral tool that puts the steel industry back in control of price. Masscorp's specialist price risk management team employs a range of derivative tools to manage the Group's exposure to physical market price fluctuations and has forged an alliance with Bank Of India to offer price risk management services to external parties.

 

Masscorp has clearly defined its risk management governance framework and risk management procedures. The Group works to understand, reduce and control risk in every pillar of its business. Risk management procedures have been developed and refined as Masscorp and the industry have evolved. A number of the risk monitoring systems, including its internal approach to risk profiling, have been developed in conjunction with its lending banks.

Masscorp: Principal Risks and Risk Mitigate


Risk management processes and internal control procedures are established within business practices across all levels of the organisation. Risk identification, assessment and mitigation are performed both "Bottom-up", with more detailed assessment at operational level, as well as through "Top-down" assessment of strategic and market risk at the executive management and Board level. The CEO, the Executive Committee, and the Risk Management Committee as its subcommittee are responsible for specifying and implementing day-to-day risk management procedures .The Executive Committee co-ordinates risk management activities and risk reporting in the Group.


Masscorp has even categorised the principal risks into commercial risks, financial risks and overall risks that can adversely affect the performance of the Group.


It is recognised that risk management and internal controls can only provide reasonable and not absolute protection against risk. Risk appetite is not static and will be reassessed on an ongoing basis to ensure it continues to be aligned with goals and strategy.

  Commercial Risks   Description Mitigation  
  Competition Risk   The biggest strategic risk is that posed by competition, whether from established competitors, new entrants or from disintermediation by steel mills • Provision of value added services at attractive pricing.
• Continuous business development and process improvement
• Open relationships with counterparties
 
     
  Credit Risk   The risk of non payment by customers for goods or services delivered by Masscorp • Use of risk mitigate on on substantially all sales
• Detailed due diligence on new and existing clients
• Setting of credit and trading limits based on due diligence and credit policy
• Diverse customer base to spread risk
 
     
  Market Risk   The risk that steel and raw material price movements have on the value of the Company’s stocks and its net position of forward purchases and sales • Setting and enforcing strict unsold limits, both in terms of volume and value
• Specialist derivatives team to trade futures contracts
 
     
  Counterparty Risk   The risk that a customer or a supplier will attempt to cancel and not perform their contracted obligations, or in the case of a supplier, not return any prepayment or pre-financing   • Experienced traders with detailed knowledge of counterparties and incisive judgments
• Setting of credit and trading limits
• Emphasis on relationship management with key suppliers and customers
• Strong in-house legal team
 
       
  Operational Risk   The risk that operational mistakes (such as the incorrect entering of trades or a payment to the wrong counterparty) are made during the course of business and the subsequent failure to pick up those mistakes through internal control mechanisms   • Audit and internal control processes
• Strong IT platform and investment in a new fully
integrated enterprise resource planning system to consolidate all areas of operation and tighten risk controls
• Continuous review of core documents and
policies by the Group’s legal team
 
  Financial Risks   Description   Mitigation  
  Foreign Exchange Risk   The risk that exchange rates negatively
impact Masscorp’s trade profitability
  • The Group has very limited natural hedges and thus our policy is to hedge all transactions that have a foreign currency element on an individual transactional basis by using derivatives  
       
  Interest Rate Risk   The risk that rising interest rates negatively impact Masscorp’s overall profitability   • The Group has obtained a number of long term debt facilities (e.g. to finance mining assets and stockholding acquisitions) and expects to make greater use of interest rate derivatives over the coming years  
       
  Liquidity Risk   The ability to trade depends on the availability of credit facilities which is dependent on the banks’ willingness to
lend. The Group must have at all times
sufficient capital to absorb the risks it runs
  • The overwhelming majority of the Group’s
transactions are self-liquidating, which greatly reduces the exposure to cash flow risks.
• The Group restricts its gearing to a level typically between four and six times shareholders’ funds.
• Substantial level of unused bank facilities
• Total of over 50 lending banks affords protection against the consequences of any bank or banks ceasing to provide funds
 
       
 
Overall Business Risk
  (All of the above)   • Capital maintained at a set level in relation to the Value at Risk and Probable Loss Given Default