RISK MANAGEMENT

BUSINESS RISKS are potential incidents which could negatively affect the achievement of vision, mission, goals and targets of the Company or organizational unit. Risk management is an effort to minimize the negative influence of various sources of risk faced by the Company’s business activities so that Company’s objectives can be achieved optimally.  The Good Corporate Governance & Risk Management Division is responsible to setting up the infrastructure, implementation, socialization, implementation coaching and management of company business risk. Risk Management Implementation in each business unit is based on the Corporate Risk Management Implementation Manual. Identified Risks are grouped into four types of risk, named: strategic risk, financial risk, operational risk and environmental risk. All identified risks are recorded in a database of risks within the Risk Management Information System (SIMARIS) of the Company.

The four types of risk can be described as follows:
1. Strategic Risk are risks that are strategic for the survival of its business, such as: technological developments, government policies, investment plans, new product development, and other related risks.
2. Operational Risk is a risk of loss due to a failure or inadequacy in the quality control process of the business process.
3. Financial Risk is a risk that directly or indirectly causing losses in the financial sector.
4. Environmental Risk is a risk that causing environmental degradation, environmental pollution, social disruption, negative impact on the company's reputation and other related issues.

All sources of external and internal risks need to be systematically anticipated to prevent issues that negatively affect the Company in the future,

EXTERNAL RISKS

Economic Risk

The steel industry is an industry which produce raw material that meets the basic needs of downstream steel industries, especially infrastructure, property, automotive, machineries and equipment. Therefore, the Company’s business performance is very much affected by the national, regional and even international economic conditions. The Company has taken strategic steps to anticipate various scenarios and events that could give negative impact for the Company's business continuity. Similarly, to anticipate the risks of international business, strategic steps have been taken to prevent the negative impact which could adversely affected Company.

Raw Material Scarcity Risk

Most of the Company's main raw materials, named iron ore and scrap, are sourced from imported supplies of raw materials. This makes the aspect of raw materials become one of the risks that need a systematic approach in its management. Some of the efforts which made to minimize the negative impacts from the scarcity risk of raw materials include, among others:

• Collaborating with other SOEs to build a local raw materials processing plant in South Kalimantan (PT Meratus Jaya Steel) which is currently still in the stage of project completion
• Encouraging the establishment of a local scrap processor to support the needs of domestic scrap raw material
• Collaborating with University’s research institutes and private sector in conducting research to maximize the utilization of local raw materials
• Conducting Long-term Supply Agreement (LSA) with raw material suppliers that have international reputations
• Expanding the network of suppliers to ensure the long-term supply of raw material needs
• Database improvement and evaluating supplier performance
• Building an incentives system for suppliers who were proved loyal in supporting the business activities of the Company

Energy Scarcity Risk (Gas and Electricity)

After raw materials, energy is a major input for the steel industry. In order to minimize the negative impact from the energy scarcity risk, the Company has made the following efforts:

• Preparation, assessment and intensive approach with Pertamina and PT PGN (as the supplier of oil and gas) and PT PLN (as the electricity supplier) to get the LTA / MOU for the Company needs
• Promote an internal program for energy efficiency through efficiency programs in all operational areas
• Review the possibility of using alternative technologies that are not based on gas (non oil gas-based)
• Optimization of production operational patterns to minimize the level of energy consumption

Risk of Assets Damage and Loss

To control the risk of damage and loss of assets, the Company made the following efforts:

• Develop a Company Security Management System (SMP KS) as a preventive and protective measure against damage or loss of assets belonging to the Company. Occupational Health & Safety Management System (OHSAS 18000) and Environmental Management Systems (ISO 14001) as the preventive and protective effort against assets damage or loss that belonging to the Company
• Develop Safety Management Systems Company (SMP-KS) as the preventive and protective effort against assets damage or loss that belonging to the Company.
• Insuring all assets and property that have a risk of loss due to damage, fire, loss and other possible causes are insured by Company insurance.
• Insuring all goods (cargo) that are in expedition (transportation) by considering the terms of delivery which agreed upon with the seller or buyer.
• Insuring all construction and erection projects which were done by contractors with due regard to the applicable contracts.
• Insuring all possible risk of loss that may occur to third-party and personnel assets that are located on the Company’s offices and plants areas.
• Establishing Emergency Response Coordination Team (TKTD) in charge of organizing the Emergency Preparedness in PT KS

Currency Exchange Fluctuations Risk

The floating exchange rate system makes the movement of the Rupiah exchange rate against foreign currencies, including the US dollar, is difficult to anticipate. The possibility of rupiah devaluing against dollar or other foreign currencies is very open. For PT Krakatau Steel (Persero), rupiah depreciation will greatly affect its cost structure; considering the large dependence on imported raw materials.

To mitigate this risk, the Company conducted the following efforts:
• Establish a hedging policy, particularly for trade transactions.
• Fixing the selling price with adjustments for the changes of exchange rate.

Business Competitors Risk

The Indonesian steel industry is relatively open from the entry of similar types of steel products from abroad (imports), so that the national steel market is very open to international supplies of steel.

To manage this risk, the Company made efforts to:

• Improve the cost competitiveness in all sectors
• Ensure the speed and decision making in handling consumer claims.
• Build customer loyalty by:
  • Striving to meet the targets for on time delivery and quality products according to consumer demand.
  • Conducting customer gatherings which held every year to strengthen the company's relationship with its customers, as well as to increase customer loyalty.
• Establish the Distributors network.
• Conduct annual customer satisfaction surveys to determine the level of customer satisfaction with our products, as well as to identify aspects that need to continuous improvement.
• Active role in the management of National Steel Industry Association ( IISIA) and Regional ( SEAISI) in order to establish communication and interactions among the Steel Manufacturers

Risk of International Regulations

The fluctuation of globalization has resulted in various new regulations which caused the stringent of business competition for the entire production chain; from raw materials procurement to distribution and sale of finished products. To mitigate these risks, the Company has undertaken the following steps:

• Conduct regular assessments of the impacts on international regulations to the Company.
• Provide solutions to the concerned regulators as an effort to protect the national steel industry.

Risk of Government Policy

Liberalization trends in world trade, together with the macro social economic domestic conditions, influence the government policy, for example, policies in concerning the privatization of State Owned Enterprises (SOEs). As a step to anticipate the negative impacts that may arise, the Company took various efforts to:

• Review the impact of government policy towards the Company and act upon them.
• Conducting institutional relationships with related agencies for the development of understanding and support company
• Offer solutions to the related regulator to protect the interests of the national steel industry.

INTERNAL RISKS

Plant Operations Risk

To mitigate the risk of disruptions in plant operations, the Company undertook the following efforts:

• Consistently implement the predictive and preventive maintenance programs according to schedules which already set.
• Identify Critical Equipment in every plant and Supporting Unit, to be programmed on maintenance and procurement management and spare part availability.
• Conduct annual maintenance programs according to the schedules which already set.
• Conduct daily, weekly and monthly production reviews on the operating performance of production facilities.
• Review and implement the revitalization program to ensure reliable operations of production facilities.

Employment Risk

Risk which associated with employment is very variative with the difference level of risk. That risk can be formed as work accidents, health, remuneration, employees welfare, lack of potential employee, and even the terminating of working relationship. To mitigate these risks, the Company took the following steps:

• Developing Human Capital Maintenance with the advanced aspects of Health Care and Wellfare to ensure the health and employees welfare.
• Formulate the Operational Health, Safety and Environmental standards Procedure.
• Conduct induction courses program for new employees.
• Safety campaign, health and the protection of working environment
• Participating all employees in the Employee Social Security program (Jamsostek), which include insuring Work Injuries (JKK), Death Benefits (JK) and Retirement Benefits (JHT) through the implementation of Social Security Program Implementation Body in accordance with current applicable legislations.
• Provide health facilities for employees and their families.
• Provide retirement plans and programs for employees.
• Provide and give the employee rights in accordance with the Collective Labor Agreement (CLA) between the Company and the employee Union.

Risk of Environmental Impact

Environmental pollution, for any reason, can give negative impacts on the working environment, employee’s health, safety equipment as well as causing possible legal action. As the proof of our commitment to protect the working environment, PT Krakatau Steel (Persero) Tbk has done:

• Establish and assign working units which are specifically responsible to manage safety, health, and Environment (K3LH).
• Company has consistently and earnestly implement the rules and regulations as well as including those already set in the Environmental Management System (ISO 14000)
• Company Environmental impact analysis (EIA) for plant operation activities and the Environmental Monitoring Plan (RPL) or Environmental Plan (RKL) to do it consistently.
• Completing the Production Unit with Equipment / Installation of pollution control formed; dedusting system, Water Treatment Plant, Waste Management industry (sludge treatment) etc.
• Applying the concept of zero waste in their production activities in order to maximize productivity and minimize negative impacts of industrial waste.
• Held Community Development Forum (BILIK) as a forum of communication between the Company, Communities and Local Government related to issues of environmental management