Risk

Risk management

Comment

Production and deliveries
Demand for Holmen’s products is affected by many factors, including political and macroeconomic factors, production by European manufacturers, changes in imports to Europe and opportunities for profitably exporting from Europe. Changes in demand for Holmen’s products affect the ability to achieve full production at the Group’s industries and can lead to lower income. Income may also be impacted if harvesting from our own forest needs to be limited as a result of lower demand and variations in precipitation and wind, which govern generation from hydro and wind power.
Holmen endeavours to maintain a good cost position through large-scale production at well-invested production facilities, efficient logistics solutions and good control over the supply of wood. Together with longstanding customer relationships and strong product brands, this also increases the ability to maintain a high level of production amid more difficult market conditions. Changes in demand for wood may be met by shifting harvesting from our own forests from year to year, while production of hydro power during the year can be controlled by regulating water reservoir levels. In 2021, Holmen increased production of wood products by 43 per cent as a result of the acquisition of Martinsons, which occurred in late 2020, and the expansion of Braviken Sawmill. Towards the end of the year, Holmen’s new Blåbergsliden Wind Farm gradually began to generate electricity. At full production, the wind farm will generate 0.4 TWh annually, which will increase Holmen’s production of hydro and wind power by 30 per cent. For information about how changes in deliveries would affect Holmen’s
operating profit, given the circumstances on 31 December 2021, see the sensitivity analysis.
Selling prices
The market balance in each product segment governs the selling price and affects income.
Holmen has limited possibilities to make rapid changes to its product range in the event of changes in price, but it adjusts its product focus towards those products and markets deemed to have the best long-term conditions, and by having a broad customer base and offering across a number of product areas. Changes in the price of wood can be managed to some extent by shifting harvesting from year to year and changes in the price of electricity can be managed by regulating reservoir water levels in order to shift electricity generation over the year. Prices for wood products increased sharply during the first half of the year because of strong demand, but during the second half, prices fell somewhat when customers phased out their stocks. Paper prices fell at the turn of the year, 2020/2021, but capacity reductions and a shortage of recycled paper and energy caused prices to rise in the
autumn. Paperboard prices rose towards the end of the year because of strong demand. Electricity prices rose during the year, but with great local variations. On average, Holmen’s electricity price was 50 per cent higher than in
2020. For information about how changes in prices would affect Holmen’s operating profit, given the circumstances on 31 December 2021, see the sensitivity analysis.
Raw materials
Wood, electricity and chemicals are the most significant input goods and price changes affect profitability. Holmen’s costs depend on the price trend for input goods, as well as on how well the Group succeeds in making production and administration more efficient. There is a risk that the Group’s costs will increase if there is a shortage of raw materials, or if prices increase for input goods.
Half of the Group’s wood needs are covered by harvesting from the Group’s own forests, while the remainder is purchased from private forest owners. The Group is largely in balance in terms of pulp as a result of the integrated production process. The paperboard business generates almost all the electricity required at its own mills, while electricity for paper manufacturing is supplied from external electricity purchases. The price risk in this consumption is managed through physical fixed price contracts and financial hedging. The Group also sells electricity from its hydro power and wind power assets to the electricity grid. The need for thermal energy is great and is met locally through recycling and production from residual products. Chemicals are a significant input, particularly in paperboard production, but the need is declining since used chemicals are being recovered at the mills. The price of electricity increased sharply in southern Sweden where the majority of Holmen’s consumption occurs. The rise in electricity prices was partially offset by hedges that had been previously made. Holmen hedges parts of the consumption by the Paper business area. For 2021, 70 per cent of consumption was hedged. At year end, 85 per cent of electricity consumption was hedged for 2022. For 2023, 65 per cent has been hedged, while for 2024 the figure is 20 per cent. As a result of the strong sawmill economy, log prices rose, while pulpwood prices were stable. For information about how changes in commodity prices would affect Holmen’s operating profit, given the circumstances on 31 December 2021, see the
sensitivity analysis.
Suppliers
Deficiencies in the supply chain for inputs in terms of security of supply and quality can lead to production disruptions. Suppliers that do not meet Holmen’s requirements can also have a negative effect on operations. There is also a risk that essential raw materials are not delivered because of changes in laws and regulations or other external factors.
Holmen endeavours to have at least two approved suppliers per area of use. In addition, Holmen’s Supplier Code of Conduct is included in all new contracts. It contains requirements on sustainable development, including by respecting internationally recognised principles on anti-corruption measures, human rights, health and safety and the environment. Since 2017, Holmen has engaged an external party, EcoVadis, to monitor suppliers regarding their compliance with the Code. Holmen is subject to the UK Modern Slavery Act and a report on this is available at holmen.com. Compliance with forest management contractor agreements is ensured through site visits in the forest and all forest management contractors are trained in forest management and labour law and are informed about where to turn if irregularities should occur. In 2021, 2 (1) cases regarding breach of the Supplier Code of Conduct were reported. In the event of such breaches of the Code, an active dialogue with an action plan is in place in accordance with Holmen’s procedures. Suppliers associated with 85 per cent (90) of the Group’s purchasing volumes have signed the Supplier Code of Conduct. Supply chain risks relating to the climate, environment, labour legislation, human rights, business ethics and a sustainable purchasing have been mapped and an action plan has been formulated. The largest suppliers of input products are engaged in dialogues regarding the reduction of fossil emissions. Despite the challenges associated with the pandemic, Holmen has been able to maintain its deliveries of essential raw materials to such an extent that production has not been negatively impacted.
Customer credits
The risk of the Group’s customers being unable to fulfil their payment obligations constitutes a credit risk.
The risk that the Group’s customers will not fulfil their payment obligations is limited by means of creditworthiness checks, credit limits per customer and, in some cases, by insuring trade receivables against credit losses. Credit limits are continually monitored. Exposure to individual customers is limited At 31 December 2021, the Group’s trade receivables totalled SEK 2 393 million (2 015), of which 34 per cent (32) were insured against credit losses. During the year, no credit losses on trade receivables had an impact on earnings (SEK -14 million). Sales to the five largest customers accounted for 14 per
cent (15) of the Group’s total sales in 2021.
Facilities
Production equipment can be seriously damaged, for example, in the event of a fire machine breakdown or power outage. This can lead to supply problems, unexpected costs and reduced customer confidence. Production facilities require ongoing maintenance. Major
maintenance shutdowns can entail higher costs and greater loss of production than planned. Investments in non-current assets can also be more expensive than initially planned.
Damage prevention measures, regular maintenance and continual upgrades can minimise the risk of damage to facilities. Training of employees promotes participation, knowledge and awareness about these risks and how they can be countered. Holmen insures its facilities at replacement value and has insurance against interruptions in the event of unforeseen events. The Group also has liability insurance that covers sudden and unforeseen environmental damage affecting third parties. The turbine in the biofuel boiler at Workington was damaged at the end of June and was out of operation for the rest of the year. Paperboard production was not affected, but energy costs rose
when electricity and gas had to be purchased at the same time that income from green electricity certificates was not received during the period that the turbine was not running, causing costs to increase by SEK 330 million. The turbine is expected to be restarted during the first quarter of 2022. An insurance investigation regarding the damage is underway. During the year major maintenance shutdowns were carried out at the
paperboard mills in both Iggesund and Workington, with an adverse effect on profit of SEK 310 million. In 2022, a major maintenance shutdown is planned at Iggesund Mill, which is expected to have a negative impact on profit of SEK 150 million.
IT systems
Efficient IT support is required to be able to plan and manage the production and when handling sales and purchasing. Disruptions in IT support and unauthorised access to information can have significant negative effects on the business.
Operating disruptions and unauthorised access are prevented by security measures and preventive measures in the form of appropriate physical protection, reliable server operation and secure networks. Measures and procedures are in place to minimise the risk of interruption and to manage situations if interruptions occur. Holmen is continually developing protective measures to address changes in the risk profile. Business operations were not affected by IT incidents in 2021. A regularly recurring IT security training course was held for employees during the year.
Forest management
Holmen’s right to manage its own forest is crucial for maintaining its value. There is a risk that requirements to allocate areas for purposes other than forestry could increase in the future. Such a development could have a
negative impact on the value of Holmen’s forest assets, and mean that forestry methods may need to change, which could reduce the harvest and increase costs
Land and forest management are regulated both nationally and at the EU level. In order to be able to engage in active and sustainable forestry, it is important that laws and regulations such as the Environmental Code, the Forest Inquiry, the EU’s forest strategy and LULUCF do not restrict the conditions necessary for sustainable operations. Holmen participates in national and international industry organisations to exert an influence
on relevant political and regulatory issues.
During the year, the right to use the forest in line with Swedish laws and regulations was questioned within the EU. Holmen has actively participated, both on its own and through industry organisations, in the debate to influence the EU position, including by elucidating the positive climate effects associated with a managed forest.
Damage to forests
Wild game can damage the forest when grazing, resulting in both deterioration of the quality of the trees and reduced forest growth. Insect pests are another risk factor; for example, the spruce bark beetle can damage spruce forests. Storm and snow damage, fungal attacks and forest fires are other examples of damage that must be addressed and managed in forestry.
Holmen’s forest holdings are scattered across large parts of Sweden and the risk of extensive damage occurring simultaneously is considered to be low, for which reason the Group does not have insurance cover for its forest holdings. To reduce the extent of grazing by wild animals, active efforts are undertaken on Holmen’s land to maintain game at the correct population level. Insect pests such as pine weevils are combatted by waxing seedlings and infested forest is harvested as soon as possible to prevent spread. The spruce bark beetle infestation continued in southern Sweden in 2021. To prevent spread, Holmen prioritised harvesting spruce bark beetle infested forests and the percentage of spruce sawn at Braviken Sawmill was adapted to take care of the damaged logs.
Climate change
The Swedish Meteorological and Hydrological Institute’s forecasts show that average temperature, precipitation and soil moisture will increase in Sweden. A warmer climate could increase the growth of our northerly growing forests with a longer growth period, more precipitation and higher levels of carbon dioxide in the air, aiding photosynthesis. It could also affect the ecosystems in that biological diversity is altered, while the risk of storm and snow damage, fungal attack, insect damage and forest fires increases. Climate change could also impact the ability to carry out harvesting, for example because of the increased risk of damage to the land.
Holmen is developing seedlings and processes for planting, clearing and thinning to adapt our forests to a changed climate. Seeds for Holmen’s cultivation of seedlings are selected to grow and flourish in a changing climate. When planting, we choose tree species based on the specific conditions of the soil to ensure the trees can better withstand extreme weather such as storms, rain and drought. Since shorter periods of frozen ground can make harvesting more difficult in the winter, this work is being adjusted through planning and by relocating machines to areas with better conditions. Ongoing climate risk analyses are conducted to create healthy, resilient forests suited to a changing climate. The risk of impact on Holmen’s sites from climate change is being managed through Holmen operational continuity planning. Risks concerning energy consumption and greenhouse gas emissions are managed through our ISO-certified environmental and energy management systems. Demand for Holmen’s products is rising in response to the market’s ambitions to counteract climate change, since our customers want renewable alternatives to fossil-based products.  More information at climate risks and opportunites
Environment and permits
Holmen runs operations that require environmental permits. The permits specify conditions regarding permitted production volumes and permitted emissions to air and water. Production disruptions can cause breaches of emissions conditions set for the business by environmental authorities, which could impact the environment. In places where Holmen has conducted industrial operations, the need for remediation may entail future costs.
Environmental measures are organised and conducted in accordance with Holmen’s environmental and energy policy. In the event of process disruptions, the environment takes precedence over production. Risks are prevented and managed through regular own checks, checks by authorities and environmental risk analyses, as well as through the use of certified environmental and energy management systems and chain of-custody certification. In consultation with the authorities, Holmen is conducting investigations to assess the need for remediation at former industrial sites. In 2021, 53 (37) environmentally related incidents were reported to the supervisory authorities. One of the nonconformities was of a significant nature in terms of impact on results and was due to a turbine breakdown in Workington. Corrective measures were taken to deal with these cases, in line with the environmental management system of the operations concerned.
Health and safety
Incidents and accidents at the workplace have an effect on human life and health. This could also lead to production disruptions and increased costs.
Good health and safety is a priority at all levels of management in the Group. Certified management systems, Group-wide targets relating to work accidents, continual training of personnel to increase risk awareness, procedures for risk observation and incident and accident reporting, and risk assessment of tasks and work by contractors are examples of activities to achieve a high level of safety in the workplace.  In 2021, the rate of industrial accidents was 5.6 per 1 million hours worked (4.3). See also page 37. The most common accidents were slips, trips and crush injuries. The most significant areas of risk involve work with overhead cranes and vehicles with people in movement. As a result of the coronavirus pandemic, a large number of adaptations and measures were implemented to ensure a safe work environment for employees and others present in the operation.
Talent management
Skilled and motivated employees are key to being able to conduct long-term business operations with good profitability. Retirements increase the need to attract new personnel, which can be challenging.
With Holmen’s employer brand, Holmen is being marketed as an employer in digital channels and physical meetings. A strong Employer Value Proposition (EVP) featuring Holmen’s sustainable business and the small big company is the prominent message. Employer branding efforts in digital channels at the Group level, combined with local efforts at our operating sites, provide a good foundation for an inflow of interested applicants to our vacant positions. The voluntary employee turnover is stable and annual surveys show that new employees appreciate Holmen as an employer, both the culture and the job opportunities. During
the year, managers were trained in skills-based recruitment in order to increase the precision of recruitment and to increase diversity.
Business ethics risks
Nationally and internationally, customers and partners place requirements on Holmen as a stable and reliable supplier that has good business ethics and clear sustainability principles. Deviations from principles and
policies could have a negative impact on reputation and business relationships.
Holmen’s Code of Conduct, business ethics policy and associated guidelines provide clear guidance on how to maintain good business ethics when dealing with external contacts in various markets. Holmen’s Code of Conduct also provides guidance on human rights, workers’ rights and the environment. These areas are clarified in Holmen’s policies and
related guidelines. Managers and employees in sales, marketing, purchasing, finance, HR, information, market communication, projects
and Group staffs have all received training in all aspects of Holmen’s Code of Conduct.
No identified or reported cases concerning deviations from the business ethics policy or the parts of the Code of Conduct or Supplier Code of Conduct regarding business ethics issues were
reported in 2021. In 2020 and 2021, 86 per cent of office workers and managers completed the training on the Code of Conduct. During the year Holmen, updated the whistleblower policy in line with the new law to protect people who report misconduct. We had no lawsuits during the year regarding corruption against the organisation or its employees.
International, political and legal risks
Holmen is active in a global market and sells products to many countries around the world. Because of this geographical spread, Holmen is exposed to political risks, conflicts, natural disasters, epidemics and pandemics. Moreover, Holmen is obligated to comply with laws and regulations where Holmen conducts business, including in areas such as the environment,
real estate, labour law and taxation. Changes in laws and regulations may affect conditions for Holmen’s operations and lead to increased costs for regulatory compliance.
Holmen participates in national and international industry organisations whose purpose is to handle the monitoring of social trends, advocacy and put forward Holmen’s position and view on relevant political and regulatory issues. Contact is established with local representatives and the general public in areas where the Group has operations. This takes place, for example, through consultation and information meetings and
through meetings with decision-makers. More unpredictable risks that may arise, such as shutdowns as a result of disease outbreaks or political unrest, are managed through ongoing external monitoring, close dialogue
and coordination with industry organisations to maintain the best possible preparedness.
Holmen worked continually in 2021 to take action to minimise the impact of the coronavirus pandemic, with a focus on the health and safety of our employees. Holmen has been active through dialogue, consultation responses, preparedness and advocacy work, on its own and together with industry organisations, to promote the growth of bio-based and fossil-free activities.

 

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Financial risks

Sensitivity analysis