Risk

Risk management

Comment

Production and deliveries
Changes in demand for paperboard, paper and wood products affect the ability to achieve full production at the Group’s facilities and can lead to lower income. Income may also be impacted if harvesting from our own forests 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 regulated by controlling water reservoir levels. The cost position is continually strengthened by targeted investments. In 2019 investments were made to eliminate bottlenecks at Iggesund Mill, enabling increased pulp production. Work on expanding production capacity by 150 000 cubic metres at Braviken Sawmill is proceeding according to plan and this is expected to enter service in 2020. During the year the decision was taken to invest in Braviken Paper Mill to continue the transition towards bright, light products based on fresh fibre. In December the decision was taken to construct Blåbergsliden Wind Farm with a 143 MW capacity, which is expected to increase Holmen’s electricity generation from hydro and wind power by 35 per cent.
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 and electricity can to some extent be managed by shifting harvesting from year to year and regulating reservoir water levels in order to shift electricity generation over the year. In 2019 paper and wood product prices decreased from a high level as a result of a worsened market balance, while paperboard prices were stable. Log prices decreased slightly in southern Sweden as a result of temporarily high supply. Electricity prices generally remained at the same level as in 2018.
Commodity prices
Wood, electricity and chemicals are the most significant inputs and price changes affect profitability.
The harvesting of logs from our own forests essentially corresponds to consumption at our own sawmills. Pulpwood from our own forests and wood chips from our own sawmills supply just under 50 per cent of consumption at our paperboard and paper mills. 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 purchases. The Group also sells electricity from its hydro power and wind power assets to the electricity grid. In net terms, the Group’s own electricity generation corresponds to just under 50 per cent of its total electricity consumption. The price risk in this consumption is managed through physical fixed price contracts and financial hedging. There is a significant need for thermal energy, but this is produced locally at each mill from residual products. Chemicals are a significant input, particularly in paperboard production, but the need is being reduced and used chemicals are recycled at the mills. The cost of input goods levelled out 2019 following sharp increases in the previous year. The price of net electricity consumption is 80 per cent hedged for 2020 and 65 per cent hedged for 2021. The nominal amount for financial hedging is SEK 326 million. The Group’s net exposure to the price of electricity will decrease once Blåbergsliden Wind Farm is operational at the end of 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.
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 against damage to property and interruption of business. The insurance premium varies from one facility to another but the maximum is SEK 30 million for a single claim. The Group has liability insurance that also covers sudden and unforeseen environmental damage affecting third parties. No event causing significant damage occurred in 2019.
Forest
Forest fires, grazing by wild animals and insect pests are risks in growing forests.
The Group’s forest holdings are not insured. They are widely dispersed over large parts of Sweden and the risk of extensive damage being incurred simultaneously is deemed to be low. 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. Central Europe has been severely affected by spruce bark beetle infestations in recent years, resulting in a high supply of spruce saw logs at lower prices. Southern Sweden was also affected by spruce bark beetle infestations in 2019. Holmen temporarily switched production at Braviken Sawmill in the autumn to only sawing spruce in order to handle damaged logs.
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, internal 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 2019 the Group’s trade receivables totalled SEK 2 005 million, of which 35 per cent (43) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -7 million (-1) impact on earnings. Sales to the five largest customers accounted for 15 per cent of the Group’s total sales in 2019.
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.
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 hired an external partner, EcoVadis, to follow up supplier compliance with the Code in the areas of human rights, health and safety, the environment, business ethics and sustainable purchasing. No cases regarding breaches of the Supplier Code of Conduct were reported in 2019 (none in 2018). By the end of 2019, suppliers accounting for just under 90 per cent (85) of the Group’s purchasing volumes had signed up to the Supplier Code of Conduct. Supply chain risks relating to the environment, labour legislation, human rights, business ethics and sustainable purchasing have been mapped and an action plan established. Holmen is subject to the UK Modern Slavery Act and a report on this is available at holmen.com.
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 these protective measures to address changes in the risk profile. Business operations were not affected by IT incidents in 2019.
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 biological diversity and raise the risk of wind and snow damage, fungal attack, insect damage and forest fires. Climate change could also impact our ability to carry out harvesting.
Holmen is developing seedlings and processes for planting, cleaning and thinning to adapt our forests to a changing climate. Seeds from Holmen’s cultivation of seedlings are selected to grow and flourish in a changeable climate and 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. The risk of impact on Holmen’s operations from climate change is being managed through Holmen’s operational continuity plannings. Risks concerning energy consumption and greenhouse gas emissions are managed through our ISO-certified environmental and energy management systems. The Forest business area conducts ongoing climate risk analyses to create healthy, resilient forests suited to a changing climate. Climate change is leading to greater demand for Holmen’s products as our customers want renewable alternatives to fossil-based products.
Environment
Production disruptions can cause breaches of emissions conditions set for the business by environmental authorities, which could impact the environment.
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 2019, 35 (32) environmentally related incidents were reported to the supervisory authorities. The nonconformities were not of a significant nature in terms of environmental impact or impact on profits.
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. Work involving overhead cranes and vehicles constitutes the most significant areas of risk. The figure in 2019 was 5.7 (4.9) industrial accidents per 1 million hours worked. See also page 33. The most common accidents were slips, trips and pinch point accidents. Accidents resulting in cuts and lacerations decreased during the year following the implementation of measures.
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.
Based on Group-wide employer branding efforts, we market Holmen as an employer using digital channels and by meeting people in person. Communication is applied both generally and directly at the primary target groups. Our efforts have resulted in many more applicants for those positions that we are looking to fill. Voluntary employee turnover is stable and surveys of new employees show that new employees have job satisfaction and that young people joining from university remain with the company, which is a plus.
Business ethics
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. Training on business ethics is provided for management groups and for employees deemed to encounter issues covered by the business ethics policy, such as marketing and sales departments and purchasers. 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. No cases concerning deviations from either the business ethics policy or the parts of the Code of Conduct regarding business ethics issues were reported in 2019. A few other events linked to the Code of Conduct were reported during the year. All have been addressed in line with Holmen’s internal processes. Steps have been taken and no further action is required.
Regulatory risks
Laws and rules in countries in which the Group operates affect how business activities can be conducted. Rules on how forests may be managed could affect future growth and harvests. Rules on the use of fresh fibre rather than recycled fibre, as well as legislation regarding water-based operations, could have an impact on the Group’s competitiveness.
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 certain political 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. On issues regarding the right to manage the forest and water-based operations, Holmen has participated actively in work with business organisations and in responses to consultation on relevant subjects. The UK’s exit from the EU could affect the markets on which Holmen sells its products. Holmen also has production in the UK that could be affected. We are following developments closely, but the outcome and consequences are hard to predict. In 2019 the EU introduced a new directive regulating the use of certain disposable plastic items. Holmen takes a positive view of the directive as it could mean opportunities for the forest industry’s renewable products.

 

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