Risk

Risk management

Comment

Production and deliveries
Demand for Holmen’s products is affected by many factors, both political and macroeconomic, including production among 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 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 controlled by regulating water reservoir levels. In 2020, Holmen acquired the wood products company Martinsons, which strengthens Holmen’s market position for wood products. In addition, much of the company’s own forests are refined by its own industry as a result of the acquisition. The work to expand production capacity by 150 000 cubic metres at Braviken Sawmill was completed in 2020. The work to construct Blåbergsliden Wind Farm with a 143 MW capacity is underway and is expected to increase Holmen’s electricity generation from hydro and wind power by 35 per cent in late 2021. Production of paper was limited during the year because of weak demand in the wake of the pandemic. For information about how changes in deliveries would affect Holmen’s operating profit, given the circumstances on 31 December 2020, see the sensitivity analysis on page 45.
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. The price of paperboard was stable during the year, while the price of wood products rose as a result of home renovation projects in several markets, at the same time that production was limited in certain regions. Paper prices fell as a result of weak demand. The large supply of hydro power caused the price of electricity to fall compared with 2019. For information about how changes in prices would affect Holmen’s operating profit, given the circumstances on 31 December 2020, see the sensitivity analysis on page 45.
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 purchases. The Group also sells electricity from its hydro power and wind power assets, as well as from bioenergy, to the electricity grid. In net terms, the Group’s own electricity generation corresponds to about 50 per cent of its total electricity consumption. The price risk in this consumption is managed through physical fixed price contracts and financial hedging. 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 being reduced since used chemicals are recycled at the mills. On average, the price of wood and chemicals was somewhat lower in 2020 than in 2019. The price of net electricity consumption is 65 per cent hedged for 2021, 65 per cent for 2022, and 15–35 per cent hedged for 2023–2025. The Group’s net exposure to the price of electricity will decrease once Blåbergsliden Wind Farm is operational at the end of 2021. The nominal amount for financial hedging is SEK 625 million. For information about how changes in commodity prices would affect Holmen’s operating profit, given the circumstances on 31 December 2020, see the sensitivity analysis on page 45.
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. In 2020, 1 (0) case regarding breach of the Supplier Code of Conduct was reported. There is an active dialogue with an action plan in place in accordance with Holmen’s procedures. Suppliers associated with 90 per cent (90) of the Group’s purchasing volumes have signed the Code. Supply chain risks relating to the environment, labour legislation, human rights, business ethics and a sustainable purchasing have been mapped and an action plan has been formulated. 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, 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 2020, the Group’s trade receivables totalled SEK 2 015 million, of which 32 per cent (35) were insured against credit losses. During the year, credit losses on trade receivables had a SEK -14 million (-7) impact on earnings. Sales to the five largest customers accounted for 15 per cent (15) of the Group’s total sales in 2020.
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 against damage to property and interruption of business. The insurance excess varies from one facility to another, but the maximum is SEK 35 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 2020. During the year one major maintenance shutdown was carried out at Iggesund Mill, which went smoothly. The ongoing investment in the Blåbergsliden wind farm is progressing according to plan.
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 2020. Disruptions in IT support were avoided despite the heavy workload caused by the increase in remote work as a result of the pandemic. The 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.
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. Of Holmen’s total land area of 1 303 000 hectares, 195 000 hectares are set aside for nature conservation purposes.
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.
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 2020. To prevent spread, Holmen prioritised harvesting spruce bark beetle infested forests and the percentage of spruce sawn at Braviken Sawmill increased 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 biological diversity and raise the risk of wind and snow damage, fungal attack, insect damage and forest fires. Climate change could also impact the ability to carry out harvesting.
Holmen is developing seedlings and processes for planting, clearing and thinning to adapt our forests to a changed climate. Seeds from Holmen’s cultivation of seedlings are selected to grow and flourish in a changing 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 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. Ongoing climate risk analyses are conducted 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 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 2020, 37 (35) 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. The figure in 2020 was 4.3 (5.7) industrial accidents per 1 million hours worked. See also page 35. The most common accidents were slips, trips, cuts and pinch point accidents. The most significant areas of risk involve work with overhead cranes and vehicles with people in movement. As a result of the coronavirus pandemic, we implemented a large number of adaptations and measures to ensure a safe work environment for employees and others present in our operations.
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, we are marketing Holmen as an employer in digital channels and physical meetings. We have a strong Employer Value Proposition (EVP) with our sustainable business and the small big company as the prominent message. Our 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. Holmen has not furloughed personnel as a result of the pandemic during the year.
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. In 2020, 0 (0) cases concerning deviations from the business ethics policy or the parts of the Code of Conduct regarding business ethics issues were reported. During the year, 89 per cent of the designated functions completed the training on the Code of Conduct. See also page 35.
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. Since Holmen’s business is based on our sustainable use of the forest and land, it is important that laws and regulations, such as the Environmental Code, the Forest Inquiry and the EU taxonomy promote the development of green growth.
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. The outbreak of the coronavirus pandemic has had a negative impact on profitability within the Paper business area, while impact on other business areas has been limited. The Group worked continually in 2020 to take action to minimise the impact of the coronavirus outbreak, with a focus on the health and safety of our employees. To mitigate the effects of the UK’s exit from the EU, Holmen took a number of measures during the year; for example, logistics solutions and warehouses were adapted to ensure deliveries to customers and from suppliers. Holmen has also been active through dialogue, responses to reports, preparedness and advocacy work along with industry organisations to promote the development of green growth.

 

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Financial risks

Sensitivity analysis