Short-term risks and uncertainties
At Kemira, a risk is defined as an event or circumstance, which, if it materializes, may affect Kemira’s ability to meet its strategic, operational and financial goals in a sustainable and ethical way. Kemira’s risk management policy and principles proactively protect and help Kemira to reach the desired aggregate risk level and ensure the continuity of Kemira's operations.
Changes in customer demand
Significant and rapid decline in the use of certain chemicals (e.g. chemicals for packaging and board production) or in the demand of customers’ products (e.g. certain paper qualities) could have a negative impact on Kemira’s business, especially in the Paper segment. Also increased awareness of and concern towards climate change and more sustainable products may change customers’ demands, for instance towards water treatment technologies with lower chemical consumption, and this may impact negatively especially on Kemira Municipal & Industrial segment’s ability to compete. Failure from Kemira’s side to be prepared to meet and manage these changed expectations could result in loss of market share.
In order to manage and mitigate this risk, Kemira systematically monitors leading indicators and early warning indicators that focus on market development. Kemira has also increased its focus on sustainability and is further improving coordination and cooperation between Business Development, R&D and Sales units in order to better understand the future needs and expectations of its customers. Kemira’s geographic and customer-industry diversity also provides partial protection against this risk.
Changes in laws and regulations
Kemira’s business is subject to various laws and regulations which are relevant in developing and implementing Kemira’s strategy. Although laws and regulations can generally be considered as an opportunity for Kemira, certain new legislative initiatives supporting for instance the use of biodegradable raw materials or biological water treatment, limiting the use of aluminium or phosphates, or relating to recovery or recycling of phosphorus, may also have a negative impact on Kemira’s business. Significant changes, for instance in chemical, environmental or transportation laws and regulations (e.g. REACH, EU sulphur directive) may generate an excessive amount of administrative work and create a risk of not fulfilling customers’ compliance requirements on time. Such regulatory changes may also impact on Kemira’s profitability through increase in production and transportation costs. At the same time such changes may also create new business opportunities for Kemira.
Kemira is continuously following regulatory discussions in order to maintain the awareness of the contents and planned changes of those laws and regulations which may have an impact, for instance, on its sales, production planning and product development needs. Regulatory effects are systematically considered in strategic decision-making. Kemira also participates actively in regulatory discussions whenever possible and justified from the industry or business perspective.
Kemira operates in a rapidly changing and competitive business environment, which represents a considerable risk to meeting its goals. New players seeking for a foothold in Kemira’s key business segments may use aggressive means as a competitive tool, which could affect Kemira’s financial results. Major competitor consolidations are considered to be risks which may result in weakening of Kemira’s market position.
Kemira is seeking growth in segments that are less familiar and where new competitive situations prevail. In the long-term, completely new types of technology may considerably change the current competitive situation. This risk is managed both at the Group and segment levels through continuous monitoring of the competition. The company aims at responding to competition with active management of customer relationships and continuous development of its products and services to further differentiate itself from the competitors.
Price and availability of raw materials and commodities
Continuous improvement of profitability is a crucial part of Kemira’s strategy. Significant and sudden increase in the costs of raw materials, commodity or logistic costs could place Kemira’s profitability targets at risk if Kemira was unable to pass such increase to product prices without delay. For instance, high oil and electricity prices could materially weaken Kemira’s profitability.
Changes in the field of raw material suppliers, such as consolidation or decreasing capacity, may increase raw material prices. Also changes in material demand in industries that are main users of certain raw materials may lead to significant raw material price fluctuations. Poor availability of certain raw materials may affect Kemira’s production if Kemira fails to prepare for this by mapping out alternative suppliers or opportunities for process changes. Raw material and commodity risks can be effectively monitored and managed with Kemira's centralized Supply Chain Management function (SCM). Risk management includes, for instance forward-looking forecasting of key raw materials and commodities, synchronization of raw material purchase agreements and sales agreements, strategic investment in energy generating companies and hedging a portion of the energy and electricity spend.
Uncertainties in the global economic development are considered to include risks, such as low-growth period in the global GDP, which could have a negative impact on the demand of Kemira’s products. Further weak economic development may also have serious effects on the liquidity of Kemira’s customers, which could result in increased credit losses for Kemira. Unfavorable market conditions may also increase the availability and price risk of certain raw materials. Kemira’s geographical and customer-industry diversity provides only partial protection against this risk.
A detailed account of Kemira’s risk management principles and organization is available on the company’s website at www.kemira.com. An account of the financial risks is available in the Notes to the Financial Statements 2013. Environmental, hazard, supplier and talent mananegment risks are discussed in Kemira’s corporate responsibility report that will be published as part of the Kemira Annual Report 2013.