Effective compliance with and systematic execution of 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.
Risk Management Policy
The key principles of Kemira’s risk management are defined in the Kemira Group Risk Management Policy. In the policy, a risk is defined as a potential event or circumstance, which, if it materializes, may affect Kemira’s ability to meet its strategic and operational goals in a sustainable and ethical way. In addition, Kemira has Group guidelines and other policies in place that specify management objectives, responsibilities and risk limits in greater detail.
Kemira Oyj’s risk management is based on the Finnish Corporate Governance Code, the Kemira Code of Conduct and the company’s values. The principles of Kemira’s risk management are also in compliance with international risk management frameworks and standards such as ISO 31000 (Risk Management – Principles and Guidelines).
In accordance with its risk management process, Kemira aims at systematic and proactive assessment and treatment of risks placed under various risk categories, such as Strategy and planning, Operations and infrastructure, and Governance and ethics. The objective of the risk management is to contribute to ensuring Kemira’s long-term strategic development and achieving Kemira’s strategic and operational targets by supporting decision-making by taking uncertainty and its effects into account.
Kemira Oyj’s Board of Directors defines the key principles applied in risk management and approves the Group’s risk management policy. The Audit Committee assists the Board in risk management supervision. The business segments and functions are responsible for the risks involved in their activities and for the related risk management. The Group’s Risk Management function is in charge of developing and coordinating risk management process and risk management networks within the Group. Internal Audit is responsible for monitoring and evaluating the effectiveness of Kemira’s risk management.
Risk management implementation
At Kemira, each business segment and key functions perform its overall risk management according to the risk management framework and process described in Kemira’s Risk Management Policy. Risks are identified, analyzed and evaluated in a consistent manner. Risk management systems and methodologies suitable for the specific risks, situations and organizational needs are applied. The results of the risk management process are reported regularly both internally and as part of Kemira Oyj’s external reporting.
Some of Kemira’s risk treatment measures are performed centrally in order to generate cost benefits and ensure a sufficient level of protection. These include, for instance hedging of treasury risks, as well as purchase and management of insurance programs to provide cover for liability, cargo, and property and business interruption risks.
About Kemira’s risks
As in previous years, risk management was integrated into the strategy process also in 2013. Risks were assessed against Kemira’s defined strategic objectives, and the key risks from different risk categories are described in the next section. Despite proactive risk management efforts, some of the risks may possibly materialize and significantly impact on Kemira’s ability to achieve its targets.
Changes in customer demands
Significant and rapid decline in the use of certain chemicals (for example chemicals for packaging and board production) or in the demand of customers’ products (for example 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. Should Kemira fail 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 negative impact on Kemira’s business. Significant changes, for instance in chemical, environmental or transportation laws and regulations (for example REACH, EU sulphur directive) may generate 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 impact for instance on 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.
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. Furthermore, 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.
Kemira’s production activities involve many hazard risks, such as fires and explosions, natural catastrophes, environmental risks, as well as employee health and safety risks. Certified management systems, efficient hazard prevention programs and the Group’s network of experts play a central role in managing these hazard risks. In addition, Kemira has several insurance programs that protect the company against financial impacts of hazard risks.
Innovation and R&D
Kemira’s research and development is a critical enabler for organic growth and further differentiation. New product launches contribute both to the efficiency and sustainability of Kemira’s customers’ processes as well as to the improved profitability. Both Kemira’s future market position and profitability depend on its ability to understand and meet current and future customer needs and market trends and its ability to innovate new differentiated products and applications. Failure to innovate or focus on new disruptive technologies and products may result in non-achievement of growth and profitability targets.
Innovation and R&D related risks are being managed through efficient R&D portfolio management in close collaboration between R&D and business segments. Kemira has improved the 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 has also established strategic partnerships with external research partners and key customers as well as involved its R&D people in key customer innovation projects. Furthermore, Kemira has increased its R&D focus towards development of more differentiated and sustainable products and processes, and is continuously monitoring sales of its new products and applications (launched to the market within the last 5 years).
Mergers and acquisitions
Tactical use of mergers and acquisitions can be considered as an important driver in accomplishment of corporations’ goals and strategies. Consolidations are driven by, for instance, chemical manufacturers’ interests in strengthening their balance sheets and establishing footholds in new markets. Kemira expects significant M&A activities within chemical industry sector to continue also in 2014 especially in EMEA and NAFTA regions.
Kemira’s investment capabilities have increased lately as a result of several divestments made in 2013. Kemira’s market position may deteriorate if it is unable to find and take advantage of future merger and acquisition opportunities. Inorganic growth through mergers and acquisitions also involves risks such as the ability to integrate acquired operations and personnel successfully. If realized, this risk may result in shortage in the set financial targets for such acquisitions.
Kemira has resources on the Group level dedicated to actively manage merger and acquisition activities. In addition, external advisory services are being used to screen potential mergers and acquisitions. Kemira is also developing its M&A procedures in order to further improve the execution of its business transactions in the future.
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.
The continuity of Kemira’s business operations is dependent on accurate and good quality supply of products and services. Kemira has currently numerous partnerships and other agreements in place with third-party product and service suppliers to secure its business continuity. Certain products used as raw materials are considered critical as the purchase can be done economically only from a sole or single source. In the event of a sudden and significant loss or interruption of such raw material supply, Kemira’s operations could be impacted and this could have further effect on Kemira’s ability to accomplish its profitability targets.In effective procurement planning, supply source selection and contract administration as well as inadequate supplier relationship management create a risk of Kemira not being able to fulfill customer promises.
Kemira continuously aims to identify, analyze and engage third-party suppliers in a way that ensures security of supply and competitive pricing of the end products and services. Development of collaborative relationships with key suppliers is being done in order to uncover and realize new value and reduce risk. Supplier performance is also regularly monitored as a part of supplier performance management process.
To secure the competitiveness and growth as well as to improve operative efficiency, it is essential to attract and retain personnel with the right skills and competences. Kemira is continuously identifying high potentials and key competencies for future needs. By systematical development and improvement of compensation schemes, learning programs and career development programs, Kemira aims to ensure the continuity of skilled personnel also in the future.
More detailed information on financial risks and their management is provided on page 29. Management of Financial Risks in the Notes section.