Risk Management

Changes in sales prices 

The biggest factor affecting UPM’s financial results is the sales price of paper. A change in the volume delivered has less than half of
the effect of the same percentage change in sales prices.

 

Exchange rate risk

Changes in exchange rates over a prolonged period have a marked impact on financial results. It is the company’s policy to hedge an average of 50% of its estimated net currency cash flow for 12 months ahead.

At the end of 2011, UPM’s estimated net currency flow for the coming 12 months was EUR 1.8 billion. The US dollar represented
the biggest exposure, at EUR 880 million. Changing exchange rates can also have indirect effects, such as change in relative competitiveness between currency regions.

Cost structure

The company’s biggest cost items are the cost of fibre raw material and personnel expenses.

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RISK DESCRIPTION ​

IMPACT​

MANAGEMENT​

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STRATEGIC RISK​

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Structural changes in paper usage may
result in decline in paper demand which
leads to overcapacity​

Lower operating rates and weaker
pricing power in the industry​

Ensure cost efficiency of operations also
at low operating rates
Proactive product portfolio management​

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Availability of roundwood is not
sufficient or is too high priced to meet the
company’s requirements​

Production efficiency weakens and
some products may not be produced
profitably​

Ownership of forestland and long term
forest management contracts
Imports of wood from other sources​

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Delay in OL 3 nuclear plant start-up and
consequent loss of profit and cost
overruns​

Material cost overrun​

Ensure that contractual obligations are
met by both parties
Arbitration proceedings have been
initiated by both parties​

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Cost of an acquisition proves high and/
or targets for strategic fit and integration of
operations are not met​

Return on investment does not
cover cost of capital​

Disciplined acquisition process to
ensure the strategic fit, right valuation
and effective integration​

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Regulatory changes such as EU climate
policy and new requirements for CO2
emissions​

Subsidies for alternative uses of
wood raw material create new
competition and increase costs​

Communicate the employment and
value-added creation impacts of such
policies clearly
Invest in new, value-adding uses of
biomass​

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​OPERATIONAL RISKS ​

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Availability and price of major production
inputs like chemicals or fillers​

Increased cost of raw materials and
potential production interruptions
would lower profitability​

Long term sourcing contracts and
relying on alternative suppliers​

Ability to retain and recruit skilled
personnel​

Business planning and execution
impaired, affecting long term profitability​

Competence development
Incentive schemes​

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​FINANCIAL RISKS ​

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Major trading currencies like USD
weaken against euro

Stronger euro will weaken profitability of
exports and attract competitive imports
to euro area​

Hedging net currency exposure on
a continuous basis
Hedging the balance sheet

Payment default or customer bankruptcy

Loss of income

Active management of credit risks and use of
credit insurance

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​HAZARD RISKS ​

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Environmental risks;
A leak, spill or explosion

Damage to reputation, possible
sanctions
Direct cost to clean up and to repair
potential damages to production unit,
loss of production​

Maintenance, internal controls and
reports
Certified environmental management
systems (ISO 14001, EMAS)

Physical damage to the employees or property

Harm to employees and damage to
reputation
Damage to assets or loss of production

Occupational health and safety systems
Loss prevention activities
Emergency and business continuity procedures

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