Note Financial risk management and hedge accounting
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Financial risk management
The AAK Group’s operations are exposed to various financial
risks, including market price risks (on raw materials, currencies
and interest rates), liquidity risk and credit risk. Since
AAK’s products are sold throughout the world, our sales
revenues are exposed to market fluctuations in the exchange
rates of the currencies involved. Moreover, the Group buys
its raw materials on international markets, so its cost of raw
materials is exposed to market fluctuations in both the price
of the raw materials and the exchange rates of the currencies
involved.
Exposure to such significant financial risks makes managing
these risks a significant factor in successful operations.
AAK believe that we are largely successful in managing risks
owing to the policies and procedures established for the
Group.
The Group’s management of price risk and other risks
related to purchasing of raw materials is regulated by AAK’s
policy and principles on the management of market risk for
raw materials, while currency risks and other financial risks
are regulated by AAK’s financial policy and principles. Policies
and principles are established by AAK’s Board of Directors,
which also monitors, evaluates and updates these policies
and principles annually.
Raw material price risks
The Group’s annual costs for raw materials are two-thirds
of the sales value of the finished products. AAK hedges
both operational raw material price risk and the underlying
operational currency risk when sales agreements are signed
with customers.
Raw material prices fluctuate, so the Group has assigned a
high priority to raw material procurement and to managing
this exposure. Raw material procurement is managed by the
Group procurement organization, which continually monitors
and controls raw material market exposure for the Group.
However, to maintain an effective organization, the Group’s
procurement organization is permitted to take limited price
risks within the framework of our trading policy established
by the Board of Directors. Since these raw material positions
are managed appropriately, AAK’s profitability is affected only
marginally by price changes. The effect on total sales and
requirements for working capital is, however, significantly
larger.
Hedge contracts are used to hedge raw material price risk.
The company hedge inventory and sales contracts using
standard commodity futures traded on commodity exchanges,
or using OTC hedge contracts or physical purchase contracts.
Exotic raw materials (of which shea is by far the most
important) must be sourced when they are available right
after the harvest season. No efficient hedge market exists for
exotic raw materials. Therefore, the Group is typically left with
a significant unhedged volume of exotic raw materials in the
months following the harvest season. The Group endeavors
to limit this exposure by entering into new exotic-raw-material
based sales contracts during the months in which the
exotic raw materials are sourced.
AAK uses fair-value hedge accounting on stocks of oils
and fats.
Exposure to raw material price risk, December 31, 2018
(Thousand tons) Inventory Sales contracts Purchase contracts Net exposure
Oils and fats 245 -1,917 1,680 8
Exposure to raw material price risk, December 31, 2017
(Thousand tons) Inventory Sales contracts Purchase contracts Net exposure
Oils and fats 255 -1,512 1,261 4