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, counterparty 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 believes 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. Currency risk is hedged when risk arise from
underlying commercial actions and flows. Interest rate risks
are hedged in line with AAK’s financial policy and principles.
Counterparty risks are measured and managed according to
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.
AAK hedges sales contracts with physical purchases of
raw material. In long-term contracts, AAK hedges by paper
purchase contracts, since there is low liquidity in the market
for longer periods. For paper purchase contracts, the Group
uses standard commodity futures traded on commodity
exchanges or OTC hedge 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.
Exposure to raw material price risk, December 31, 2019
(Thousand tons) Sales contracts Inventory Purchase contracts Net exposure
Oils and fats 1,786 -334 -1,461 -9
Exposure to raw material price risk, December 31, 2018
(Thousand tons) Sales contracts Inventory Purchase contracts Net exposure
Oils and fats 1,917 -245 -1,680 -8