Following risks and uncertainty factors may, if they are realised, affect M-real’s financial performance and capacity to act:
Uncertainty of the general economy development
In the main markets, paper and board demand mainly follows the general economic development. Demand improved clearly in 2010 as the result of the recovery of the world economy. There are still significant uncertainties connected with the development of the general economy. In particular, the development of the euro area influences the demand for and profitability of M-real’s main products.
Competitive environment
The balance between demand and supply has a significant impact on the prices of paper and paperboard products. In 2010, the market balance was mainly normal for M-real’s main products. The demand for folding boxboard exceeded the supply in Europe in 2010. Any decrease in demand or increase in supply in the future may have unfavourable effects on the market balance. Business cycles unfavourable to M-real or capacity increases by competitors may decrease the prices of M-real’s products. On the other hand, potential capacity closures in the industry or consolidation of the industry structure may lead to an increase in prices. The strengthening of the euro versus the US dollar in particular may result in increased imports to Europe, which would further weaken the market balance in Europe.
Credit and other counterparty risks
The management of the credit risks involved in commercial activities is the responsibility of M-real’s centralised credit control and business areas. The credit control function together with the business areas defines the internal credit limits and terms of payment for different customers. A significant part of the credit risks are transferred further to credit insurance companies by means of credit insurance contracts. M-real’s customer credit risk was at a normal level in 2010. Measures are taken to reduce the risk further by intensifying internal credit control and its processes. The main principles for the company’s credit control are defined in the credit policy approved by the company’s Board of Directors. Counterparty-specific, approved maximum amounts are also applied to money market investments, derivatives and borrowings in order to ensure creditworthiness and to reduce risk concentrations.
Changes in consumer habits
In the future, changes in new electronic communications technology, marketing channels and other consumer habits may change the demand for M-real’s paper and paperboard products.
Price risks of production input costs
A radical and unforeseen rise in the price and transport costs of production inputs important for M-real’s operations, such as wood, energy and chemicals, or problems with their availability may reduce profitability and threaten the continuity of operations. M-real endeavours to hedge against this risk by entering into long-term delivery agreements and related derivative contracts. Depending on the EU’s decisions and emission right prices, significant additional costs may be entailed for M-real as from 2013 due to the need to purchase emission rights for its operations. Cost inflation will accelerate clearlyin 2011 compared to 2010, mainly due to increased prices of wood, energy and chemicals.
Liability risks
M-real’s business operations involve various types of liability risks, the most central of which are general operational liability risks, environmental risks and product liability risks. Measures are taken to manage these risks by improving business processes, practices, quality requirements and the transparency of operations. Some of the above-mentioned risks have been transferred to insurance companies by means of insurance contracts.
Business interruption risks
Different kinds of large losses, major accidents, natural disasters, serious malfunctions in the key information systems, labour disputes and delivery problems of the most important raw materials may, in extreme cases, interrupt M-real’s business operations and even cause loss of customers. Continuity and recovery plans have been drawn up in the business areas and plants to mitigate these risks. In addition, some of the mill operation interruption risks have been selectively transferred to insurance companies by way of insurance contracts.
Personnel
M-real has paid special attention to ensuring the availability and retention of personnel by means of various development programmes and special measures. M-real endeavours to prepare for a generational shift and other risks related to personnel by means of career
planning and job rotation.
Financial risks
M-real’s profitability improved considerably during 2010. M-real launched new profit improvement measures in January 2011, the positive effect of which on the result for 2011 with the programmes implemented during the preceding years will total approximately
EUR 90 million compared to 2010. M-real has good opportunities for covering the accelerating cost inflation by means of its own measures in 2011. There are uncertainties and the risk of not achieving the desired profit improvement in full associated with the implementation of the internal profit improvement measures. The main financial risks involved in business operations relate mainly to currencies, interest rates, liquidity and counterparty risks and the use of derivative instruments. The financial risks are managed in accordance with the treasury policy approved by M-real’s Board of Directors. The aim is to hedge against significant financial risks, balance the cash flow and give the business units time to adjust their operations to changing conditions. M-real’s financial risks and their management are described in more detail on pages 53–57 2010 annual report.