AAK Annual Report 2018

72 3 Note Financial risk management and hedge accounting Financial risk management The AAK Group’s operations are exposed to various financial risks, including market price risks (on raw materials, curren- cies 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 mana­ ging 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-ma- terial-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