AAK Annual Report 2019

36 Risks and risk management AAK’s operations are constantly exposed to risks, threats and external factors with an impact on the company. Through a proactive approach to business intelligence, the company aims to anticipate changes in factors affecting operations. Plans and policies are adjusted continuously to counteract potential negati- ve effects. Active risk management, such as hedging raw material prices and currencies, reduces the risks that the company faces. Raw materials Harvests are weather-dependent. While a year of poor harvests drives up prices, a year of successful harvests reduces them. Most of our raw materials are traded on the international world market and purchased in foreign currencies. This exposes us to significant currency and raw material price risks. We have a strategy of active risk management and as soon as a sales contract is signed, we hedge the equivalent currency and raw material price exposure. This safeguards margins against price risks on agreed sales contracts. Since many raw materials are produced far away from our production plants and markets, transport costs are an important factor. Particularly the potential impact on margins from the growing demand for environmen- tally-acceptable transport methods have to be taken into consideration. Competition in commodities is fierce. The processing industry AAK is part of the processing industry. Improvements in results are achieved through organic volume growth and by increasing sales of speciality products with higher margins relative to lower-margin bulk products. Capacity expansion aimed at increasing total volumes to meet growing demand has a relatively long planning horizon. AAK must analyze potential growth in good time. In the meantime, it is possible to balance produc- tion between our plants to enable processing of specific products closer to their markets and accommodate swings in supply and demand. Key speciality products are produced at dedicated plants, where problems with machinery can have a major impact. Changes in the competitive environment The sector in which AAK operates is undergoing structural change. As a sector that has existed for just over a century and has a fundamental dependence on natural products, there is great pressure for more intensive development. This includes demands for sustainable, ethical production, where producers accept responsibility for social issues and the environmental impact of their operations. AAK operates on the basis of an organic growth and selective acquisition strategy. A strong balance sheet has laid the financial foundations for future acquisitions. There is intense competition in the industry. Several global competitors deliver large volumes of bulk products with limited margins. Our response is to focus more on products with better margins and higher value. These include confectionery products and cosmetics, as well as value-adding ingredients for the bakery, dairy and infant nutrition industries. Political instability Operating globally always carries risks, but it can also be a stabilizing factor. Although AAK largely operates in mature markets in the US and Europe, much of company growth is generated in developing markets, which are vulnerable to political instability that can impact currencies and exchange rates. We also operate in Eastern Europe, the Middle East, Asia, Africa, and South America, where instability may arise. As a well-established operator in these areas, we have extensive experience of handling such issues. In addition, we operate with a deliberate risk management strategy. Global operations also involve risks such as trade barriers, inflation, environmental and health-related legislation, and changes in national or regional legisla- tion, e.g. the introduction of protective tariffs and taxes, which prevent AAK from operating in a free market. Trade sanctions and export controls AAK is committed to conducting business in accordance with applicable trade sanctions laws and export control regulations which AAK believes are important tools in