AAK Annual Report 2020

AAK Annual Report 2020 75 Note 3 | 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, 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 mar- ket 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 it is 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 mate- rials. 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, 2020 (Thousand tons) Sales contracts Inventory Purchase contracts Net exposure Oils and fats 1,586 -287 -1,319 -20 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