Short term risks and uncertainties
Kemira is exposed to risks that may arise from its own operations or from changes in the operating environment.
Kemira’s most significant risks relate to the following themes:
- Price and availability of raw materials and commodities
- Hazard risks
- Changes in customer demand
- Economic conditions and geopolitical changes
- Innovation and R&D
- Changes in laws and regulations
- Talent management
- Climate related risks
- Risks and impacts of the war in Ukraine
All risks mentioned above are described in more detail in Kemira’s Financial Statements Bulletin 2022 on page 20.
Latest update to short-term risks and uncertainties
In Kemira’s annual risk review published in conjunction with the Financial Statements Bulletin 2022, Kemira referred to geopolitical tensions in Eastern Europe and how geopolitical tensions and sanctions against Russia could cause disruptions in energy and raw material availability in Europe. The war in Ukraine, which started in February 2022, has increased uncertainty in Kemira’s operating environment, particularly
related to energy availability. The risks and impacts of the war in Ukraine are described in more detail in the next column.
A significant and sudden increase in the cost of raw materials, commodities, or logistics could place Kemira’s profitability at risk if Kemira is not able to pass on such increases to product prices without delay. For instance, considerable and/or rapid changes in oil, energy, and electricity prices could materially impact Kemira’s profitability. Changes in the raw material supplier field, such as consolidation or decreasing capacity, may also increase raw material prices. Furthermore, significant demand changes in industries that are the main users of certain raw materials may lead to raw material price fluctuations. In 2022, raw material and commodity prices increased significantly mainly following the war in Ukraine. Energy and electricity prices also increased significantly, particularly in Europe following the war in Ukraine. The war in Ukraine also led to concerns about sufficient energy availability to Europe. In 2023 variable costs are expected to stay at a high level although cost increases are expected to moderate. Electricity prices are expected to stay above long-term average levels.
Poor availability of certain raw materials may affect Kemira’s production and also profitability if Kemira fails to prepare for this by mapping out alternative suppliers or opportunities for process changes. Raw material and commodity risks can be effectively monitored and managed with Kemira’s centralized Sourcing unit. Risk management measures include, for instance, forward-looking forecasting of key raw materials and commodities, synchronization of raw material purchase agreements and sales agreements, captive manufacturing of some of the critical raw materials, strategic investment in energy-generating companies, and hedging a portion of the energy and electricity spend. In 2022, Kemira witnessed some raw material availability issues following the war in Ukraine and due to COVID-19 restrictions in China. Before the war in Ukraine, 1% of Kemira’s total direct purchases and logistics costs were related to purchases from Russia and Belarus. Kemira did not purchase raw materials from Ukraine. In 2022, Kemira worked to find long-term alternatives to Russian and Belarussian suppliers. Continued supply chain disruptions are possible in 2023 depending on the development of the war in Ukraine. Also the relaxation of COVID-19 restrictions in China could have an impact on global supply chains.
Following the war in Ukraine, the energy market in Europe has been disrupted. This has led to temporary shutdowns in industrial production in Europe due to high energy prices, particularly for natural gas. The unaffordability of energy for industrial operations could lead to extended or permanent shutdowns of chemical manufacturing in Europe, which could have an adverse impact on Kemira’s supply chain. Kemira is monitoring the situation closely.
Kemira sources large share of its electricity in Finland at production cost (Mankala principle) through its partial ownership in the electricity producing hydro and nuclear assets of Teollisuuden Voima and Pohjolan Voima. Significant long-term disruptions to the production levels in these assets could have an adverse financial impact for Kemira.
Financial risks are described in the Notes to the Financial Statements 2022.
Risks and impacts of the war in Ukraine on Kemira
Following the war in Ukraine and subsequent sanctions against Russia and Belarus, Kemira announced its decision to discontinue deliveries to Russia and Belarus on March 1, 2022. Russia accounted for around 3% of Kemira’s sales in 2021. Revenue from Belarus and Ukraine was not material in 2021. The fifth EU sanctions list published on April 9, 2022 included the majority of Kemira’s products. Kemira announced on May 6, 2022 that it will exit the Russian market. At the end of September 2022, Kemira had no operative business or personnel left in Russia.
The direct impacts of the war on Kemira have been and are expected to be limited. Before the war, 1% of Kemira’s total direct purchases and logistics costs were related to purchases from Russia and Belarus. Kemira does not purchase raw materials from Ukraine. In 2022, Kemira was able to manage the situation without operational disruptions and has worked to find long-term alternatives to Russian and Belarussian suppliers.
In 2022, the main risk from the war in Ukraine was accelerated inflation. The war in Ukraine and the sanctions against Russia and Belarus have created concerns about sufficient energy availability to Europe, particularly in natural gas. Kemira is a significant user of energy. The majority of Kemira’s energy purchases is electricity, but some of Kemira’s production facilities use natural gas in Europe. The energy crisis also increased energy prices significantly during 2022 and prices are expected to stay above long-term average prices also in 2023. Kemira’s annual energy purchases globally increased from around EUR 200 million in 2021 to around EUR 300 million in 2022. Kemira is monitoring the energy market situation and its impacts on Kemira closely. The energy crisis did not have a material impact on Kemira’s
operations during 2022.
Kemira is also exposed to indirect impacts via Kemira’s customers and suppliers. In particular, high energy prices or disruptions in energy availability could reduce or temporarily stop production at Kemira’s customers and/or suppliers, which could affect Kemira’s end market demand or supply chain. During 2022 some of Kemira’s customers in the EMEA region, particularly in the Pulp & Paper segment, curtailed or
temporarily closed production due to high energy prices, particularly during Q3 and Q4 2022.
In 2022, Kemira recorded EUR 4.8 million of losses related to its exit from Russia. At the end of 2022, net assets in Russian amounted to around EUR 8 million and consisted mainly of cash and cash equivalents denominated in Russian roubles. Kemira is looking at options to repatriate funds from Russia. Kemira had no assets or personnel in Belarus or Ukraine at the end of December 2022. For Kemira’s outlook 2023, including assumptions behind the outlook, please refer Kemira’s Financial Statements Bulletin 2022 to page 28.