INPUT PRICE FLUCTUATIONS ON THE MAIN RAW MATERIALS AND SERVICES
The operating environment exposes UPM to a number of risks and opportunities. Many of them arise from general economic activity and global megatrends.
We invest in selective strategic projects to enable profitable growth. Investment projects are often large and may take several years to complete. They may also involve strategic, technical and operational risks. Our large pulp mill project in Uru- guay consists of several subprojects. The biochemical refinery project in Germany involves new technology and opens new markets for us. The OL3 power plant project may impact energy costs or the fair value of our energy shareholdings. The COVID-19 pandemic and the required additional health and safety measures have added a new challenge to large investment projects. Management: Stringent and continuous operational planning, steering and supervision, quality control, input procurement, scheduling as well as resource and cost monitoring. Environmental, health, safety and social impact assess- ments and protocols. Stakeholder engagement. Opportunity: Carefully selected and implemented growth projects improve our earnings and returns, and change the positioning of the company.
The main production inputs required in the manufacturing of our products are wood, fibre, chemicals, energy and water. The prices for many of these inputs have been volatile in recent years and are expected to remain volatile for the foreseeable future. Governmental protection, trade protection measures, climate change, local and global environmental policies, possibly impacted by COVID-19 related governmental actions or restrictions, could continue to cause further uncertainty around the prices and availability of these inputs. Management: Continuously improving resource efficiency and supply chain optimisation. New technologies. Long-term supply contracts and relying on alternative suppliers. Selected ownership of forest land and long-term forest management contracts. Opportunity: Circular economy and continuous improvement in resource effi- ciency and resilience to withstand price fluctuations offer competitive advantage.
Risks in the report of Board of Directors on page 129 Sensitivity to carbon pricing is presented on page 136 Main earnings sensitivities are presented on page 160 UPM’s cost structure is presented on page 161 Main currency exposures are presented on page 190
CYCLICAL AND COMPETITIVE BUSINESS ENVIRONMENT
INFORMATION TECHNOLOGY AVAILABILITY AND INCREASING CYBERCRIME ACTIVITY
OPERATIONAL HAZARDS, HEALTH AND SAFETY ISSUES AND BUSINESS INTERRUPTION
The transition to a low-carbon economy can cause policy changes and shifts in market preferences, standards and technologies, which in turn may result in changes to cost structures and change the competitiveness of products, raw materials, industries and countries. The physical impacts of climate change in- clude more frequent and severe extreme weather conditions, which can increase droughts and forest fires and cause uncertainties in business operations. Damage caused by insects and tree diseases can become increasingly common. Management: Long-term targets and science-based measures to mitigate global warming through sustainable forestry, emissions reductions and innovat- ing novel products. Opportunity: Transition opportunities include those driven by resource efficiency and the development of new technologies, products and services that could bring new markets, customers, sources of funding and competitive advantage for us. Longer forest growing season in northern hemisphere.
UPM’s current product offering competes in markets where there are competing alternatives for customers and where the shifts in supply and demand continu- ously influence prices. Changes in production capacity, new product develop- ment and competitor and consumer behaviour may impact the price levels for our products and cause demand fluctuations. Rapid acceleration in digitalisa- tion and e-commerce may expedite the decline in demand for graphic papers and simultaneously increase demand for sustainable packaging products. Management: Industry-leading balance sheet. Continuous improvement in competitiveness, resource efficiency and customer offering. Responsible opera- tions. Business portfolio development. Opportunity: Growing need for renewable and recyclable solutions creates business opportunities and drives demand growth.
Our business operations depend on the availability of supporting information systems and network services. Unplanned interruptions in critical information sys- tem services can cause disruptions to the continuity of operations. The information systems may be exposed to a cyber-intrusion that could cause leakage of sensitive information, violation of data privacy regulations, theft of intellectual property, production outages or damage to reputation. Management: We systematically maintain and further develop our measures for cybersecurity protection. Opportunity: Sophisticated IT systems enable efficient operations and opti- mised performance, as well as new customer services and data security.
Our operations are exposed to risks arising from the environment, fires, natural events, site security and occupational health and safety. A major incident at a UPM site or at a critical part of the logistics chain could cause a shutdown or curtail pro- duction. Any failure to maintain high levels of safety management could also result in physical injury, sickness or liability to employees, contractors or third parties. Management: We systematically maintain and further develop our management, safety, security and loss prevention programmes as well as insurance protection. Opportunity: Industry-leading environmental performance provides com- petitive advantage. Health and safety performance strengthens engagement, efficiency and productivity.
GEOPOLITICAL AND ECONOMIC UNCERTAINTY
CHANGES IN POLICIES, LEGISLATION AND
Decisive carbon removal policies may require a rapid growth in carbon removal technology solutions, but could accelerate the tendency to optimise short-term actions and lead to restrictions on wood-use. Management and opportunity : Sustainable forest management and expansion of forested areas. A widening digital gap and unbalanced economic development can worsen societal fractures and recovery from the pandemic. Management and opportunity : Economic activities and creating incremental value in remote areas especially related to forests. Financial risks include foreign exchange and interest rate fluctuations, challenges in refinancing, counterparty or credit risks or changes in taxes. Changes to the monetary policies of major central banks may significantly impact interest rates and conse- quently various currencies that directly or indirectly affect UPM. Our foreign exchange rate risk primarily relates to the US dollar, British pound sterling and Japanese yen. Management: Continuous hedging of net currency exposure. Hedging the balance sheet. Continuous improvement in com- petitiveness. Disciplined planning and selection of investments. Business portfolio development. Opportunity: Diverse business portfolio and geographical presence, focus on competitiveness and strong balance sheet may present strategic opportunities in a changing currency environment.
The rising protectionism in Europe, global trade tensions between major economies, e.g. the US and China, as well as political uncertainties in several countries continue to cause uncertainty in trade policies and economic growth, and challenge competitiveness for companies with international value chains. The testing relationships between businesses, governments and society, and the changing pandemic containment measures may continue to stress the economic and political environment and cause local challenges to our operations or influence demand for our products. Management: Monitoring through international trade associations. Compli- ance. Continuous improvement in competitiveness. Disciplined planning and selection of investments. Business portfolio development. Opportunity: Diverse business portfolio, geographical presence and responsi- ble business practices may present opportunities for supply chain optimisation or strategic opportunities (incl. M&A) in an economic downturn.
The rising social inequality and strain on our natural ecosystem have intensified the expectations for companies to deliver economic, social and environmental benefits and complement the actions being taken by governments. Changes in regulation, taxation or subsidies could have an effect on our performance, competitiveness and the costs and availability of raw materials. Environmental regulations may continue to become more stringent. As policies, legislation or stakeholder expectations, or the application of them, change, additional costs in complying with more stringent requirements may be imposed on us. Management: Responsible operations in the value chain enhance the ability to operate and influence long-term business success, including environmental management systems, sustainable forestry and compliance. Opportunity: Creating value for society, as a company and through our renewable and responsible solutions, is an integral part of our strategy. The bioec- onomy offers new opportunities for value creation and business growth.