Commodity risk management
Valmet is exposed to risk in variations of the prices of raw materials and of supplies including energy. Subsidiaries have identified their commodity price hedging needs and hedges have been executed through Treasury using approved counterparties and instruments. For commodity risks separate overall hedging limits are defined and approved. Hedging is done on a rolling basis with a declining hedging level over time.
Electricity exposure in the Nordic subsidiaries has been hedged with electricity forwards and fixed price physical contracts, which are designated as hedges of highly probable future electricity purchases. Hedging is focused on the estimated energy consumption for the next two-year period with some contracts extended to approximately five years. The execution of electricity hedging has been outsourced to an external broker. As at December 31, 2019 Valmet had outstanding electricity forwards amounting to 175 GWh (158 GWh) and 175 GWh (206 GWh) under fixed price purchase agreements.
To reduce its exposure to the volatility caused by the surcharge for certain metal alloys (Alloy Adjustment Factor) comprised in the price of stainless steel charged by its suppliers, Valmet may enter into average-price swap agreements for nickel. The Alloy Adjustment Factor is based on monthly average-prices of its components of which nickel is the most significant. As at December 31, 2019 Valmet had 54 metric tons outstanding average-price swap agreements for nickel (0 metric tons).
The following table presenting the sensitivity analysis of the commodity prices comprises the net aggregate amount of commodities bought through forward contracts and swaps but excludes the anticipated future consumption of raw materials and electricity.
A 10 percent change upwards or downwards in commodity prices would have the following effects, net of taxes:
|Electricity - effect in profit for the period||+/- 0.0||+/- 0.0|
|Electricity - effect in equity||+/- 0.4||+/- 0.5|
|Nickel - effect in profit for the period||+/- 0.1||-|
Cash flow hedge accounting has been applied to electricity forward contracts. The effective portion of derivatives is recognized in Equity and the ineffective portion is recognized through Consolidated statement of income. Hedge accounting is not applied to nickel agreements and the change in the fair value is recorded through Consolidated statement of income.