2012 Integrated report - Sappi

Governance and compensation continued
Top risks
Risk philosophy
We have a coordinated risk management approach and methodology to manage, coordinate and execute the risk management
process throughout Sappi.
Complete risk assessments are conducted at least annually in our divisions and for the group, and are updated every six months.
The process uses our strategy as the base against which to assess risk scenarios. The scope of the risk assessment includes risks
that may lead to a significant cost, liability or loss, including loss of opportunity, or may affect the current strategic plan. These risks
are identified and analysed, and risk responses to each individual risk are designed, planned, implemented and monitored.
Risk
1. We operate in a cyclical
industry. Global economic
conditions may cause
substantial fluctuations in
our results.
Risk description and treatment
Our pulp and paper products are significantly affected by cyclical changes in industry capacity and
output levels and by the impact on demand from changes in the world economy. As a result of supply
and demand imbalances in the pulp and paper industry, these markets historically have been cyclical,
with volatile pulp and paper prices. In addition, recent turmoil in the world economy has led to sharp
reductions in volume and pressure on prices in many of our markets and we acted rapidly to match our
output to demand by curtailing pulp production at Tugela and Enstra Mills. We took actions to improve
efficiencies and reduce costs in all aspects of our business. We continue to maintain a high level of
economic pulp integration on a groupwide basis which reduces the impact of pulp price fluctuations on
our results. We will continue to monitor the supply/demand balance which might require us to impair
operating assets and/or implement further capacity closures.
2. The markets for pulp,
dissolving wood pulp and
paper products are highly
competitive.
There has been a recent trend towards consolidation in the pulp, dissolving pulp and paper industries
creating larger, more focused companies. The dissolving wood pulp capacity conversions at our
Ngodwana and Cloquet Mills to increase our market share and strengthen our leading position in the
speclialised cellulose market are on track. We also continue to drive good customer service, innovation
and efficient manufacturing and logistics. We are focused on improving the performance and
competitiveness of our European business, in particular of coated mechanical paper. We are also taking
steps to improve the performance of our Southern African paper and paper packaging business.
3. We require significant
amounts of finance to fund
our business and our ability
to generate cash or borrow
depends on many factors,
some of which are beyond
our control.
Our ability to fund our working capital, capital expenditure, research and development requirements and
to make payments on our debt principally depends on cash available from our credit facilities, other
debt arrangements and our operating performance. Our year end cash balance as well as our debt
maturity profile provide us with adequate headroom to fund our short term requirements. We are also
focusing on profit improvement in our operations by reducing fixed and variable costs, spending capital
prudently and managing working capital levels.
4. Fluctuations in the value of
currencies, particularly the
Rand and the Euro, in
relation to the US Dollar,
have in the past had and
could in the future have a
significant impact on our
earnings in these
currencies.
Sappi is exposed to economic, transaction and translation currency risks. The objective of the group in
managing transactional currency risks is to ensure that foreign exchange exposures are identified as
early as possible and actively managed. In managing transactional currency risks, the group first makes
use of internal hedging techniques (hedging to the functional currency of the entity concerned) with
external hedging being applied thereafter. External hedging techniques consist primarily of foreign
forward exchange contracts and currency options. Foreign currency capital expenditure on projects is
covered as soon as practical (subject to regulatory approval).
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