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<strong>SAPPI</strong><br />
NOTES TO THE GROUP ANNUAL FINANCIAL STATEMENTS (Continued)<br />
for the year ended September 2010<br />
29. FINANCIAL INSTRUMENTS (Continued)<br />
During 2010, we have contracted two pulp swaps in Europe for a limited volume of pulp (6,000 tons<br />
for each swap). Sappi Fine Paper Europe (‘‘SFPE’’) buys pulp from external suppliers at a variable price<br />
consisting of a reference price linked to the Pix Pulp index which is adjusted with a premium depending<br />
on the pulp market conditions. As SFPE expected pulp prices to increase, it was decided to fix the pulp<br />
price for one year by entering into a pulp swap whereby the variable price was swapped for an annual<br />
fixed price.<br />
The group’s pulp swap contracts at the end of fiscal 2010 are detailed below:<br />
2010 2009<br />
Fair value Fair value<br />
Contract amount favourable Contract amount (unfavourable)<br />
Base currency (Notional amount) (unfavourable) (Notional amount) favourable<br />
(US$ million)<br />
Bleached<br />
Hardwood Kraft<br />
Pulp (BHKP)<br />
bought ........<br />
Northern Bleached<br />
Softwood Kraft<br />
US Dollar 1 0.2 — —<br />
(NBSK) bought . . Euro 2 (0.1) — —<br />
3 0.1 — —<br />
b) Credit risk<br />
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in a<br />
financial loss to the group. The group faces credit risk in relation to trade receivables, cash deposits and<br />
financial investments.<br />
Credit risk relating to trade debtor management is the responsibility of regional management and is<br />
co-ordinated on a group basis.<br />
The group’s objective in relation to credit risk is to limit the exposure to credit risk through specific<br />
group-wide policies and procedures. Credit control procedures are designed to ensure the effective<br />
implementation of best trade receivable practices, the comprehensive maintenance of all related<br />
records, and effective management of credit risk for the group.<br />
The group assesses the credit worthiness of potential and existing customers in line with the credit<br />
policies and procedures. Appropriate collateral is obtained to minimise risk. Exposures are monitored<br />
on an ongoing basis utilising various reporting tools which highlight potential risks.<br />
In the event of deterioration of credit risk, the appropriate measures are taken by the regional credit<br />
management. All known risks are required to be fully disclosed, accounted for, and provided for as bad<br />
debts in accordance with the applicable accounting standards.<br />
Quantitative disclosures on credit risk are included in note 16 of the annual financial statements.<br />
On average 60% of our trade receivables are credit insured.<br />
F-95
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