Risks and uncertainties
Risk management is an essential part of Lemminkäinen’s business operations. Risk management seeks to ensure that strategic and operational targets are achieved and business operations are secured in a changing environment.
Fluctuations in economic trends cause uncertainty in Lemminkäinen’s operating environment and make it more difficult to forecast future changes. New construction is sensitive to economic cycles and therefore poses a risk. This risk is managed both structurally and operationally.
The company’s residential development and construction involves both sales and price risks. As unsold residential units tie up capital, the company only starts new housing construction if a sufficient number of the units have been reserved in advance. The number of unsold residential units will be kept as low as possible. When undertaking commercial development, business premises are usually sold to property investors in the early stages of construction at the latest, thereby reducing sales risks.
Lemminkäinen’s residential development and construction in Russia involves the risk related to the development of the exchange rate of the rouble, oil price development and economic growth in Russia. A downward trend in these factors may influence the purchasing power of consumers and consequently the demand for new apartments. The risk is managed by continuously monitoring and analysing the operating environment. In addition, the company aims at acquiring plots in central locations in the centre of St Petersburg where the value of apartments is more resistant to economic fluctuations.
Project-specific risks generally involve the management of costs and project implementation. Lemminkäinen is continually developing its contractual expertise and project management practices during the tender and implementation stage. Project monitoring systems and steering models have been renewed and more attention has been paid to competence development of the personnel.
Climate change and unusual weather phenomena also pose a risk in the construction industry. Unusual or harsh weather can weaken the profitability of our operations by interrupting or delaying projects. The company seeks to improve the management of the impact of seasonality by increasing the flexibility of the personnel structure, by increasing outsourcing and by optimising fleet maintenance schedules.
Lemminkäinen uses large amounts of oil-based products in asphalt production. The price of bitumen is tied to the global price of oil. Lemminkäinen manages the bitumen price risk with oil derivatives and contractual terms. The company uses over 300,000 tonnes of bitumen annually, of which more than a half is hedged using the above-mentioned methods.
Lemminkäinen seeks to protect itself from currency exchange risks primarily through operative means and, if necessary, with the aid of foreign currency loans and currency derivatives. In 2013, about 67% of Lemminkäinen’s net sales derived from countries whose functional currency is the Euro. Other major currencies are the Swedish, Norwegian and Danish Crowns and the Russian Rouble.
Another risk is posed by the above-mentioned legal proceedings concerning damages related to the asphalt cartel, should the parties decide to file an appeal of the District Court decisions with the Court of Appeals.
More information about Lemminkäinen’s risks, including a more detailed description of the company’s risk management, is presented in the Annual Report and on the website. A more detailed account of the financial risks is also provided in the notes to the annual financial statements.