Mondi is a leading paper and packaging group with its 2007 turnover in excess of €6 billion, employing 33,000 across 113 sites in 35 countries. This month we talk to Andreas Resei, Mondi’s European Treasurer, about the actions Mondi has taken to reduce its carbon footprint and the developing emissions trading market.
Andreas Resei
European Treasurer
Andreas Resei (47) is European Treasurer of the Mondi Group.
After finishing his studies (Master of Business Administration in Graz, Austria) he worked in a bank for several years. Since 1989 he has been employed in corporate treasury functions mainly in the paper industry. His responsibilities in various roles also covered related areas including IFRS-accounting and corporate risk and credit management. He joined the Mondi Group in 2001.
Can you give me an overview of Mondi?
We are a leading paper and packaging group. We produce paper – office paper and packaging paper – largely from our own forest resources and mills in Eastern Europe and South Africa. We are Europe’s largest producer of kraft paper, the largest producer of office paper and second largest producer of uncoated wood-free paper. We have divisions that convert this paper into corrugated board and then into boxes, as well as bags and other packaging products. There are also other operations which include a paper merchant company in Austria and Eastern Europe and newsprint activities.
From its initial South African roots, Mondi grew rapidly via acquisitions in Europe with the support of its parent Anglo American. In mid-2007 we successfully demerged from Anglo American with listings on the London and Johannesburg Stock Exchanges. Following the demerger the company is now in the midst of an internal reorganisation into a Europe & International Division and a South African Division.
What impact has the demerger from Anglo American had on your treasury operations?
Historically Anglo American’s role in Mondi’s treasury was in providing funding and establishing treasury policies. Following the demerger, Mondi has established its own Group Treasury headed by our Treasurer, James Paterson, who is based in London. Since the demerger we have established our own Treasury Policy and have arranged a new €1.55 billion loan facility to replace the financing provided by Anglo American.
We are now in the process of reorganising the treasury function within the Group to align it with the new business organisation. The new global treasury function will operate out of London, Vienna and Johannesburg and provide centralised support for the business units.
We are also in the process of selecting a new treasury management system to support the activities of the new treasury function. Once this is implemented in 2008, we will be able to operate as one treasury function from a number of locations globally with key responsibilities for cash pooling, netting and cash forecasting being managed from Vienna.
What are your responsibilities?
Under the new organisation I now report to the Group Treasurer in London whereas I used to report to the Packaging division CFO. I will be responsible for running the Vienna treasury, which will manage the European cash pooling, cash forecasting and netting system for the Group, in addition to providing direct treasury support and advice to some of the key business units.
Energy is a key input cost in the production of paper. Many of our mills have integrated power plants supplying energy in the form of steam and electricity that is used in the production of paper. Managing CO2 emissions is therefore a critical part of our business. In 2006, our management committed to reduce the specific energy input as well as the specific CO2 emission per tonne of paper produced by 15% by 2014 against the 2004 baseline.
Mondi is also committed to increasing the energy input based on biomass fuels, that is fuels derived from organic matter, which are considered to be carbon neutral. Capital expenditures in this area are positively seen and supported by senior management.
The development of a CO2 market has been instrumental in demonstrating the economic value in environmentally beneficial projects within the Group. The increase in energy prices has also provided further incentive for supporting projects which focus on improving energy efficiency overall.
How have you tackled this?
Under the EU ETS (European Union Emissions Trading Scheme) our subsidiaries are allocated EUAs (EU emissions allowances). One certificate allows the emission of one tonne of CO2 into the atmosphere. If the subsidiary emits less carbon than their allowance they can sell their excess credits for cash, but if they emit more they have to buy credits to cover their shortfall.
The role of treasury in this is to act as the central co-ordination platform, offsetting the positive and negative positions held by different subsidiaries within the group, which saves considerable value given the current spreads in this market. We then manage the Group’s net CO2 position in the financial markets. Historically Mondi has been long of credits which have been a valuable income stream for the Group. We are currently waiting for our final allocations of EUAs under Phase II of the scheme before we can then review Mondi’s overall position at the start of 2008.
We also have projects in South Africa and Russia which are expected to generate CERs (certified emission reductions) or ERU (emission reduction units). These are carbon allowances issued under a separate scheme to the EU ETS, but which can be used to cover a certain amount of emissions in the European Union, depending on the country.
At the moment it is not clear exactly how this works. Currently it is not possible to convert CERs into the EU ETS – however, this is likely going to change next year. So in terms of the central treasury, this is an area that we are closely monitoring and will look to use to optimise the Group’s emission position when possible.
Together with Procurement we also look into the energy position as a whole because from our perspective carbon allowances are only one sub-topic of the broader topic of energy. What we are currently working on is structuring the energy supply contracts together with Mondi’s Procurement department, using our understanding and knowledge of financial instruments to evaluate the benefits of long-term supply contracts.
For example, looking at gas, in the future our intention is to look to manage our energy positions using financial instruments dealt with banks as an alternative to using fixed price contracts from suppliers. This will be done via Group Treasury, which has the infrastructure in place with the financial institutions and which understands how to trade, value and account for such derivative contracts.
So at Mondi the treasury is central to tackling carbon emissions?
We co-operate closely with Procurement as a central function. Procurement has the technical expertise and the direct links to operations in this area and we add the financial expertise. Our first role is to offset positions within the group.
The second step is to have a good overview of what is happening in the market and to approach suppliers directly via Procurement and compare this with the financial markets where we can achieve similar effects via derivatives. So a close relationship between the Group’s Procurement and Treasury departments is necessary to manage carbon emissions effectively.
Managing carbon emissions does not currently require a dedicated resource within Group Treasury. I do some work on this and one person in the front office also works on it. It adds up to less than one person overall. But on the other hand, Procurement does certain things and additionally some aspects of this have to be tackled at the subsidiary level, such as dealing with the allocation of allowances, which is done by the local governments.
What sort of challenges have you encountered?
The first challenge is to get a clear understanding of the Group’s allowances. In this area we have the allocations from the governments, which are based on local rules and are also influenced by lobbying.
The second challenge is to have an accurate estimate of our expected emissions to enable us to identify our net position.
Thirdly, because the market realised that there were excess CO2 allowances available, the price for these allocations has dropped to close to zero. The first drop happened in May 2006 when the allocation for the first year took place and the countries reported some over-allocations. At that time the price dropped from about €30 to below €15 within one week.
At that time there was little liquidity in the market and it was also difficult to sell large amounts. The price then stabilised for a while above €10 because it was not clear whether it would be possible to bank the allowances, ie carry them over to the next period. When it was clarified that they could not be carried over, the price dropped again to below €1 in the first half of 2007. The price is now in the region of €0.05 – €0.10 per tonne of CO2.
What impact has that had on your programme?
In 2006 we benefited from the additional income arising from the sale of excess allowances, but as the prices have declined we have not continued to benefit from the reduction in our carbon emissions. However, this year we will see the pricing for the next phase. At the end of the day a considerable amount of our capital expenditure is focused on energy and the reduction of carbon emissions, such as the move away from energy sources which increase the carbon emissions to carbon neutral sources such as biomass.
What sort of action will be taken to prevent this sort of price drop in the future?
It depends on the political climate at the end of the day. For Phase II there will be fewer allowances allocated and it is clear that we won’t be able to carry existing allocations over to Phase II.
There is a discussion for Phase III, which starts in 2013, that there will be no free allocations any more for certain industries, and I understand we could be in this group. The system might change to an auction system. So the possibility of banking allowances from Phase II to Phase III would be very valuable.
From the regional industrial view I think it is important that more or less every country participates in some kind of scheme. If they don’t, the industry might move away from the areas where these emissions allowance schemes are taking place and paper will be produced only in China or India, or only in the US.
What areas will the Mondi treasury be focusing on in 2008?
The primary focus in treasury will be implementing the new organisation. This will include rolling out the new treasury management system and the new central treasury activities. I think these will be the major changes.
Additionally, I would personally like to progress our understanding and competence in managing our energy exposure and develop and channel our energy management approach, perhaps more in line with how we manage foreign exchange exposures. This energy management approach will also include our CO2 allowances.
