Risk Management


Due to the nature of our business we are exposed to a number of operational and financial risks. PhosAgro has an established risk management framework that is designed to identify, evaluate and manage the risks and uncertainties facing the Company. The Board of Directors has overall responsibility for managing both financial and non-financial risks.

Our approach: 

PhosAgro has established risk management policies to identify, monitor and analyse risks, and specific rules and procedures to mitigate against these risks, and to ensure compliance. The Board of Directors periodically reviews PhosAgro’s risk management policies and systems to reflect changes in market conditions and the Company’s activities.

Key objectives:

  • Identify and manage all possible risks and uncertainties facing the Company
  • Improve the decision-making processes to respond promptly to risks as they emerge

Risk management methods:

  • Avoid risky investments
  • Avoid working with unreliable partners and customers
  • Ensure the Company has adequate insurance cover
  • Financial planning
  • Coordination and consistency of management processes and programmes aimed at developing the Company.
Key Risks Description Mitigation
Operational Risks
Risks related to operating in the fertiliser industry, which is cyclical in nature PhosAgro operates in a cyclical industry, and demand for and prices of the Company’s products are difficult to forecast. Historically, demand and prices for PhosAgro’s products have fluctuated significantly in response to changes in market conditions.

PhosAgro’s phosphate-based fertiliser production lines are flexible and can switch between MAP, DAP, NPK and NPS, within two working shifts. This allows the company to move between phosphate fertilisers and complex fertilisers at short notice in response to changes market demand.

Such production flexibility helps the Company to maximize its profitability during periods of growth, and to maintain high capacity utilisation levels when market conditions are weaker.

Risks related to a potential decrease in demand for mineral fertilisers and/or apatite concentrate

A decrease in the demand formineral fertilisers and/or apatite concentrate may occurdue to:

  • Reduced usage of fertilisers by farmers in markets affected by economic factors, weather conditions or other natural occurrences;
  • Introduction and/or extension of anti-dumping measures in importing countries leading to a decrease in supply requirements and/or a need to find other markets, resulting potentially in higher logistics costs;
  • Introduction of export quotas and duties by the Russian Government on products, leading to the restriction of export activities and therefore negatively impacting the financial results of the Company;
  • Changes in the freight market related to a reduction in the availability of vessels of the required tonnage, leading to an increase in logistics costs.

PhosAgro’s flexible sales and production model helps to reduce the risk of declining demand in particular markets.

The Company continuously works on diversifying and optimising its product range, and also on optimising gross output and phosphate export volumes, in order to minimise the negative impact of a potential decrease in demand.

PhosAgro also sells its products on a variety of markets, achieving a good range of delivery destinations on the basis of maximising the netback price (selling price less selling costs), which helps to reduce risks associated with logistics.

Since February 2012, PhosAgro has been shipping some of its products abroad by container. Compared to shipping in bulk by sea,this means PhosAgro can be more flexible on logistics. It enables the Company to increase the number of countries to which it ships products, reducing its dependency on traditional markets, and to sell its products in smaller consignments. PhosAgro now exports by container to the following countries, where previously the freight charges were too high: Thailand, China, Indonesia, Malaysia, the Philippines, South Korea and a number of African countries. The netback price is generally better when shipping by container due to lower freight and other charges.

Risks relating to mining activities

The Group’s apatite-nepheline ore mining operations are subject to the hazards and risks normally associated with the exploration and extraction of natural resources through open pit and underground mining activities. Such risks could result in extraction shortfalls, unexpected production stoppages, injuries or damage to property.

The Company implements an ongoing technical programme to explore and assess ore reserves, which ensures that production is continuous and at an even pace.

PhosAgro hasintroduced systems to monitor and control mining production units, together with other safety measures, and the Company constantly looks for ways to improve them further.

Risks related to intense competition

The company is subject to intense competition from both domestic and foreign producers. Fertilisers are global commodities with little or no product differentiation. Customers make their purchasing decisions primarily on the basis of delivered price, andto a lesser extenton customer service and product quality. PhosAgro competes with a number of domestic and foreign producers, including state-owned and government-subsidised entities.

PhosAgro is currently one of the lowest-cost producers of MAP/DAP globally, and is pursuing a strategy of further increasing its cost advantages through vertical integration in key feedstockslike phosphate rock and ammonia. The Company’s management believes that this strategy will help it to remain competitive globally in the long term.

Risks related to changes in prices for raw materials and third-party supply

The principal raw material used for the production of ammonia is natural gas, which PhosAgro purchases from OJSC Gazprom. The key risk is the potential increase in prices for natural gas, as the Russian government announced plans to increase domestic gas prices by up to 15% per year for the years 2012 and 2013, with the aim of ultimately reaching netback parity with Gazprom’s European export prices.

One of the major raw materials used for the production of phosphate fertilisers is sulphur, which the Company purchases from external suppliers.

It is possible that electricity tariffs will increase more than the Company has anticipated in its strategic plans.

In order to reduce overall consumption of natural gas, PhosAgro is modernising its ammonia production facilities to decrease gas consumption per unit of output.

In order to mitigate risks related to sulphur prices, the company uses diversified sulphur supply. PhosAgro purchases sulphur from Gazprom as well as from other Russian and Kazakh companies.

Since 2003, PhosAgro has been implementing a power generation and saving programme to reduce its reliance on third-party energy suppliers. At Ammophos and BMF the Company has constructed power generation facilities that produce electricity utilising steam generated from sulphuric acid production. In addition, Ammophos and BMF produce electricity and heat using steam-powered turbines. As a result, Ammophos is fully energy self-sufficient and also sells energy to third parties, while BMF produces enough energy to satisfy more than 70% of its requirements. Overall, the Company is more than 35% energy self-sufficient. PhosAgro expects to commission a new natural gas-powered electricity generation facility at Cherepovetsky Azot with a generation capacity of 32 MW in May-June 2012.

Risks related to the transportation of raw materials and products

Railway transportation is PhosAgro’s principal means of transporting raw materials and products. Moreover, the Company’s production facilities are located at considerable distances from most of the destination markets and ports. As a result, the Company’s operations are heavily dependant on the Russian railway system, and rely predominantly on the rail freight network operated by OJSC Russian Railways, a state-owned monopoly company handling a significant majority of all railway freight in Russia. The Russian Government sets rail tariffs and may further increase these tariffs, which are index-linked to the inflation rate. Access to rolling stock has become more complicated, mainly due to the restructuring of Russian Railways and the transfer of the rolling stock to its subsidiaries Freight One and Freight Two.

PhosAgro operates approximately 6,000 railcars. In order to reduce reliance on third-party railcar providers, the Company plans to increase and refurbish its own railcar fleet, adding railcars with an increased load capacity. PhosAgro has a well developed transportation infrastructure within its production facilities, including maintenance depots for the rolling stock.

To reduce the number of empty runs made by our rolling stock, the Company is optimising its haul distance strategy.

Financial Risks

Credit Risk

The Company’s credit risk is the risk of financial loss if a customer, or a counterparty to a financial instrument, fails to meet its contractual obligations. Credit risk principally arises in connection with the Company’s receivables from customers and from loans issued to related parties.

The Company has established a credit policy under which each new customer is analysed individually for creditworthiness before the Company’s standard terms and conditions for delivery and payment are offered. These state that substantial customers / traders must pay for the delivery of fertilisers not later than ten days following the receipt of the shipping documents, while less substantial customers and those who fail in other ways to meet the Company’s creditworthiness criteria may only transact with the Company on a prepayment basis. The credit review includes analysing external ratings (when available) and, in some cases, bank references.

The majority of PhosAgro’s customers have done business with the Company for a number of years, and losses from bad debts have been rare.

In monitoring customer credit risk, customers are grouped according to their credit characteristics. New customers are required to deal with the Company on a prepayment basis or to present an acceptable bank guarantee. The Company maintains an allowance for impairment, which represents its estimate of losses incurred in respect of trade and other receivables and investments.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due.

The Company’s approach to managing liquidity is to ensure, to the extent possible, that it will at all timeshave sufficient liquid funds to meet its liabilities when due, both under normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation. Typically, it ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 30 days, including the servicing of financial obligations; this excludes the potential impact of force majeure circumstances that cannot reasonably be predicted, such as natural disasters. In addition, the Company maintains several lines of credit with a number of Russian and international banks.

Currency Risk

The Company’s presentation and functional currency is the Russian rouble, and it is exposed to currency risk on sales, purchases and borrowings that are denominated in other currencies, primarily the US Dollar and the Euro.

PhosAgro’s currency risk relates to the majority of its revenue coming from foreign-currency-denominated export sales, and is mitigated by a natural hedge effectively created by borrowings denominated in foreign currencies.

The Company also buys and sells foreign currencies at spot rates when necessary to address short-term imbalances. It also sometimes uses derivative financial instruments (mainly FX forwards) in order to manage its exposure to currency risk.

Interest Rate Risk

Interest rate risk is the risk that changes in interest rates will adversely impact the financial results of the Company.

The Company’s management does not have a formal policy for determining the proportion of exposure that should be at fixed or variable rates. However, the Company’s management exercises its judgment to decide whether a fixed or variable rate would be more favourable over the expected period until maturity. PhosAgro does not hedge its interest risk exposure at present, but may consider doing so in the future.

The company carefully monitors its borrowing levels, and does not plan to substantially increase net debt from the current levels, except for sensibly structured M&A deals or major projects for the construction of production facilities.