Yara's risk management aims to identify, assess and manage risk factors affecting the performance of all parts of the company. It is a continuous and systematic process to avoid damages and losses, and to unleash business opportunities.
Risk management in Yara is based upon the principle that risk evaluation is an integral part of all business activities. Yara has established procedures for monitoring the primary risk exposures and assessing risk levels. In some cases Yara may utilize derivative instruments such as forwards, options and swaps to reduce these risk exposures.
Priorities and procedures
All business activities involve some degree of risk. Identifying, assessing and managing risk is a continuous process and the overall objective of risk management in Yara is to ensure that risks are managed systematically and as efficiently as possible and given correct priority, so as to avoid damages and losses, and create value from opportunities.
Risk management is a centrally controlled process but the responsibility for day-to-day risk activities is placed with the operating segments and expert organizations. Procedures and responsibilities are defined in the Yara Steering System, as outlined on page 20 (Corporate Governance).
A framework, including policies and procedures, has been implemented to facilitate the management of risk in Yara. The business outlook, secondary risks and opportunities arising from global trends and challenges, such as climate change and increased market volatility, are discussed in the Management Discussion & Analysis beginning on page 27.
Yara is exposed to a number of risks that are either strategic, operational, compliance-related or ethical, which could have a materially adverse effect on the company’s business, operating results and financial condition and, as a result, the share price. The following risk factors are currently considered by the Executive Management to be the most relevant risks to Yara’s business.
Yara’s vision to be an industry shaper and its ability to deliver on overall ambitions and goals are dependent upon the company successfully implementing its strategy and capitalizing on new business opportunities.
With the current business platform, Yara’s goal is to achieve a ten percent market share of the global fertilizer market. This market share will maximize the advantages of the company’s business model: scale, flexibility and global reach. Yara strives to reach this goal by implementing a business strategy consisting of a number of key elements, all based on Yara’s competitive strengths. In a highly-competitive industry, operational excellence with a strong focus on cost control, capital productivity improvement, optimized capacity utilization and continued expansion of presence in key markets will always remain key objectives.
To ensure that the right decisions are made and to fulfill its strategy of profitable and sustainable growth, Yara builds on extensive business experience and leading industrial and agronomic expertise and continuously reviews business models and commercial processes.
In connection with growth measures pursued by Yara, an overall understanding of the pricing risk in commodity fertilizers is vital when making value-creating business decisions. There is always a correct price for any asset, and a company that has a clear view of the pricing mechanisms of its products has a better ability to create value. Yara has a proven acquisition track record with successful integration (e.g. Kemira GrowHow, Saskferco, Fertibras).
The operation of Yara’s production plants, storage facilities and the transportation of products have associated risks of major accidents, such as explosions, leakage or fire, or causing harm to property, employees, communities or the environment.
Yara has a strong track record in health, environmental and safety performance. The belief that every accident is preventable is the basis of the safety program within the company. The goal is that no one should be injured or their health jeopardized while working at Yara. Yara works continuously and systematically to prevent occupational safety risks and avoid any accidents, by means of stringent standardized operating procedures throughout the company, training of employees and audits.
Strong management commitment and employee involvement in preventive actions is crucial and compliance is monitored diligently. Through internal networking and best practice, new improvements / changes are being implemented in the organization. All accidents and near-miss incidents are thoroughly investigated and preventive actions are implemented to avoid similar incidents in the future.
Despite the nature and scope of the operations, with a high need for responsible risk management, Yara has rare occurrences of accidents as compared to the industry average.
Yara’s operations are subject to many environmental requirements under the laws and regulations of the various jurisdictions in which the company conducts its business. Stricter environmental legislation also creates new business opportunities.
The Yara Operational Standards have been implemented throughout the entire organization.
Throughout more than 100 years of operation, Yara has built a strong reputation among its stakeholders around the world. Since the IPO in 2004, the company has additionally built a distinctive brand and strong brand equity. The brand recognition and strong reputation are significant assets that are reinforced through precise operating procedures on a global scale. During 2009, all major plants and market management teams received intense crisis management training. Considerable effort is put into scenario planning to eliminate risk of reputational damage and devaluation of the brand assets.
Recognizing that reputational value is based upon Yara’s total operations, reputational risk management has a wide scope ranging from product issues, accidents, security and corporate matters to more external events such as natural disasters and political interference. Given the broad and diverse nature of its business, Yara is very focused on building management awareness and crisis management capability at top industry levels. At every step, the company wants to shape best practice in order to mitigate any unforeseen reputational impact that could hurt the business.
Sourcing of natural gas and oil
The availability and price volatility of natural gas and other essential energy sources pose both opportunities and risks for Yara. Being dependent upon large volumes of energy, the company’s position and operating results could be adversely affected by the inability to replace, on competitive terms, the supply contracts when they expire. These risks are minimized through global purchasing activities, based on the company’s energy strategy. Yara continually monitors the credit risk of its suppliers and business partners.
The pricing structure of energy contracts are either spot deal or forward contracts, which are oil-linked or gas hub-based.
During the last years, Yara has switched a major part of its European gas sourcing from oil-linked to hub-based contracts. Yara has chosen to stay mainly spot on the hub exposure and limit forward buying.
The choice to stay spot is based on the historically proven strong contango in the forward gas market, possibly explained by low liquidity and a concentrated supply side wanting to discourage hub-based pricing. Yara is well-positioned to cover the risk of the spot exposure. The company has the operational flexibility to reduce gas purchases and import ammonia for fertilizer production if gas prices peak. Yara also has a natural hedge in the strong correlation between nitrogen fertilizer prices and global energy prices.
Yara is of the opinion that oil over time will have a stronger price development than natural gas. Oil consumption is mainly driven by the transportation sector having few substitutes. Natural gas consumption is more driven by electricity and heating, where coal and nuclear energy are closer substitutes.
Yara believes that long-term nitrogen fertilizer prices will be set by the cost of developing new production in low-cost gas regions. With LNG-parity developing, the gas cost in these areas will be linked to gas prices in Europe, reducing the risk for high European gas prices. Linking Yara’s European energy costs to oil would provide more price risk.
Sourcing of dry raw materials
For the production of NPK, Yara depends upon access to dry raw materials such as phosphate and potash salts. Yara has through acquisitions added sourcing capability of own phosphate rock, reducing dependence upon imports from other suppliers. In addition to its own mining operations, Yara has a strong belief in long-term relationships with a wide network of suppliers, to minimize dependence upon a few. For potash, Yara is not vertically integrated into ownership of mines, which creates risks for the NPK business in times of high potash prices.
Yara’s ability to compete effectively and meet market demands depends heavily on the skills, experience and performance of its employees. A sufficient, balanced and suitably qualified staff is essential for Yara to be successful in its endeavors.
The company has through its global presence access to highly qualified and diverse personnel.
Yara’s focus is to optimize workforce performance through people management, performance management processes, talent development frameworks and coordination, organization and branding of Yara’s learning activities. Yara is building a candidate pipeline through key talent identification, succession tools, global talent sourcing and recruitment processes. In addition, Yara continues to build a highly-valued work culture based on innovation, talent retention and teamwork.
Yara established a dedicated compliance unit in 2009, responsible for coordinating and overseeing ethics and compliance work, including the follow-up of corporate citizenship commitments and reporting.
During 2009, the Yara Ethics Program was developed, based on the fundamental principles of the company’s Code of Conduct, structured around its core values of ambition, teamwork, trust, and accountability. The program was launched early 2010.
The global financial crisis has led to increased focus and attention on liquidity, credit and currency risk in general. Through constant development of procedures and best practice, Yara has established comprehensive tools to reduce/minimize such risks.
Liquidity risk may result from sudden unexpected cash outflows, a fall in credit rating, or other events causing counterparties to avoid lending. This could affect Yara’s ability to realize its strategic objectives. Yara’s strategy for mitigating liquidity risk is to maintain a solid financial position and strong creditworthiness. This is achieved by flexibility in capital expenditures and fixed cost levels. Yara is also able to implement measures to reduce credit risk further, increase focus on liquidity planning and to match the maturity profiles of the loan portfolio.
Yara has a well-established system for credit management, with established limits at both customer and country level. Yara’s geographically diversified portfolio reduces the overall credit risk of the group. Due to Yara’s geographical spread and significant number of customers there are no significant concentrations of credit risk.
Prices of Yara’s most important products and raw materials are either directly denominated or determined in US dollars. In markets outside the US, local prices will generally adjust to fluctuations in the US dollar exchange rate, however with a certain time lag.
Yara keeps a major part of its debt percent in US dollars in order to reduce overall currency exposure. Yara utilizes derivative instruments to manage foreign currency exchange rate risks.