Yara’s risk management aims to identify, assess and manage risk factors that affect the performance of all parts of the company. We operate a continuous and systematic process to mitigate potential damages and losses and to capitalize on business opportunities. Ultimately, the process contributes to achieving Yara’s long-term strategies and short-term goals.
Risk management at Yara is based upon the principle that risk evaluation is an integral part of all business activities. We have procedures for identifying, assessing, managing and monitoring our primary risk exposures. In some cases, Yara may utilize derivative instruments, such as forwards, options and swaps, to reduce these risk exposures.
Framework and procedures
In 2009, Yara implemented a framework including policies and procedures to facilitate risk management. The primary purpose of the framework is to minimize the organization’s exposure to unforeseen events and to provide certainty to the management of identified risks. This creates a stable environment within which Yara can deliver its operational and strategic objectives.
Yara has adopted the Committee of Sponsoring Organizations of the Treadway Commission (COSO) ERM framework as the best practice benchmark for assessing the soundness, efficiency and effectiveness of its risk management. Yara has also learned from other companies in order to compare practices and improve its risk management system.
While risk management is a centrally controlled process, the responsibility for day-to-day risk activities is placed with the business segments and expert organizations. Through a continuous process of risk identification, monitoring, management and reporting throughout the organization, Yara provides assurance to the Board of Directors and stakeholders.
The business segments and a number of expert organizations perform a risk assessment, aiming to identify, assess and document the key risks that affect the business and understand how these risks influence performance. Yara’s executive management performs a separate risk evaluation, based on a top-down approach.
Yara determines the materiality of risks by developing a risk profile and considering the likelihood and consequence of each risk. In assessing the likelihood and consequence of risk, we employ a combination of qualitative and quantitative risk assessment techniques. We evaluate each risk to determine whether the level of risk is acceptable or unacceptable and to prioritize the risks that have the greatest potential impact on us.
We implement mitigating strategies and operational controls to ensure that each risk is minimized and effectively managed. When preparing the risk mitigation plan, we determine risk responses by evaluating the cost of control and potential impact, relative to the benefits of reducing the risk. Our business segments and expert organizations are responsible for making business continuity planning part of their key risk management activities and preparing contingency plans for high-impact, low-likelihood risks.
Once risks are treated, we monitor the residual risks continually to ensure that they remain at an acceptable level. We review the risk profile and update it at least annually, with more frequent updates if we identify new opportunities or risks. The risk mitigation plan is reviewed and updated on a quarterly basis to reflect the current status of risk and action plans, and communicated to Yara Management during the quarterly review meeting.
Yara is exposed to a number strategic, operational, financial or compliance-related risks that could have a material adverse effect on the company’s business, operating results and financial condition and, as a result, the share price. Executive management currently considers the following risk factors to be the most relevant to Yara’s business:
Yara’s vision to be an industry shaper and its ability to deliver on its broader ambitions and goals are dependent upon the company successfully implementing its strategy and capitalizing on new business opportunities.
A set of global trends and an array of external events, in addition to more company-specific risks such as acquisitions, divestments and capital structure, could have a significant impact on Yara’s growth trajectory and shareholder value. These risks could impede Yara from reaching its strategic goals. However, if managed properly, they present opportunities. By managing strategic risk, Yara is able to position itself as a risk shaper that pursues growth both more aggressively and more prudently.
To ensure that the right strategic decisions are made, Yara builds on extensive business experience and leading industrial and agronomic expertise. The company continuously reviews business models and commercial processes. Partly building on lessons learned from the financial crisis, Yara has made strategic decisions to implement new business models in key countries. To better capitalize on Yara’s global strengths, improve profitability and achieve strategic objectives, the company repositioned and changed the focus of its operations in Brazil, Thailand and South Africa.
Thorough insight into the pricing risk in commodity fertilizers is vital when making value-creating business decisions. The pricing eventually determines whether a project is profitable or not, and Yara has historically proven its dedication to this philosophy by its willingness to walk away from expectedly unfavorable deals such as the one with Terra Industries Inc.
A range of risks, from identification to integration, are associated with major investment projects. While Yara has a proven acquisition track record with successful integration, we continually take steps to improve procedures and risk assessments. This ensures that Yara is able to effectively integrate businesses acquired or generate the cost savings and synergies anticipated.
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, causing harm to property, employees, communities or the environment.
Yara has a longstanding commitment to safety and a strong track record in health, environmental and safety, compared to the performance of our industry peers. Our 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 accidents, through strict, standardized operating procedures, employee training and audits. Strong management commitment and active employee involvement in preventive measures is crucial, and compliance is monitored diligently. All accidents and near-accidents are thoroughly investigated and preventive action implemented.
However, Yara experienced three serious accidents with a total of four fatalities in 2010, demonstrating the need for continuous focus on operational discipline and follow-up of work activities. A lot of effort has therefore been expended to improve process safety at Yara, building on a process that was initiated in 2009.
To maintain its industry-leading position and further improve operational safety mechanisms, Yara established Process Safety as a functional area in 2010. The Process Safety programs focus on technical analysis, effective alarm and control systems, procedures, training and competence development. More attention is also given to reducing incidences of human error, an important factor in most accidents.
Yara’s operations are subject to many environmental requirements under the laws and regulations of the jurisdictions in which the company conducts its business. Stricter environmental legislation also creates new business opportunities.
Over the past century, Yara has built a strong reputation and brand recognition with its stakeholders around the world, significant assets that are reinforced through precise operating procedures on a global scale.
Reputational value is based upon Yara’s total operations. A variety of issues and incidents could potentially harm Yara’s reputation and public image, ranging from product liability, accidents, security and corporate matters to external events such as natural disasters and political interference.
Reputational risk management therefore has a wide scope. Yara’s risks are mitigated through implemented policies, procedures and tools and by building the capability to communicate skillfully with stakeholders and the media, particularly in challenging situations.
Yara is focused on developing industry-leading capabilities in awareness and crisis management. At every step, the company aims to implement best practices in mitigating unforeseen and harmful reputational impacts. Considerable effort is put into crisis management training and scenario planning to minimize the risk of damage to the company’s reputation and brand assets.
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. Given that the company’s operations require large volumes of energy as inputs, our position and operating results could be adversely affected if we are unable to secure competitively priced replacements when our energy supply contracts expire. These risks are minimized through global purchasing activities, based on the company’s energy strategy.
Yara’s energy contracts are structured and priced as either spot deals or forward contracts, which are oil-linked or gas hub-based. During the last years, the company has switched a significant percentage of its European gas sourcing from oil-linked to hub-based contracts. Yara has primarily opted to utilize spot pricing on its hub exposure and limit forward buying.
Yara is well-positioned to cover the risk of its spot exposure. The company has the operational flexibility to reduce gas purchases and import ammonia for fertilizer production if gas prices peak. Yara also benefits from a natural hedge in the high correlation between nitrogen fertilizer prices and global energy prices.
Sourcing of dry raw materials
Raw material risks are linked to supply and the structuring of prices of raw materials necessary for production. Yara relies on key third parties, including key suppliers, for a range of raw materials. The company is vulnerable to termination of or material change to our arrangements with certain key suppliers, as well as the potential failure of key suppliers to meet their contractual obligations.
Yara depends on access to dry raw materials, such as phosphate and potash salts, for the NPK production. By upgrading its NPK plant and adding phosphate sourcing capability through acquisitions, Yara has increased its flexibility and reduced its dependence on imports from other suppliers. To reduce dependency further, Yara aims for long-term relationships with a wide network of suppliers. Yara works continuously to optimize the phosphate balance and identify opportunities of further improvement.
The potash operations are not vertically integrated, which represents a risk for the NPK business at times when potash prices are high.
Yara’s ability to compete effectively and meet market demands depends heavily on the competence, experience and performance of its employees. A sufficient, balanced and suitably competent staff is essential for Yara’s business to be successful.
Yara’s strategic focus and priorities are to optimize workforce performance, build a candidate pipeline and build a highly valued work culture. The company has implemented initiatives to improve the quality of human resource management, create a transparent recruitment process, secure access to the best talent available and evaluate talent and performance effectively.
Yara is exposed to several risks driven by changes to the political and economic conditions in the foreign countries in which it operates. Developments, such as changes in political leadership, could represent either threats or opportunities, depending on the specifics of the situation. A politically or economically unstable environment could affect investments and operations, resulting in financial loss. These risks are generally beyond the company’s control, but could result in Yara being unable to deliver on its obligations or fulfill its strategy and objectives.
Policies and guidelines on currency and country exposure are aimed at minimizing this risk, and the company’s exposure is limited in high-risk areas. Yara monitors political and economic developments in foreign markets as an input to risk mitigation recommendations. We utilize country and currency credit limits to ensure that our exposure is controlled. These measures are also used to assess the risk profile of new projects as part of the capital expenditure approval process.
Yara also uses insurance and trade finance instruments to mitigate this type of risk in certain cases.
Yara’s continued success as an industry leader depends on the company’s ability to retain and promote the ethical reputation and the public trust that it has earned. Yara’s Ethics and Compliance Department coordinates and oversees ethics and compliance work, including the follow-up of corporate citizenship commitments and reporting.
In February 2010, Yara launched a company-wide Ethics Program, based on the fundamental principles of the company’s Code of Conduct, structured around its core values of ambition, teamwork, trust and accountability. During the year, the program was rolled out throughout the organization and an array of ethics tools were provided to Yara employees, including a handbook, telephone hotline, videos materials and a web-based portal. So far, approximately 80 percent of Yara employees have participated in ethics training, which will continue in 2011, and there is currently a high level of awareness of the Ethics Program within the organization.
Although the financial crisis brought about increased focus on liquidity, credit and currency risk, financial risk management has always been an area of great attention in Yara. Due to its substantial operations outside Norway, Yara is exposed to various financial risks. Yara has in place, and is constantly developing, comprehensive policies, procedures and tools to manage these risks.
Yara continued to strengthen its financial position during 2010. The company’s debt-to-equity ratio has declined sharply after 2008, driven by a reduction in working capital as inventories were brought down to optimal levels, improved earnings and the profitable divestment of the non-core Fosfertil ownership.
Refinancing/acquisition financing risk
Refinancing/acquisition financing risk represents the risk that the refinancing of maturing loans or establishment of new financing may be difficult or costly to arrange. Adverse financial market conditions could lead to higher funding costs and postponement of projects. Yara’s strategy for mitigating this risk is to maintain a solid financial position and strong creditworthiness.
This is achieved by flexibility in capital expenditures and fixed cost levels. Yara reduces the refinancing risk by basing its long-term funding on a variety of funding sources to avoid dependency on individual markets and by timing the maturity dates of large facilities to avoid them turning due at the same time. Committed liquidity reserves are maintained to meet unforeseen costs.
Yara has access to sufficient funding and borrowing facilities to meet currently foreseeable requirements.
Credit risk represents exposure to potential losses deriving from non-performance of counterparties. Credit risk is monitored and managed by the business units on the basis of standard Yara policy and procedures and regular reporting. Yara has a well-established system for credit management, with defined exposure limits at both customer and country level. A number of instruments, such as credit insurance, letters of credit and bank guarantees, are employed to mitigate credit risk.
Yara’s geographically diversified portfolio reduces the overall credit risk of the group. Due to Yara’s geographical spread and large number of customers, there are no major concentrations of credit risk.
As the fertilizer business is essentially a US dollar business, prices of Yara’s most important products and raw materials are either directly denominated or determined in US dollars. In markets outside the USA, 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 in US dollars in order to reduce overall economic currency exposure. Yara also utilizes derivative instruments to manage foreign currency exchange rate risks.
A well-established system for currency risk management is in place, with defined currency exposure limits. Yara’s geographically diversified portfolio reduces the company’s overall currency risk.
Pension liability risk
Yara Pension funds are invested in various asset classes, the value of which moves over time dependent on the economy and the underlying assets. The different asset classes carry varying degrees of risk and expected rates of return. The assets shall over time cover the pension liabilities Yara has taken on.
Potential losses and/or increased liabilities may result in unfunded positions in local pension funds that may require cash transfers from Yara. The pension fund management is heavily regulated by respective regulatory authorities. Yara has established a common policy, for the asset allocation and management of the local pension funds. Each pension plan is managed by trusts/boards and reporting routines from the funds are established.
An important risk-reducing factor for Yara was the change in pension plans from benefit plans to contribution plans in the UK and Norway, which limits the potential increase in pension liabilities and transfers future risks to the employees.
Interest rate risk
Interest rates on different currencies vary dependent on the economy and political actions, which will influence Yara’s funding cost over time. The interest rate portfolio is optimized based on ongoing evaluations of financial markets and the economic situation, and the exposure is monitored closely. In order to reduce volatility, Yara keeps part of the portfolio in fixed interest rate agreements.
The overall exposure of our fertilizer business to interest rate fluctuations is considered low.