Risk and uncertainties

Our Risk Management framework enables us to mitigate the challenges that we face, based on our operational expertise and our view of the markets in which we operate.


The risk management processes we continue to develop aim to help us better identify, manage and address the risks associated with our business activity. Whether these are of an operational, financial, strategic or reputational nature, our ability to mitigate these risks is what allows us to successfully meet our business plans and fulfil our ambitious development targets. We evaluate risks according to their degree of probability and the severity of their impact before prioritising them in accordance with our response strategies. Appropriate risk response actions can vary between avoidance, transference, mitigation, or acceptance.

Our key risks are detailed and illustrated further in our strategic risk maps below.


Unplanned production shutdowns or equipment failures
Our operational performance and financial results are directly related to our ability to produce and sell our products. Any unplanned disruptions to production due to equipment failures or unplanned stoppages may negaatively affect the Group’s performance. Our implementation of comprehensive maintenance and capital repair programmes coupled with our long-term programme of capital investments and renovations are designed to mitigate these risks. Our risk response is further complemented by employee technical training programmes as well as equipment and business interruption insurance.

Health, safety and environment (HSE)
All our production subsidiaries employ environmental management and safety systems certified to ISO 9001, ISO 14001, and OHSAS 18001.

We regularly review our HSE procedures and emphasise on-site emergencyreadiness, especially in the event of an emergency situation potentially involving hazardous chemicals or other dangerous items. We offer employee accident insurance and we have introduced a series of HSE components within our management KPI system to embed HSE accountability throughout the production chain.

The importance that we attach to our HSE Policy and Framework is exemplifiedby the appointment of Egor Yurkin to establish and lead a new HSEDepartment. Egor brings many years of experience in health and safety management in international industrial companies. His key aim will be to establish EuroChem as a health and safety exemplar by 2018.

We seek to control as much of the production chain as possible, from raw material procurement to intra-Group logistics and production to R&D, all the way to our customers’ fields. Developed logistics functions are vital in minimising inefficiencies and capturing value. We produce up to 15 million tonnes of products per year, from raw material procurement, to intercompany shipments and final delivery; our logistical requirements are extensive and essential to the success of our business model. We employ various techniques, ranging from daily planning to targeted insurance coverage, to constantly minimise the probability and possible impact of potential events adversely affecting our ability to supply our plants and customers.

Fraud and bribery
EuroChem seeks to build its business processes in a way that minimises the possibility of fraud risks. Our Company’s Internal Affairs and Audit units regularly evaluate the integrity of our internal control systems. Preventive and detective controls, such as transaction monitoring procedures complement our risk action. Purchases are conducted through a tender process, which includes a series of strict requirements for potential suppliers of goods and services.

Construction risks
We have set ambitious strategic development targets for the Company. Delays in the construction of facilities or production units can ultimately erode our competitiveness and lead to significant loss of benefits, such as we have seen in one of our potash projects. To reduce our exposure to these risks we carefully select our contractors and seek to control procurement and construction risks. We have recruited experienced personnel and leading contractors as well as taken out insurance coverage for mining, logistics, property, and business interruption risks. These procedures have been further enhanced following the difficulties we have experienced at our VolgaKaliy potash project.

Financial risks
We assess and prioritise financial risks according to their impact on the Company’s cash flows, including the possible contagion of risk situations across the Group’s units. The prices for the majority of our products (nitrogen and phosphate fertilizers, and iron ore concentrate) are subject to relatively high volatility. These can be affected by various factors ranging from raw material availability and pricing to political and regulatory changes, farmer economics, seasonal variations and disruptive weather patterns. The main objective of the financial risk management function at EuroChem is to reduce the volatility, in a cost-effective manner, of the Group’s likely future cash flows to the extent necessary for maintaining its balance sheet at a desired level of strength (across-the-cycle net debt/next twelve months’ EBITDA ratio within a 1.5x and 2.0x band).

Product prices
Out of all our risk factors, declines in either or both fertilizer product prices and iron ore prices typically have the largest impact on our cash flows. While the ability to mitigate these risks through financial instruments is limited by liquidity constraints, their use is assessed by management on an ongoing basis. We constantly seek to build on our competitive advantages and improve our position on the global cost curve. Investments in efficiency and deeper vertical integration coupled with our geographical expansion have provided us with both relatively predictable and stable margins across our business segments by spreading the risks associated with the seasonality and cyclicality of product demand.

Foreign currency risk
Our revenues, expenses, capital expenditure, investments, and borrowings are denominated in different currencies. While a significant portion of our revenues come from export sales denominated in US dollars, our expenses, excluding debt servicing, are mostly incurred in Russian roubles. As a result, an appreciation of the Russian rouble against the US dollar tends to result in an increase in EuroChem’s costs relative to its revenues. This currency mismatch can significantly affect our profitability and debt burden.

We currently mitigate this risk by matching cash flows and using derivative financial instruments such as forward currency contracts to limit our exposure to currency fluctuations.

Interest rate risk
We are exposed to interest rate risk as a portion of our borrowings, apart from Eurobonds and rouble bonds maturing in 2017 and 2018, respectively, and a bilateral loan with a Russian bank, is comprised of loans with floating interest rates. While we may occasionally enter into hedging arrangements to mitigate the impact of interest rate fluctuations, the impact on our cash flows tends to be limited as periods of rising interest rates historically correspond with periods of elevated commodity prices.

Increases in costs
Increases in certain major costs items such as natural gas, electricity, and transportation costs at a rate outpacing increases on global markets may have a negative impact on EuroChem’s position on the global cost curve.

We seek to reduce the impact of rising prices and tariffs by increasing energy efficiency at our production facilities, optimising logistics with our own rail stock, transhipment terminals, and sea-going vessels, and deepening our vertical integration.

Other financial risks that we continuously monitor include liquidity risk, credit risk, financial covenants and ratings risks, and material tax risks. A discussion of our credit risk management is available in note 35 of EuroChem’s 2013 audited IFRS financial statements.

Strategic risks
We identify, assess, and respond to strategic risks through the regular strategic review of our business segments. We classify as ‘strategic’ the risks gravitating around and within business and investment decisions, which arise and evolve within our regional and global competitive landscapes as in our regulatory environment.

The key strategic risks to our Nitrogen, Phosphate, Potash, and Distribution segments are highlighted in our strategic risk maps and table below.

Reputational risks
The advent of the digital world and the increasing reach of social media have significantly reshaped the way organisations view and manage their reputation. We view the protection of our reputation as a crucial aspect of our risk management procedures. Risks to our reputation encompass operational, financial, and strategic dimensions and can have repercussions throughout the Group’s business. To mitigate these risks we rely on our sound corporate governance and robust HSE standards. Additionally, our public relations,government, and investor relations functions follow our unified communication policy which is underpinned by our timely, accurate, and transparent approach to disclosure. We have further advanced our reputational risk management by implementing a crisis communications system, which aims to prevent and contain reputational damage by ensuring that a situation is dealt with publicly and in an open, timely, transparent and proactive manner.


Risk management methodology
In 2013, we created a methodological unit responsible for the development, implementation and continuous improvement of the unified risk management system within the Group, including all of its international business units. The Group-wide risk management methodology will be based on the international standards, such as ISO 31000 and COSO ERM, and will include unified policies and methods for strategic steering, risks assessment and mitigation, communications and monitoring so as to further improve the effectiveness of our risk management and internal controls systems. We plan to roll out the implementation of our unified risk management system across all the Group’s processes, including strategy and planning, operations and change management, throughout 2014-2016.

Operational risks
The main points centre on the need to increase the efficiency of business processes and reach corporate maturity. But in addition during 2013 we conducted a series of necessary measures to improve the efficiency of our integrated insurance programme. As an example, we have implemented permanent storage insurance within our product cargo programme, and we have worked with a global insurance broker and risk adviser to:

  • Identify effective insurance claims
  • Establish probable maximum loss (PML) and maximum foreseeable loss (MFL)
  • Assess risks identified by independent industrial engineers


One of our strategic objectives remains to further integrate our risk management policies and system at every level of the Group’s activity.

In 2014, we plan to complete the implementation of our integrated insurance programme system to all areas of the business, including to foreign assets. Coverage is to include:

  • Unified insurance methodology
  • Evaluation of insurance and reinsurance service providers
  • Unified documentation procedures
  • Guidelines for the assessment and identification of risks
  • Evaluation of insurance brokers.

Also in 2014, we plan to implement a project finance insurance of underground risk programme.



A key pillar of EuroChem’s strategy is rooted in its upstream operations and we aim to achieve full self-sufficiency in all three primary nutrient segments over the next few years, in natural gas, phosphate rock, and potash. At the same time, we will continue expanding our product mix as we evolve with our customer base.

Our ability to anticipate, assess, and address risks in a timely manner is crucial to our business. EuroChem’s risk management system is key in improving the efficiency of our business processes. Over the next few years our task is to fully integrate our risk management system throughout the Group’s operational processes to minimise risk and maximise value creation.

Contingencies, commitments and operating risks are further discussed in note 34 of EuroChem’s 2013 IFRS Financial Statements while additional information on financial and capital risk management is provided in note 35.

For this purpose, the Group will make significant investments into construction of new nitrogen and phosphate production capacities in Russia and abroad.


Each circle represents the estimated position of a key risk as at 31 December 2013. The dotted arrows illustrate changes to risk perception over the previous six month period. The absence of an arrow implies a stable risk perception. The table below summarises the key factors behind the highlighted changes in the risk assessments shown:

Preceding six months

Following six months






Potash prices reduction


Dramatic change of the market model due to dissolution of the BPC marketing vehicle.

Expectant attitude of major buyers


The gradual rebalancing of the market. The need to replenish stocks by the main buyers.


Nitrogen prices reduction


Expected addition of new capacities.

Significant increase of Chinese exports


The high season export tariff policy in China is expected to be revised to incentivise local consumption. Potential capacity additions (primarily, North American) have been revised downwards.


Iron ore prices reduction


Stable Chinese demand


Slowdown in China’s economic growth.

Dramatic increase of supply (new projects – Rio Tinto, BHP).


Phosphate prices reduction


Increase in export from China.


– Further benefits expected from the environmental capital expenditure programme

– Deeper integration and improvement of HSE functions throughout the business chain

– Commissioning of additional water treatment facilities


Foreign Exchange Risk


There were no fundamental changes in the US and European economy. Russian Central Bank to continue supporting Russian rouble


Slowdown of the Russian economy. Increased pace of the business activities in USA and Europe. Lower Russian Central Bank interventions to the Rouble exchange market.










Failure to meet deadlines and budgets of potash projects due to various issues surrounding logistics, geological conditions, shaft sinking and ore extraction operations.

Involvement of experienced mining sub-contractors.


Potash prices

Decline in price for potash fertilizers may result in sub-optimal returns from the potash project.

Achieve the lowest cost-delivered-to-market globally among the traditional mining firms. Increase own consumption of K by raising NPK capacity. Secure own logistics and shipping channels.




Gas cost increase

Differential in natural gas cost between Russian and European/US producers is decreasing.

Upstream integration.

Deep modernisation of ammonia production to improve ammonia gas efficiency.

Launch production of higher-value-added and premium speciality products.



Unplanned business interruption, including accidents and incidents due to the age and depreciation of equipment, breach of technological processes and logistics.

Full insurance coverage, including business interruptions. Controls over maintenance and repairs. Logistics management/new storage facilities.


Nitrogen prices

New supply from low gas cost areas may cause an unfavourable shift in EuroChem’s position on global cost curve.

Cost reduction, deep modernisation and efficiency upgrade of ammonia units. Own natural gas capacity. Branding of speciality products




Iron ore

Iron ore prices are largely based on Chinese growth and represent a risk to EuroChem cash flows.

Iron ore hedging mechanisms. Monitoring of debt levels for potential volatility in iron ore-related cash flows.


Phosphate prices

New supply from low cost areas may lead to the gradual erosion of EuroChem’s position on the global cost curve.

Reliance on third-party supply of the phosphate rock.

Tight cost control; added flexibility at production plants; increase NPK production in line with own potash ramp-up; increase foothold in the domestic and CIS markets.

Target reductions in logistics costs.




Bottlenecks/increasing prices

Limited fertilizer transhipment capacity in Russia. Growth in the cost of rail and port services. Limited warehousing capacity within port infrastructure. Limited in-house transportation and freight capability.

New projects/mining and production capacities.

Build and operate own port terminals and transhipment capacity as well as storage facilities and the acquisition of rolling stock and vessels. Accurate planning of logistics within investment/project planning

Automation of the routing/dispatch model




Environmental/ reputational

Environmental/reputational damages due to the nature of production coupled with age of certain assets.

Measure and monitor environmental footprint and public perception.

Commit funds to reduce the environmental impact of operations.

Rapid response to environmental emergencies – real and alleged.

Policy of openness to the public.

Insurance programme.




Cash flow/debt capacity shortage

EuroChem may not be able to cover all its planned investments from operating cash flows and new debt due to delays in the launch of projects and/or main products price reductions.

Maintain maximum readiness to tap all possible sources of debt and/or equity finance; extend debt maturity profile, effective hedging strategy. Study of alternative funding options, review financial covenants, strategic partner, project financing and other non-covenant financing



Foreign exchange risk

Cash flow structure is exposed to the currencies exchange rates volatility.

Monitoring of the currency positions fluctuations.Hedging. Borrowings in the planned cash inflows currencies.