eurochem-annual-report-2011

Business review
Management report
Income statement continued
Structure of materials and components 2011
RUBm
4
5
6
7 1
2011
3
54 EuroChem Annual Report and Accounts 2011
2
2011 2010 2009
1 Natural gas 13,619 12,006 9,250
2 Apatite 7,566 5,442 1,039
3 Other 6,871 5,111 4,741
4 Goods for resale 5,296 2,991 2,671
5 Sulphur 2,964 1,499 1,448
6 Ammonia 2,990 264 340
7 Potassium
chloride 1,295 1038 955
Total 40,601 28,351 20,444
Despite the gradual increase of natural gas prices in Russia, we continue to benefit from cost advantages
over competitors operating in areas with higher gas prices, such as, for example, Ukraine and Europe.
The Russian government’s current intention to gradually raise domestic gas prices to a level equivalent
to the European netback price has prompted us to initiate a partial back integration into gas production
so as to provide us with a natural hedge. Nevertheless, despite the planned increase, as illustrated in the
tables below, a significant cost advantage is expected to remain even when assuming domestic gas prices
reach European netback levels
Maintaining competitiveness in nitrogen
Prilled urea, delivered to Brazil cost (USD/tonne)
Nevinnomysskiy Azot
Ukrainian producers
East-European producers
0
Assuming gas price = USD 160/1,000m3 (equivalent to USD 340 netback price from Europe)
Assuming gas price = USD 235/1,000m3 Assuming gas price = USD 374/1,000m
Gas cost Other production costs Delivery costs
3
50 100 150 200 250 300 350
Prilled urea, delivered to Europe cost (USD/tonne)
Novomoskovskiy Azot
European producers
Ukrainian producers
0
* Gas costs for Western Europe as at German border.
Assuming gas price = USD 160/1,000m3 (equivalent to USD 340 netback price from Europe)
Assuming gas price = USD 364/1,000m3 50 100 150 200 250 300
Assuming gas price = USD 235/1,000m
350
Gas cost Other production costs Delivery costs Import duty (Europe)
3
Distribution, general and administrative and other operating expenses
Compared to 2010, total distribution costs increased by RUB 1.2bn or 7% to reach RUB 19.0bn as
compared to RUB 17.8bn in 2010. Transportation costs remained the main component of distribution costs
and accounted for 84% of these expenses in 2011 compared to 87% the previous year. Despite the year’s
lower iron ore sales volumes and the oversupply situation on the freight market, slightly higher fertilizer
sales volumes for some products coupled with longer average shipping distances nudged transportation
costs up 3% to RUB 15.8bn.
General and administrative (G&A) expenses were 24% higher in 2011 at RUB 4.7bn, as compared to the
RUB 3.8bn of the previous year. G&A labour costs, which went from representing 56% to 52% of G&A
expenses, rose 16% year-on-year to RUB 2.4bn. The increase was spurred by a combination of salary
indexation and increased personnel intake for the development of our potash deposits. Other expenses
grew 42%, in part due to increases in property tax expenses which stemmed from additions to fixed assets.
Other operating expenses were higher in 2011 and amounted to RUB 191m, as compared to RUB 17m
in 2010. Behind these expenses were operating (i.e. those not resulting from financial activities) foreign
exchange losses of RUB 200m from the depreciation of the US dollar against the Russian rouble in 2011
versus gains of RUB 208m the previous year on strong US dollar appreciation.