Risk Management

Risk Management

The Company has several opportunities to be exposed to financial risk due to the activities/business activities carried out, such as market risk (including the impact of foreign exchange rate and interest rate risk), price risk (commodity), and credit and liquidity risk.

The Company’s risk management aims to identify, measure, monitor, and manage primary risks to protect long-term business continuity and minimize unexpected impacts on the Company’s financial performance.

The treasury carries out the financial risk management function under a policy approved by the Board of Directors. The treasury department identifies and evaluates financial risks. The Company uses various methods to measure the risks faced, such as sensitivity analysis for interest rate risk, exchange rate risk, other price risks, and receivable aging analysis for credit risk.

In general, the level of risk faced by the Company can be described as follows:

Risk of Increase in Raw Material Prices

The risk of rising raw material prices arises because of volatility in raw material prices caused by the weakening of the Rupiah exchange rate and the increase in oil or natural gas prices. The Company obtains raw materials from suppliers both domestically and internationally. To mitigate the above risks, the Company entered into a contract to purchase raw materials at an agreed price during the contract period. The product’s selling price is adjusted to the purchase price of raw materials. This contract aims to maintain the Company’s profit margins.

Risk of Decline in Fertilizer Commodity Prices

The increase and decrease in fertilizer raw materials’ prices affect the selling price of the Company’s products. The risk of decreasing fertilizer commodity prices will reduce the Company’s products’ selling price, which will ultimately have a negative impact on the Company’s revenue but not materially affect the Company’s profitability. To mitigate the risk of falling commodity prices, the Company maintains a margin of selling prices for the Company’s products to consumers. Besides, the sale of the Company’s products is also carried out in sales contracts whose formulations use international raw material price references.

Risk of CPO Price Decline

The risk of falling prices for Crude Palm Oil (“CPO”) results in oil palm plantations trying to make efficient and reduce fertilization frequency, thereby reducing fertilizer purchase consumption. Operational efficiency in oil palm plantations or reduction in operational oil palm plantations can directly affect fertilizer use. Reducing fertilization frequency, the volume of fertilization and fertilizer in plantation activities will reduce the demand for fertilizer in general and NPK fertilizer in particular. To mitigate the risk of CPO price decline, the Company continues to develop the Company’s consumer base by increasing the number of the Company consumers, especially in plantations that can carry out fertilizing activities regardless of CPO selling prices.

Business Competition Risk

There are 7 (seven) NPK fertilizer producers in Indonesia with a large enough production capacity. The Company supplies non-subsidized NPK fertilizers around 4.5% to 5% of the total national demand, reaching 7.5 million tons. With a market share of this size, it can lead to the dynamics of fertilizer business competition, such as price wars on the market. To mitigate the above risks, the Company continues to develop markets in plantations that still use single fertilizer to switch to compound fertilizers. The Company consistently maintains the quality of the Company’s products and maintains good relations with consumers.

Risk of Changes in Foreign Exchange Rates

For the risk of exchange rate fluctuations, the Company uses a significant portion of its Rupiah to conduct its business activities. The Company does not feel a significant effect on foreign exchange rate fluctuations.

Risk of Increased Interest Rates

An increase in interest rates can have a negative impact on the Company’s business activities because an increase in interest rates will result in increased borrowing costs, which can impact the decline in the Company’s net profit. Besides, this also results in increased costs incurred by the Company in obtaining new funding for business development for working capital and capital expenditure.