Good day, and thank you for standing by, and welcome to Yara's Fourth Quarter results 2021. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I'd now like to hand the conference over to your speaker today, Silje Nygaard . Please go ahead.
Yes. Hi, everyone. Thank you for dialing in, and welcome to the conference call for Yara's Fourth Quarter results presentation. I hope you all had a chance to watch our presentation today. We will just open up for questions. I am here together with our CEO, Svein Tore Holsether, and CFO Thor Giæver. We also have Dag Tore Mo on the line with us, our Market Intelligence. With that, operator, if you could please open up for questions. Thank you.
Thank you. As a reminder, if you wish to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound or hash key. Please stand by while we compile the Q&A roster. As a reminder, that is star one to ask a question. Your first question comes from the line of Alex Jones. Your line is now open.
Great. Thank you. Good afternoon. I've got two questions, if I can, please. The first on NPK premiums. Clearly they got significantly compressed this quarter by rising Nitrogen and Potash prices. Could you talk about, sort of the path to recovering those margins and whether you would expect to get back to sort of that $80 a ton that we saw in the first nine months of 2021, in the next few months, or whether it could take a bit longer, and whether there's a volume trade-off as well? Thanks.
That's the first one. The second question, just on power prices. Clearly natural gas prices have been very visible, but electricity prices have also gone up significantly and you don't necessarily disclose a sensitivity for that. Could you help us with how much that's contracted for you versus on the spot market and whether there could be a year-on-year cost impact for you in 2022? Thank you.
Yeah. Hi, Alex. This is Thor. I can comment on both and then the others may add. On the NPK premiums, as you know, and nothing unique for NPK, we see it at the same in nitrates that we you know very sharp increases on the commodity reference prices this quarter. The follow-through effects on other prices, products and markets takes more time. There's also the element of you know the highest prices we've seen. As you know, certainly for Nitrogen prices have fallen back a bit and so in a way the peak is quite small volumes, limited trades.
More generally on NPK, the prices move more slowly there, both on the way up and on the way down. And you can see in the illustration in the chart that the prices are moving, have moved up, but more slowly. Recovery, I mean, given the volatility we have now, it's we can't really sort of pinpoint a number where we'll be next quarter, for example, in terms of of a premium. Overall these prices are increasing but more slowly. Just keep in mind that, you know, what we've seen in the fourth quarter, certainly on Nitrogen prices are lower now than they were towards the end of the fourth quarter. On power prices, it's, and the range is again here due to timeline, because how this feeds into our cost of sales varies a bit by product and so on. It's in that range.
Great. Thank you.
Thank you. Your next question comes from the line of Andrew Stott. Your line is open.
Yeah, good afternoon. Thank you. Two questions. First is similar theme on realized prices. Depending on exactly how you calculate the NPK impact on the quarter, it seems to me like you're booking, I don't know, somewhere between $600 and $650 per ton for Urea, which would suggest that you're nearer that two-month lag than that one month. How much of that are you gonna recover in Q1? How is realized pricing looking now versus Q4? That's the first question. Second question is on Ammonia. Is there a number you can attach to the exceptional costs related to Ammonia imports for Q4? And is there any guidance for 2022? Sorry, I said two, I'm gonna steal a third. Any thoughts on China and its return to the export market? Thank you.
Hi, Andrew. This is Thor Giæver again. I can start on the realized prices. A bit sort of linked to the comments I just made. We've illustrated clearly that the rough timing effect in the quarter is a result of partly, you know, non-spot prices taking somewhat longer to move and also the fact that we sold relatively more in the first part of the quarter than at the end. As you may have seen in the report, we've also stated that sales were slower in December and in January.
We are now particularly in Europe right ahead of the peak season, and you know, that is also with industry deliveries being 17% behind a year earlier at the halfway stage of the season. You know, there is clearly a lot of demand to come and, you know, that's the normal period. Sometime between, shall we say, mid-February and early March, weather dependent and a bit sort of market dependent, that's where the peak deliveries come in Europe. Given all of the above, I mean, we're also in line with what is normal. We have a shorter order book typically in the spring in the first half of the year, longer order book in the second half of the year.
When you ask about recovery, I would say, you know, the symmetry factor here when you talk about price lags is not necessarily so much within a season, but within you know, in some periods you have price appreciation. Other times it goes the other way. In this situation, when prices move fast up, then the other price references do not react as quickly. You know, when it happens the opposite, we tend to benefit. We've seen that, for example, on NPKs, when raw material prices fall, NPK prices do take longer to adjust the other way. Yeah, your question, I think the second question was on the cost of Ammonia sourcing in the quarter. We haven't quantified this in the report, but it's in the region of $50 million-$60 million. The final question, could you repeat the question on China please?
Yeah, of course. Can I just pick you up on that second answer first? Is there any particular communication on 2022 on those Ammonia imports? I mean, maybe if I ask another way, are you still actually importing Ammonia at these levels?
Yeah. I mean, we are always importing Ammonia because we are structurally short in Europe and long.
Yeah
Outside Europe, we don't necessarily always sort of do that much internally. We do always have some external sourcing. It's at a lower level now than in the fourth quarter because, as you know, we had quite material impairments, particularly in October, November time. Now, most of our production is running normally, so we are sourcing less Ammonia now.
Okay, thanks. Yeah, the final question was: when do you expect China to return to the export market?
Yeah. That one. Now, I think we do, Dag Tore Mo, if you are on the line, you can maybe comment on this one.
Yeah. Can you hear me?
Yeah.
Yeah. I have not picked up any signs that there will be a change to the water signals that the restrictions will last through June. I'm not seeing anything. There are some small volumes coming out, but nothing major. Through June is our expectations, and there is also a paper market in China that is also behaving as if there is not going to be significant exports until the second half of the year. That is the current information we have.
Great. Thank you very much.
Thank you. Your next question comes from the line of Chetan Udeshi. Your line is open.
Yeah, hi. Thanks for taking my questions. The first question I had was, you know, there is a chart in your presentation, which is the usual chart, which shows that the sort of stocks of the inventory of nitrate producers as of December and most of Q4 last year was below the sort of levels we've seen through last seven-eight years. I was just wondering if you had any sense of how the sort of stock situation in the supply chain outside of the producers stocks.
Do you have any tracking of that metric, given that, you know, that is also a key part of the puzzle in terms of how the demand might behave in the next couple of months, especially as we go into the peak season? Second question was, thanks for quantification of the decarbonization CapEx in the slide, which is close to $100 million. Is that sort of a run rate we should expect going forward per year for Yara, at least for the next few years? Or is that not necessarily the case, and it could be lumpy from one year to the other?
Yeah. Okay. I can start on the nitrate stocks and Dag Tore Mo maybe speak up if you have anything to add. As you say, Chetan, would be nice to have data here. Unfortunately, particularly for Europe, which is for nitrates, that's the region you're mainly talking about. There are no public statistics on the rest of the value chain stocks. Having said that, I think the situation now and has been the case for a while is there's I would say nothing to indicate that those stocks are significant. We've had I would say quite a few years in a row of relatively more just in time buying compared to history.
We know that delivery is at the halfway stage of this current season. We're 17% behind. You know, demand and application rates have generally been normal to strong. I would say there's nothing to indicate that those stocks are significant. Dag Tore Mo, I don't know if you want to add to that.
No, I think that you're right, Thor, because we have also indication that the opening inventories or let's say leftover inventories from last season, we think we're also very low as prices were increasing. I think you're absolutely right, Thor.
Yeah, thanks. In terms of the GHG reduction CapEx, we have guided on a spend of not per year, but over the period up to 2025, of $250 million-$450 million.
To add this is actually keep in mind that there's an income component to this as well as the food system needs to decarbonize since it represents 25%-30% of greenhouse gas emissions, while Yara is already leading when it comes to carbon footprint, both in our own production but also in agronomic advice and application of our products. There are further opportunities here and where the major food companies have made commitments to decarbonize their supply chains. An important component of that is what happens in the field of the farmer, but also how products are produced.
It's about creating the incentives for the farmers as well, so that the farmers are not only paid for a crop, but also how the crop is produced. This will generate more and more income in the years to come. We see it also as a significant breakthrough on the new contract with the Swedish company Lantmännen, where we made the first contract for fossil free fertilizer based on a value chain impact. That's an illustration of what is possible here when you do a full value chain thinking around it. Based on studies done by Boston Consulting Group together with the World Economic Forum, the overall cost to decarbonize the food system isn't that large.
It's about a 4% cost increase. If you look at the totality, this is doable. Obviously, if we were to absorb it only in our P&L, it would be too high for the farmer. It would be too high for them to absorb it as well. When you see the full value chain, this is both doable, and I should also add the necessary in order to reach the Paris Agreement.
Thank you.
Thank you. Your next question comes from the line of [James] . Please ask your question.
Yes. Good afternoon. I think Thor has touched upon it, but just to be clear, on this realized prices also on nitrate there, we saw them being on the aim roughly 130 below the one-month lag and much closer to the two-month lag market reference price. How should we think about this for Q1? Will it be then, I think you mentioned shorter timeline again, that it should be more like a normal situation, so closer to the one-month lag for Q1.
Yeah. Hi , this is Thor Giæver. Yeah, I think that's the correct way to think about it. As mentioned earlier, it's not anything unusual as such, given that. You know, it's normal seasonally to have a longer order book in the start of the season and second half of the year and shorter in the springtime. Of course, as you're aware, and as we've shown in the presentation, the sort of dollar impacts of this are higher with the higher price volatility.
Thanks. Just a follow-up on the demand side. You mentioned expectations and how does this develop for nitrates in Europe. We saw that deliveries in Africa and Asia were down 27% year-on-year in Q4. Do you see more pushback from customers outside of Europe and Americas might be more price sensitive on the you know current still high prices there?
Yeah. I would maybe not think of it so much. I mean, there is a region element here, but it's probably fundamentally more about the types of the structure of agriculture because, you know, where you have the big commercial and export oriented or should we say, fully market-exposed agricultures and then you're talking Europe, U.S., most of Latin America and especially Brazil, of course.
You know, I think that is where you see less demand destruction when prices go really high because they have a better ability to pass on and you know, are also exposed to higher food prices that we're seeing. When you see it in Africa and Asia, that's probably where you have more markets that are less global market exposed. If it's a non-export-oriented farmer that's selling domestically, then you know the cost increases you're facing for inputs, you know, there's less ability often then to pass on the cost in your revenue.
Understood. Thank you.
Thank you. Your next question comes from the line of Rikin Patel. Your line is open.
Hi. Thanks for taking my questions. Firstly, you announced earlier in January that you'd be winding down your sourcing of Potash from Belarus. I'm just curious, have you been able to fill your requirements there for NPK production in both Brazil and Europe, or is there still any sort of shortfall? Secondly, on costs, in the bridge, you booked a $54 million headwind on fixed costs. Could you just remind us what the breakdown there is between the spending on growth initiatives versus any underlying impacts from overhead inflation? Thanks.
I can start on Belarus actually. We have a number of other suppliers and, as you know, we've, what should we say? The risk picture has been evident with regard to Belarus for some time. We've prepared contingency plans for that and we are able to source from other suppliers here to be able to operate our NPK plant. That is working well. In terms of the fixed cost, you know, most of the increase that we're seeing now is the one that we've flagged and planned for.
The roughly $100 million per annum that we've reallocated from CapEx to fixed costs, reflecting that most of our new business growth initiatives require relatively more fixed costs compared to CapEx. It's on top of that, we've had some extra costs related to the higher curtailment level we saw in the fourth quarter. Some of it is related to the pandemic. Of course, there is increasing inflation in several parts of the world now. Still the main part of this is the planned element.
Okay, great. Thanks.
Thank you. Your next question comes from the line of [Tamangun] . Your line is open.
Hello, good afternoon. Thanks for taking my question. Just curious about your Ammonia production target for 2023. Is it going to be all achievable with the bottlenecking of your own capacity or you would need to achieve this target externally or this may have to be revised? Secondly, can you elaborate on the Potash impairment in Ethiopia because that seems surprising given the commodity price trajectory. Thank you.
Would you mind repeating the second question? I heard it was related to Dallol, but I didn't quite catch the question.
Yes. Yes, indeed. Just a bit more clarification about the impairment on the Dallol mine, which seems a bit surprising given the Potash commodity price trajectory.
Starting first, I mean, you've correctly observed that on Ammonia production is where we have a bigger gap to close for our 2023 target. Different from finished fertilizer where we are very much on track to meet the target. Yeah, we have a job to do to reach that target, but we still consider it within reach, you know, during these next two years. As mentioned on the webcast, we have a company-wide program to improve, particularly on the turnaround planning and execution, maintenance related and also in our root cause analysis follow-up.
We've been targeting this towards the sort of highest value plants, but we are following this up closely at all plants. We've had good results, and I mentioned Pilbara during 2021 has been a real improvement. Of course, we need this in other plants. But it's not the case of meeting this objective. This objective is not sort of going to happen through acquisitions, for example.
Yeah. No, I should add that it hasn't, from a resource perspective, been easy in the last two years, both with regards to, I mean, the travel restrictions, the ability to get spare parts at the right time and maintenance experts and so on, for specific issues. We've had to make a very strict allocation of where we put our resources. As Thor mentioned, on where we see the biggest impact. We have for a number of locations demonstrated that we reached this level, but we still have some sites that are lagging behind. Hopefully now with better ability to transfer resources. An important part of this is the training of our employees and transfer best practice as well, that this will improve going forward.
Yeah. On Dallol, I mean, you're correct that the Potash market prices have been improving. This write down is not about the global market, but more specifically about the project and the location. As you're probably aware, this is in Ethiopia and the situation there is sufficiently uncertain to that. Although you know we still intend for this project to go ahead, but we are looking for structural solutions to limit the CapEx that we put in going forward. Given most importantly the situation in Ethiopia, we see this project as having a high level of uncertainty too.
Thank you.
Thank you. Your next question comes from the line of Mubashir Chowdhury. Your line is open.
Hi. Thank you for taking my questions. Just two please. One clarification from a question earlier, around the impact of Ammonia sourcing. I think you said it was around $50 million-$60 million in the fourth quarter. Now you're saying that you're operating or importing as per normal. Does that mean that there shouldn't be a negative impact for the first quarter? Is that the right way of thinking about it? Then secondly, you talked about the low business or the low volumes and demand in the fourth quarter on a year-on-year basis, and you talked about the 17% behind on inventories. I think your Urea volume in the fourth quarter was down 18% year-on-year.
How much of this was due to shutdowns and how much of this was slow demand? Given that the farm is behind 17%, should we be assuming that that -18% volume or the volume lost in fourth quarter comes back in the first quarter, second quarter, and therefore we should be expecting a strong uptick on a year-on-year basis in the Urea volumes?
Yeah. On the Ammonia sourcing, I mean, yeah, it if at all, it'll be a small effect in the first quarter I think is the correct way to read that. I should add that we can discuss whether it was actually. I mean, yeah, the cost, we've given the cost of the Ammonia source. Of course we're doing this because it's profitable. You know, with the alternative would be to either, you know, have less Ammonia and upgrade less production, or produce Ammonia unprofitably. I wouldn't as such call it a negative. Yes, correct, we are producing at a normal level now so that the sourcing level should be more normal.
In terms of the demand question, I mean, as we've mentioned also in previous quarters, you know, the high price levels we've seen through a big part of this season, you know, there's no doubt that there's some demand destruction that will take place as a result of it. You'll see estimates, I think often in the region of 5%-10%, but varying by location. For Europe as you're talking about the 17% where we are behind. You know, it certainly seems likely that a lot of that will be caught up. Where we end for the full season is still an open question and depends on the price developments, also at the back end of the season.
Sorry, just to clarify. On your own Urea volumes, which are down 18% in the fourth quarter, the current expectation is that given the demand remains strong, you should be seeing a stronger volume picture in the first, second quarter.
Yeah, I think that's a reasonable assumption. Sorry, you did ask also that whether this was due to curtailment, and I would say to a limited extent because our finished product production has broadly speaking not been impacted by the Ammonia curtailment since we've been able to source.
Okay, perfect. Thank you very much.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypad. That is star and one to ask a question. Your next question comes from the line of Joel Jackson. Your line is open.
Hi, good afternoon, everyone. I'll ask a few questions one by one. I wanted to ask about something you had in your release. Quote, "Publication prices are far away from the majority of traded volumes." You're basically saying that a lot of benchmark prices out there, excuse me, were these spot prices were not really transacted liquid, were not liquid. Can you elaborate on that? Have you seen this before? Which nitrogen commodities or NPK was this mostly affecting? Has this stopped in Q1? Are the benchmarks correct and liquid?
Yeah, I think actually the main point we were trying to get across, Joel, was that there is a difference sort of reference-wise and timing-wise between, for example, an FOB Egypt, or Black Sea for that matter, and an inland CIF or CFR price that we are typically selling at. So that's one part of it.
It's also linked to the price movements have been, you know, quite, you know, record high this quarter, and that some of the highest price quotations are, you know, a few trades at, you know, what looks like, at least for now, a peak, you know, that we saw in around November, December, and that has, you know, doesn't necessarily feed through to a lot of other locations and products. Those two factors I think go some way to explaining this time lag factor that we highlighted in the quarter, where, you know, if you run the sensitivities, you get this almost $500 million effect or difference between a one-month lag and a two-month lag in the quarter.
Okay. My second question is, you know, I'm sure you would agree and tell me, you know, that obviously European gas is setting cost curves now for nitrogen production or nitrogen markets, and it seems like Ammonia is following more sort of around the cost curve, whereas Urea prices in different markets around the world are trading below what you think would be European cash cost support levels. Ammonia looks quite expensive versus Urea, when typically it's kind of reversed. Can you comment on some or all of that, please?
I think maybe let's start to hear. This is a more or less pure external market comment. Let's get Dag Tore to comment on this one.
Yeah, I mean, it goes a little bit. It's in ways a bit cyclical as well, right, with the curtailments and so on, a lot of products. When the spike started in fourth quarter, the Urea price reacted much faster, and the Ammonia prices were lagging. We had several months of a record strong upgrading margins. But as the Ammonia market has tightened, as you mentioned. Currently there is basically no upgrading margins from Ammonia to Urea. You're right, in some instances it's even negative. Right now, if you would find the curtailments logical, I agree. It is a bit more likely that we see it on the Urea part than on the Ammonia in the current market. That's a correct observation.
Okay. My last question is a follow-up on the Ethiopian assets. I'm someone, as Thor probably knows, who was fortunate to visit these assets a decade ago, just before you bought out the majority of the control from, I think it was called Ethio-Potash or something like that at the time, or Sainik. Anyways, also, I know the history, right? Like Yara and its predecessor company have been looking around Ethiopia for Potash concessions for, I don't know, 20, 30 years, a very long time, and never really advanced anything. There's lots of reasons why, right?
You've got geology issues, geography issues. You're near Eritrea. You've got railway issues that never got built. You have war. I guess what I wanna ask the question, you still say it's attractive project. What would have to happen for Yara to actually go in now and wanna build this, you know, Ethiopian Potash and SOP asset? Is it the railroad, the railroad finally gets built to that area?
No, I think Joel and you know a good list of all the factors contributing here. I think on the other hand, in a way it's quite simple, and this is the message we've had for some time on Dallol is that we are and have been looking for structural solutions where we are able to progress the project without it you know being a significant further CapEx on our part. That's in essence what it will take. Of course, all the other factors you list remain challenges and you know do heighten uncertainty and that's why we've taken the right time.
Thank you very much. Thank you. Your next question comes from the line of Magnus Rasmussen. Your line is open.
Hi, thank you for taking my question. As you've said, NPK premiums have been there according to your slide, even in the negatives. If we have a situation here where we have persistently relatively high Urea prices over time, how do you see sort of willingness among your customers to pay up for nitrogen premiums and, NPK premiums, in such an environment relative to what we've seen over the past years where Urea prices have been quite depressed?
I think there's I mean, there's two factors to bear in mind. That I mean, one is the cost side in a way that you mentioned or sort of if the commodity reference prices are high in general, that does tend to over time also lift NPK and other prices. But then it also depends on the income side for the farmer because if that's the only thing that happens, if their incomes remain stable while their costs go up, then you tend to get demand destruction. You know, the answer tends to be there that yes, prices will go up, but you will lose some demand. Now, that doesn't seem to be the case now as you've seen, you know, food prices are rising as well.
They haven't risen as meteorically as some of the input prices so far. They are rising and we've seen the FAO price index, you know, reach a record just recently. The other side of this then if food prices, farmers' incomes rise then you certainly have a situation where you will be able to potentially maintain the demand volume at higher prices and even higher margins and premiums.
Okay, thanks. That was it from me.
Thank you. Your next question comes from the line of Lisa De Neve. Your line is open.
Hi, this is Lisa. I think you were taking my questions. I have two. So thank you for providing an update on some of your carbon initiatives and the income you may see from that. Can you provide a bit of a broader update on your $300 million-$600 million EBITDA program by 2025, and how much we could actually see from that this year? That's my first question. Then I have a small follow-up on the sort of cost questions we've seen today. We talked a bit about power prices, but some of your other costs, including payroll, also appear to be going up quite a bit. How should we think about inflation of the fixed cost base and beyond that for Yara in 2022? An overview and sort of maybe percentage guide would be very helpful or anything for that matter.
Yeah, I mean, hi Lisa. The 300-600 we touched on in the presentation, well, not the numbers as such, but on our KPIs that we are in a way still in the first phase on these, a lot of our new business development, and that goes for new revenues as well as measures like hectares under management. So you know, these are not meaningful bottom line numbers in 2022. We do have a number of initiatives that we are you know in the should we say ramp up and portfolio management phase.
They're, I would say for most or all of them, that you know the ramp up will not be linear. You know, it will start very small and can increase quite rapidly when it starts to grow. We will revert in one of the next few quarters with a deeper dive on the status there, including how we see the 300-600. In terms of inflation, I mean, it's, I would say so far, that hasn't been a way outside of our planned ranges. Clearly we're in an environment now where that could become an increasing factor.
I think it, you know, it underlines the need for us to continue with continuous improvement efforts throughout the whole business, to be able to do what we can to offset that inflation. We can't guide you on a specific number for this year. As you know, our business is, you know, we are the most global of players present in more than 60 countries and with different kind of fixed cost profiles in those. Again, a topic that we will be reverting on through the year.
Okay. Thank you very much for that.
Thank you. We will now take our last question, and it comes from the line of William Wilkes. Your line is open.
Hi. William Wilkes from Bloomberg. I was just wondering about energy contract renegotiations. Is the rise in your energy prices due to renegotiating contracts at higher prices? How do you see that developing going forward? Thank you.
Hi. No, the energy cost, I mean, we have most of our production in Europe, certainly, and that's where you've seen the cost increases reflect the spot market level. We have our contracts that we buy typically are gas on at day ahead terms. We get, you know, as one of the large, if not the largest, industrial buyer in Europe, we have competitive terms, but it's we choose to have a spot link also due to the flexibility it gives us, as we saw, particularly in the fourth quarter, to stop production from time to time, if it is more economical to source. That means that we are, when we produce, fully exposed to the spot price developments, which, as you probably know, have been quite volatile in the fourth quarter.
Thank you.
There are no further questions from the phone lines, sir.
Okay. Thank you all for dialing into the presentation. Feel free to reach out to the IR team if you have anything else you want to discuss with us. Have a nice day. Thank you.
Thank you. That does conclude our presentation for today. Thank you all for participating. You may now disconnect. Please.