Good day, and thank you for standing by. Welcome to the Yara third 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 and one on your telephone. If you require further assistance, please press star and zero. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Silje Nygaard. Please go ahead.
Thank you, and welcome to the telephone conference for our third quarter results. My name is Silje Nygaard. I am the Acting Head of Investor Relations. I am here today together with our CEO, Svein Tore Holsether, our CFO, Thor Giæver, Head of Market Intelligence, Dag Tore Mo. We just recently had the presentations. We have no further introductory comments. We open up for questions. Operator, will you take the first question, please?
Of course, I will. Thank you, ladies and gentlemen. Just a quick reminder, to ask a question, it is star and one on your telephone, please. Your first question comes from the line from Joel Jackson. Your line is now open.
Hi. This is Bria Murphy on for Joel Jackson. Thanks for taking my questions. You mentioned limited impact on your finished fertilizer production from curtailment, given your ability to source some ammonia from elsewhere. What percentage of this shortfall is being made up with purchased ammonia versus Yara-produced ammonia outside of Europe?
Hi, Bria. This is Thor. As you've seen, we have about 40% curtailment on ammonia in Europe at the moment. We have plants outside Europe that are pure ammonia producers like Freeport and Trinidad, also Pilbara in Australia that normally sell ammonia direct into the market. Our ammonia plants in Europe are all set up to supply our plant. I think you can assume that the equivalent sourcing need is required in Europe. In Europe, we are net short, at any given time, we do source some ammonia from externally. On that basis, that means that it'll be somewhat below 40%, that we are, l et me think about this. We have a higher totality. Yes, the number will be slightly less than 40% additional from the sourcing side.
Okay. Thank you. Just, I guess as a follow-on, is any other Yara European production at risk of closure if gas prices stay at these high levels? Can you please elaborate on what's most at risk?
Yeah, of course. As we say, we have to monitor the situation quite closely. It's probably unnecessary to say it's quite unprecedented to see both gas prices at this level in Europe and also the volatility where you can sort of be swinging between $30 and $40 just in the space of a week or less. In addition, you have the price side of the products that the plants are producing. At this time, we're not going to, if you like, speculate in the development. We're aiming to produce and supply finished products. We've been able to do that so far. As we said in the presentation as well, we need to do that in a financially viable manner as well. It's certainly possible that we'll need to make further adjustments going forward. That can be both ways.
As you've seen, we've had a strong development for most nitrogen prices as well, and that's why even though the ammonia margins in some cases, or in most cases these days are negative, the fully integrated margin so far overall has been good enough for us to continue with the finished product.
Okay. Thank you.
Thank you. Your next question comes from the line from Lisa De Neve from Morgan Stanley. Your line is now open.
Hi, good afternoon. Thank you for taking my questions. I have two: First and foremost, how should we think about the fixed costs associated with the European ammonia curtailment? How should I think about the associated cost from sourcing ammonia elsewhere? I'm not talking about the fact that you pay more for a ton of ammonia because prices are going up, but any sort of freight cost that we have to take into account or anything else? That's my first question. Coming back to the previous question on ammonia. I'm aware, and maybe I'm wrong, that you normally sell about 500,000 tons of ammonia straight into the market every single year. How much of that is contracted or is this just all spot? Thank you very much.
Yeah. Hi, Lisa De Neve. This is Thor again. On the first question on the fixed costs, these are temporary curtailments we are making here. In those situations, typically, we will take the opportunity to do some maintenance, maybe training, and as a rule, we're not doing layoffs, for example. This doesn't tend to impact fixed costs very much. As you know, fixed cost, especially today, is quite a small share of the total cost for these units. In terms of the, correct me if I sort of misunderstood the sourcing cost question, but I heard you were maybe asking about freight rates and so on. Of course, when you need to do more sourcing, especially internationally these days, that can incur some extra costs. Probably, in not quite the same proportion as fixed costs.
Overall, these will probably not be the largest elements in the equation compared to the size of cost of sales, and selling prices, and operating margins these days. Did that cover your question?
No, that's very helpful. Thank you very much.
Thank you. The next question comes from the line from Sam Perry from Credit Suisse. Your line is open.
Hi. Thanks for taking my question. Given the current high prices, are you seeing any down trading in finished product? I guess related to that, at what level do prices become unaffordable for farmers?
Yeah, I can maybe start on this, and both of you can add as needed. Clearly, with price increases of this magnitude, it is reasonable to expect that there is some demand destruction going on. Whether that is short-term or longer- term will depend on how the situation evolves from here. At the same time, of course, there are curtailments. As always, the market is using prices to find a balance. As we touched on in the report, that we think there is probably quite a big difference between the regions here.
For example, in Europe, probably similar in the U.S., farms will normally be operating close to optimal, and in terms of fertilizer rates, and may make adjustments here in a way that whereas there may be other parts of the world where the cost developments now could mean the difference between whether you are applying fertilizer or not. That can be also more of a concern with way beyond Yara, as Svein Tore would also touch on today. Yeah. Do you guys want to add?
You've covered it.
Okay. Seems like my comments covered it, Sam.
Great. Thank you.
Thank you. The next question comes from the line from Alexander Jones from Bank of America. Your line is open.
Thank you. Got two questions, if I may. The first one, I think in your prior quarterly report, you mentioned that gas prices have gone up, that nitrogen prices have gone up sufficiently that your margins were offsetting the gas price. Are you able to give us sort of similar color on how that trade-off is playing out for Q4 so far, admittedly, given pretty high volatility, as you mentioned, on both gas and finished product prices? Then the second question around some of your premium products. You've talked in the past about a sort of value-based pricing approach here, more set on base the yield the farmer's getting rather than necessarily the input cost. How is it going with those products in terms of passing through high gas prices to farmers? Thank you.
Hi, Alex. Thor again. Outlook for fourth quarter. We can't get into kind of what the fourth quarter overall will look like, as you can imagine, both given our non-guiding policy and also that there is a high volatility in the market now. If we look at the situation now with gas prices around $30 and urea, if you take Egypt now latest at $845, nitrates with a premium over that, there are decent margins for these products now. Without going into sort of a detailed comparison to last year, I think that's the overall statement. Ammonia, of course, is more problematic, but only in a way if you are a pure ammonia producer. As mentioned, that's not really our situation in Europe.
Just to clarify, it's important that we don't see this only at gas price Europe in isolation; this is about utilizing the network that we have our global position, our global plants that can supply ammonia. We're the world's biggest trader of ammonia. We have ammonia ships and a network that enables us to flex the operation. That's one of the advantages with a significant part of our nitrate and NPK production is that we can switch to ammonia, as we've done now in this quarter as well. Going forward, it will be a dynamic evaluation of how to optimize our system. With regards to your point on value-based pricing, that is ongoing work.
It's important that in the middle of an energy crisis now that we don't forget about the need to restructure the whole energy system, but also how food is produced to continue the road towards decarbonization. Here we are with the progress that we see. The farmers have a role to play. It's about creating additional sources of income for the farmers to create incentives for more than producing kilos, but also how it is produced, how nutritious the food is, the quality of the food, how efficient was it produced, in terms of land usage, but also water usage. All these are factors where we can combine with our products and agronomic advice to improve, which makes the farmers more resilient both economically but also to deal with climate change.
It adds additional revenues in our model as well, and it supports the transition to a lower- carbon system. Of course, this will take some time. Definitely, the interest is there. Then I would also like to add that we do see when it comes to green hydrogen and green ammonia, there are many initiatives and interesting discussions with regards to clean ammonia going into the shipping industry. We've seen some announcements in that as well in the recent weeks on progress on that.
Thank you.
Thank you. The next question comes from Troels Larsen from SEB. Your line is open.
Good afternoon. A couple of questions partly been answered or explained. More of a follow-up. First, on the situation with the curtailment capacity in ammonia in Europe. Are you able to if this kind of continues now throughout Q4, will you then be able to replace that ammonia volume with sourcing from your plants or buying ammonia outside of Europe?
Yeah. Hi, Troels. Thor again. That's what we're doing right now. How this plays out for the full fourth quarter, again, is going to depend on that dynamic both between gas prices and nitrogen. I should also add, there are regional differences there. For example, on ammonia, you're seeing different levels between the European region and the Americas, for example. That is something that we can sometimes have an arbitrage on. We are better placed than others there because we are the largest and most global producer and trader. Yeah, we can't guide on what this will be because of the volatility and the situation. We are certainly able to source what we need for the time being.
Of course, it's also a dynamic discussion with a number of our customers as well. We touched on the farmer part or the ag part of the business. We also have a significant industrial footprint in Europe. We've been through a very rapid increase in the cost and the structure of some of the contract resets that will take some time to phase it in. We've been optimizing for the short term now and then as we have dialogues and make products available, it's about pricing that at a level that is reasonable for us as well. That takes a bit more time. In the meantime, we've been supporting that with having the flexibility on bringing in ammonia. There are many moving parts on it.
Understood. With the current curtailment of the ammonia production in Europe, is that having an immediate effect on your gas purchases in Europe? Now with 40% of the capacity being curtailed, also your gas purchases in Europe is turned down 40%? How should I think about that?
Yeah, Troels, that's roughly the right way to think about it. Of course, we have different plants with different scale and efficiency. It won't be exactly like that. In principle, yes, that's how it works.
Yeah. Just related to your kind of guidance or outlook on gas costs as that is based on kind of stable or normal purchase volume. I guess with the current situation, then obviously the negative effect from that will be lower.
We already appreciate you guys trying to model the fourth quarter, maybe have a bit more of a challenge than normal.
Yeah. Okay, thanks.
Thank you. The next question comes from the line from Rikin Patel from Exane BNP Paribas. Your line is open.
Hi all. Thanks for taking my questions. Firstly, on free cash flows and the negative development you saw there during the quarter. I suppose you flagged a reversal in prepayments from Q2 before, but maybe if you could just explain why there was such a sizable outflow on inventories. Going into Q4, should we expect some normalization in those inventories? Just on CapEx, what exactly are you spending on in Q4? Is it mainly turnarounds, or are there any other sort of projects in there which is resulting in that quite high implied expenditure? Thanks.
Yeah. I'll start on the inventory. I think the reason for the inventory increase, I mean, on the one hand, just for anyone we do present two sets of numbers there. One is the KPI on the improvement program, where our operating capital efficiency has continued to improve quite a lot in the quarter. The number of operating capital days is down again. On an absolute level and quarter-over-quarter, we have a significant increase, partly, as you say, related to prepayments, which was as expected, and partly linked to inventory value, because with higher both gas prices and product prices, typically each ton in inventory has a higher value.
When you look into the fourth quarter, I guess, again, we can't guide on where we'll be at the end of the quarter, but at least right now, I think it's fair to say that prices have continued to increase. All other things equal, if anything, probably our inventory values have now increased a bit further. Of course, it depends on how we produce and deliver throughout the quarter. Rikin, I didn't quite catch your second question.
It was related to CapEx in Q4. I guess you're having quite a few turnarounds right now, so I'm just curious what you're likely spending on in Q4.
Yeah, the turnarounds are actually the ones we've taken are scheduled. As we say, the 40% curtailment is a mix of planned turnarounds and market-related curtailment. The turnarounds are in the, if you like, within our CapEx guidance. There's also some planned growth projects in there. As you may have seen, we've reduced our full-year guidance, saying that there's about NOK 200,000. We had NOK 1.3 billion for the full year. We've reduced that to NOK 1.1 billion, but it's basically phasing into next year. Some of the projects, not the turnarounds, but some of the other projects that are where at least the spending is moving a bit into the other part of next year.
Okay, thanks.
Thank you. The next question comes from the line from Adrien Tamagno from Berenberg. Your line is open.
Hello, good afternoon. Thank you for taking my questions. Is this current situation with natural gas pricing spiking made you think again about your policy around hedging and forward purchases of natural gas?
Yeah. Thanks, Adrien. What was I going to say? We've had a very consistent long-term, I should say, base policy, not just within gas, but also within most parts of currency, and in general, that we are the largest and most international and diversified fertilizer company. There is a strong correlation over time between food, energy, and fertilizer prices. We have a high operational flexibility. Those factors underpin our sort of low- to- no- hedge policy. That, of course, is not to say that you always find times where isolated, you could have done something clever, but every time we then therefore view hedging as a cost rather than a benefit. I think, in the situation so far, we feel that particularly the operational flexibility here, well, and the correlations.
As gas prices increase, with Europe clearly being the swing region now, that brings up nitrogen prices as well. We have assets that generate higher returns in that situation. Combined with the flexibility that we can use in Europe, this is a situation that we are managing quite well, in our view, without doing any hedging.
Okay. In terms of European capacity, the plant that you had to shut down, does this trigger any impairment testing going forward?
In principle, we do impairment testing continually. We have done that also for this quarter and have not any assets that we've flagged for this. You can see we have, in the past, flagged and, in our annual report, some units which are sensitive. I think, again, looking at the overall situation so far, a bit related to the previous question, higher energy prices have come with higher nitrogen prices. When we can use our flexibility to basically keep operating and keep achieving decent margins on upgraded products, then overall that should mean we don't necessarily have impairment indicators. Having said that, just to add, of course, that doesn't mean that from time to time you can have plants than we've had in the past or operations where you are challenged.
That is also maybe more linked, rather than the global developments, it's linked to, for example, whether you have sufficient scale, whether you are upgrading products or not. As mentioned earlier, it's an advantage, especially these days, to be upgrading rather than purely producing, for example, ammonia. It's also linked to market access. Our plants and our system generally has more options for market access than maybe some of the smaller, more local players.
Yeah. That's clear. Thank you.
Thank you. The next question comes from the line from Bengt Jonassen from ABG Sundal Collier. Your line is open.
Thank you very much. I have a couple of questions on following the steep price increases on the nitrates. Do you see NPK following those price increases? That's the first question. The second question, do you see any order book destruction? Order books at this time compared to last year, is it quite normal or is it lower? The final question would be on your natural gas cost guidance, given that you have reduced purchases as of today. Is there a one-to-one relationship between the reduction in percentage and your gas cost guidance? Thank you.
Thanks, Bengt. I think probably the main observation on NPKs versus nitrates is that clearly on the cost side, it's within gas and nitrogen that you have the steepest cost increase as well. I think there's a logic in that nitrates, along with other nitrogen products, have risen far more than P and K. As you know, our P and K prices have been rising as well. It is an environment where virtually all product prices are rising, but there is a difference between pure nitrogen, straight nitrogen, and the others. In terms of order book, as we touched on, yes, price increases at this level do lead to demand destruction. We, I think like yourselves, will need to see when the season is over how much this has been.
As mentioned, we think in the more mature regions like Europe and the U.S., it's probably going to be more on the margin. I should say more marginal than maybe other parts of the world. Bear in mind that we started the season with quite low inventories and also not very high pre-buying. It's not like there's a big overhang in the market. The last thing I would say is that, right now, it's a bit of we could have had a much longer order book, but given the volatility, we don't want to sell far forward. It is a dynamic between the buyers and the sellers here, and this is mainly about Europe. In terms of the energy guiding, I think yes, in principle, that you can sort of reduce it pro rata with our curtailment.
I think the only comment to that is that we tend to curtail a bit more in the smaller units mixed with a bit lower energy. Directionally, I think it's the right way to think about it.
Thank you.
Thank you. The next question comes from the line from Morten Normann from Carnegie. Your line is open.
Yeah. Hi, guys, and good afternoon. Lots of my questions have been asked already, but you mentioned that you have a net short position in Europe with regard to ammonia. What's the size of that in, let's say, in a normal year? You also said that you're able to source the ammonia that you need. What do you think is the mix between sourcing from third party and your captive production outside of Europe? If you have any, can you have any flavor of how much volumes you have sourced for the fourth quarter? Thank you.
Yeah. Hi, Morten. I think some of this we can probably revert to you after the call. In terms of our, we are structurally normally long, in the range of 500,000 tons- 1,000,000 tons globally. The European shortfall within that is probably a bit larger than that. Let's say around 1,000,000 tons , thereabouts, maybe a bit more. You can kind of analytically get to this by looking at our production capacities by product. Yeah, in terms of the mix right now between own plant and sourcing, that's commercially a mix that we don't want to go into granular detail on.
Just to add, that this is part of the strength of our ammonia trade and shipping as well, that we have both our own captive plants, but also a huge network of other suppliers as well. Then it's about optimizing that so that the physical movements are optimized from a logistical point of view, so that this isn't one- to- one. Clearly, we've tested our system with the rapid increase in prices now in third quarter, and we have been able to maintain production in Europe almost at full capacity . It's been a test, and I'm really pleased with how our organization has responded to this.
Just while we're on that topic, and Lisa, if you're still on the line, I know you, I realized belatedly you did ask about our contract structure on ammonia sales, but I would place that in the same category that this is commercially a sort of level of granularity that we don't want to go into extent.
Okay, thanks.
I might have to.
Thank you. The next question comes from the line from Andrew Stott from UBS. Your line is up.
Oh, good afternoon, everybody. Thank you for the opportunity. I've got three things I wanted to tackle. One is clearly the topic du jour on the Q&A so far, which is the mitigation strategy. I had a reasonably straightforward question. How durable is this? It's working at the moment; you're cutting enough production to boost pricing. You can source ammonia anywhere between $600 and $850, according at least to my data. It works. Why wouldn't you do that for a sustainable period of time on the, obviously on the condition that European prices of gas remain so high? Are there any practical limits? Are there certain sites, I'm thinking Germany and Italy, for example, where you couldn't import ammonia? I totally understand what you're saying on the flexibility, but just how durable is it, is the question.
Should I stop there, or do you want me to ask the other two?
Yeah, we can take that one first.
Great. Thanks.
As you see in the increase in the gas price, this quarter came quickly, and we've been able to deal with that with a combination of increased prices and using the flexibility that we have in our ammonia sourcing system. For longer term, of course, we will continue to source ammonia from elsewhere. In parallel with that, in order to maintain production at the highest level possible and optimize profits, we are also then in constant dialogue with customers as well to ensure product availability, whether that is through surcharges in the short term, to contract negotiations and formula-based pricing that will then go into the pricing of the products as well. This will be a combination.
What we're doing right now isn't exactly how we will deal with it going forward, but we have been able to deal with it in a good way now in the short term, and then we're working in the mid to long term as well to maintain and utilize the flexibility that we have in our system. Thor, I don't know if you want to add.
Yeah. I think maybe, back to the comment is appropriate too, that sort of a longer term scenario where we are, and others are sourcing a lot more ammonia from Europe, there may not be capacity for that in the market. Right now, it's clearly tighter on the urea than ammonia. Probably over time, some kind of leveling out that could involve both the ammonia price and the gas price. Especially as we get into spring, probably most of us are expecting gas prices to calm down.
Okay, thank you. Second question was on NPK. When you consider how discretionary the P and K is relative to the N, do you have to rethink a bit on how you supply the LatAm market in particular, or not?
Well, in many of these markets, we are also helped on the NPK side by a very tight market condition for P and K. I don't know if you observed in the publications also that other NPK producers are actually talking about very strong sales to Latin America on NPK as an example, just because it's difficult for the Latin Americans to source K directly. There are many elements of it. There was also a question earlier about NPK. Of course, it depends also a little bit on whether you take a relative pricing perspective or an absolute pricing perspective. Of course, when you get to these nitrate price levels we have in Europe now, which may not be that applicable outside Europe, having a relative premium compared to historic norms is probably not that easy, right?
Yeah.
Yeah. Of course, these are things that we are working on continuously. They have a separate unit that is handling all these issues.
We have to keep in mind that for Latin America, the types of crops that NPKs come into are high-value crops as well, and there has been a response also in pricing. This is not happening, only a nutrient increase in isolation. We are seeing increased food prices, and as we indicated in our report and in our press release as well, with rising food prices, there are some concerns on how this will impact vulnerable communities as well.
Okay, thanks. Then the last question was on China. What's your information on China's export strategy now? Obviously, we've all read that supposedly there's no exports till next June. Is that your working assumption?
It certainly is the assumption in the market, and I guess that says most of it. Just today, you have a domestic price level in China now of, let's say, just a bit over NOK 500 or so, and you have a global market value of more like NOK 700, maybe in Asia, for granular urea, or above NOK 700. There is already a huge disconnect between the domestic market price in China and the global market. Players now act as if there was more or less an export ban. Of course, there hasn't been an announced export ban. It's just that the NDRC, the government agencies, have asked players not to export. They have introduced some measures in the ports, approval systems. They have asked ports through the provinces also not to receive urea or fertilizer into the ports.
Rather than just putting on an export tax or banning exports, there are a number of other measures that in effect are now stopping the exports. That's, of course, what the market expects now than if you look at the relative pricing. Of course, the players say if they can get out anything, they will probably try for it because there is so much money to be made, right? They have already toned for the current India tender, and there are talks of some cargoes maybe being stopped, but most of it seems to be being allowed through customs before these new inspection rules came into force on October 15. As you say, the general expectation is through June. I think that hasn't been said, so to be monitored, I would say.
Particularly interesting on the P side, where they have such a large exportable surplus, because the nitrogen, they don't really have an exportable surplus now. It's because they have a lower production. They have high gas costs. They got high coal prices. They have allocation issues on power. They have an energy crisis also in China. It makes sense, right? On the P side, it's also interesting that they are restricting exports there. We are trying to follow this, of course. To your question, the market is now acting as if there is an export ban practically.
Okay. Thank you very much for taking the questions.
Thank you. The next question comes from the line from Mubasher Chaudhry from Citi. Your line is open.
Hi. Just one question, please. Could you provide some comment around the premium on NPK, the compound premium? It seems to be narrowing again in the third quarter. Just some thoughts around if and when we should expect that to stop becoming back to a premium and what the contract structures are around there to allow that pricing to be pushed through. Just some color around that would be helpful, please.
Hi, Mubasher. This is Thor. I'll reference a bit what Svein Tore mentioned earlier, that I think we need to be aware that the price levels we are at now for particularly nitrogen, but also P and K, the higher you go I guess without an equivalent food price increase, which I think is the case now, food prices have increased, but not as much as fertilizer prices, then the relative premium, all other things equal, will tend to compress. In addition to the fact that our NPK prices tend to be more sticky, do not react as fast as the spot prices, particularly for nitrogen now. It's important to underline, these products have pretty decent margins, it's just that on the premium measures compared to the strong price increases we're seeing now, the premium becomes smaller, particularly in percentage terms.
As always, our main role for the regions commercially here, particularly for the NPK, is to constantly be trying to improve our market and crop mix. In other words, to move more and more towards the sectors that have the best ability for demand-driven pricing rather than cost-plus.
Sure. That's helpful. Thank you.
Thank you. For the last question for the moment comes from Brian Kuzma from Thomist Capital. Your line is open.
Hey, guys. Thanks for taking my call. Can you guys hear me?
Yeah. Sure. Please go ahead.
Okay, great. I guess I just wanted to understand as you look out at the nitrogen market, what percentage are, I mean the crop prices are where they are. They are really strong. Everyone is going to keep using nitrogen at these levels. What portion of the ammonia market goes to more price elastic markets where you actually can see demand destruction?
I'll hand over to Dag Tore in a moment, but if you look at the three nutrients, and with nitrogen, I alluded a bit to it in the presentation as well, the impact of not utilizing nitrogen fertilizer is immediate and large. If you take grain, if you don't apply nitrogen fertilizer for a season, then the first harvest drops by nearly 50%. That demand will be there. I'll hand over to Dag Tore.
Yeah, I think a lot of other sectors also probably have fairly low price sensitivity when we look at things like, let's say, the AdBlue market in Europe and NOx emissions reductions and other industrial sectors are probably also doing quite good.
If you take AdBlue as an example, you need it to run the trucks. It's a minor cost in totality, but if you don't have it, the trucks don't run. Clearly, there is a demand need in that segment as well and the same for some of the other sectors as well, including CO2, as we've seen from the shutdowns. Ammonia production is one of the most efficient ways to get food-grade CO2 as well, and that also has implications. A number of sectors that are completely dependent on having the supplies.
Okay. That makes a lot of sense. I guess what I'm struggling with is, I've noticed there's a little bit of a negative tone to the call and the questioning, but it looks to me like there's going to be a multi-year shortage of nitrogen and nitrogen products as a result of all of these bottlenecks along the supply chain and the inability to pass price along. It seems to me like it's a multi-year boom to be in the nitrogen business, and I'm trying to see why that doesn't play out.
How do you guys not crush it for the next year and a half based off of inventories being low, and as long as crop prices and end-use prices are strong, you guys are going to be able to pass all this stuff through, and there's going to be a shortage as a result of all these curtailments, aren't there?
I think that's certainly what we're seeing for now. Having said that, we are cautious Northern Europeans; we tend to not guide and guarantee things too far out in the future. There are parts of this which are quite an unprecedented situation. I think it's perfectly understandable in this situation that there are a few questions also around potential negative effects. As we've said, the situation you describe is what we're seeing for now.
Great. That's helpful. Thanks.
Thank you. We have a few more questions now. The next question comes from the line from Morten Normann from Carnegie. Your line is open.
Yeah. Hi again. You sell a lot of third-party products, more than 12,000,000 tons in a year, maybe. Are you able to crank out a higher margin now? My question is, are you selling these products at a pure dollar per ton or partly a percentage of the price?
We tend to secure this quite a lot more than we have in the past experienced, shall we say, the negative sides of having large open positions on third-party products. Our business model these days is more based on the own produced core. It's not to say that there can be some position effects here, but most of the time we have quite a tight risk management on the third party business.
Yeah, at these elevated prices, are you able to take a higher margin on average on the sales?
Well, when I say tight risk management, it means, for example, that we do a lot of back-to-back sales. It doesn't necessarily create a margin opportunity in this scenario.
Okay, understood. Bye.
Thank you. The next question comes from the line from Chetan Udeshi from JPMorgan. Your line is open.
Yeah. Hi. Thanks for taking the question. My first question was on Slide 27 of the pack, which actually shows the energy cost dynamics, and I'm just curious here. Historically, Yara's global cost has aligned pretty well already, at least closely with the TTF price. But it seems at the moment, the gap between what you guys talked about for Q4 versus the TTF price and what's the same in Q3 as well, is the gap probably seems at least higher than in the past. I'm assuming this is not yet taking into account the production costs. Maybe it will just be useful to understand why that is the case, because I think at least my model had higher gas cost in Q4 versus what you guys are guiding to.
It seems this chart explains it at the, let's say, the transmission of the current spot price on TTF is not as much as we've seen in the past. I was just curious to understand why that is. The second question was, there was some communication from European Union just a few days back noticing or noting rather that the pollution of water bodies because of over application of nitrates, et cetera, is still a problem in the European Union and seems they're going to take some further action on it. What implication does it have on Yara and just the overall demand for nitrates in Europe?
Yeah, I think maybe starting on the gas, what we put on the curve there is I think 7th of October forward prices.
Very close to today.
Yeah. As Dag Tore just said, very close to today. At least we haven't intended to put anything else than that there. If you're seeing any differences.
Maybe in greater detail, but maybe we’ve seen already, but in the graph on Page 27, just keep in mind that the market prices there for Henry Hub and TTF are not lagged while we have a lag in the Yara average cost.
Yeah. The Yara line is trying to show our cost of sales, which is normally lagged by roughly a month versus spot gas.
Okay. That explains it. Thank you.
Thank you.
In terms of EU, as you're aware, Europe is the region with the highest focus on environmental footprint across all industries, not just fertilizer. We see this as just as much an opportunity as a challenge. Our products and solutions are geared towards higher efficiency, and it's not about maximizing consumption as such. I don't know, this is core to our strategy, really.
Thank you. The last question is a follow-up question from Andrew Stott from UBS. Your line is open. Andrew Stott, your line is open.
Sorry. Yeah, thanks for the follow-up. It was a question as well, similar to Chetan's on gas prices. It was culpable as being much higher than your guidance. Can I just confirm it is based upon normal production? In other words, t he curtailments are not part of the $850?
Correct.
Yeah. Perfect. Thank you.
Thank you. With that, we have no further questions at the moment.
Okay. Thank you all for participating in the call today. Have a nice day. Thank you.
That does conclude the conference for today. Thank you all for participating. You may now disconnect.