Good afternoon, ladies and gentlemen. Thank you for standing by, and welcome to the Yara Second Quarter Results 2017. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone. I must advise you that this conference is recorded today, Tuesday, 18th of July 2017. I would now like to hand the conference over to speaker today, Mr. Svein Tore Holsether. Thank you. Please go ahead, sir.
Thank you very much, welcome to the Yara Second Quarter Results conference call. Before we open up for questions, some brief comments on our results. Yara delivered results reflecting lower commodity fertilizer margins. Our cash return on gross investment, or CROGI, was at 7% for the quarter, which is well below our target of 10% or more through the cycle. On the positive side, we delivered increased fertilizer production and continued growth in industrial product deliveries. Our ammonia production was lower, underlying the need for our ongoing efforts to improve operations. The Yara improvement program is on track and has already delivered 120 of the targeted $500 million of annual earnings improvement within 2020, measured at 2015 conditions.
In addition, Yara has a pipeline of growth products focused on premium and industrial products, these products will generate a further $650 million of annual EBITDA improvement by 2020, again, applying 2015 market prices. We have corrected our quarterly report on page nine, which initially stated that the $650 million was at current prices, and we apologize for any confusion around that. With these introductory remarks, we are now ready for your questions. Operator, can you please now open up for questions?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from the line of Fahad Tariq. Thank you. Please ask your question.
Hi, this is Fahad on for Joel Jacobsen. My first question was around urea prices for next year. You talked a bit about how you think urea prices will be affected based on additional capacity into 2018. Can you talk about what you expect for the range of prices next year? Specifically, do you think urea prices, the highs will be higher than this year and the lows will be higher than the lows this year? Does that make sense? Just trying to compare the range you expect for next year versus this year.
Maybe I should start and just commenting upon that. At Yara, we have never given specific price guiding. As such, what we do is try to explain how we see the market function and maybe to those comments, Thor, I can say a little bit of how we see the supply side going forward over the next year and elements on the demand side. Yeah, I guess we have implied in what we have said that we don't believe in a return to any kind of demand-driven market condition for 2018, so that prices will in general be kind of cost-driven. Of course, also to what extent the industry is able to run at higher rates is of course important as well. We believe that there will be basically a supply-driven or cost-driven pricing.
Then, of course, the hardship usually than what is happening in China with coal and gas prices, environmental issues, currency developments, all the costs, et cetera. Also to what extent the producers, as they run at lower negative margins over time, to what extent capacity is then taken out to more permanent, which is more difficult to say. It's not up to us to give a price forecast, but we do expect, let's say, the current cost-driven price logic to continue also next year.
Okay. The other question I had was, in Brazil, maybe if you could give some more color on what the outlook is for the rest of the year. I know that Yara is gaining market share, particularly in premium products, it seems. We've also heard reports of elevated stocks and inventories being high in the channel. Maybe talk a bit about what the outlook is for the rest of the year. Thanks.
I could say that so far this season, first half of the season, the deliveries have been in line with last year. Going forward, it will of course depend on crop prices, which has for many crops been a positive development lately. Of course, we believe over time that fertilizer demand in Brazil will continue to grow. Still, there are huge potentials to increase intensity and productivity in Brazilian agriculture. Typical forecast of what we will grow year-over-year longer term varies, I would say, between 3%-5% annually. What happens in a single year is more dependent on future price development, including currency. We would like to be more specific on that. No. Yeah. We have no particular reason to be negative or anything about Brazil.
It's always a bit of a phasing issue with, we have not yet reached the peak season, and what I've heard deliveries so far are flat. I don't think that's giving a very strong signal either way to what it will hold the year we end. I think we just have to see how it develops. I think, certainly, just looking at the numbers, when you add production and imports, you get to a higher number than the deliveries, because obviously an inventory increase by, on the producer level in Brazil during the first half is stronger than last year. Of course, that is not a problem as we get into the peak season later.
Okay, great. My last question is just on margins. This quarter, crop nutrition margins, low singles just in terms of operating income margin and low margins and also in the production business. How should we be thinking about margins for the rest of the year? Is it similar to the levels we're seeing in Q2, given that gas prices are expected to be flat? Any commentary on that would be helpful on operating income margins.
Yeah. As you said, if you look at the forward prices for gas, they are quite flat over the next couple of quarters. Your question on margins come back to what do we believe about pricing then? As we said, we don't give guidance specifically on price estimates. As to fully assess over the next year or so, we would presume or actually at least plan for a supply-driven market on the commodity side. Then, as we mentioned, there has been a pickup in crop prices, which could give a positive momentum to some of our more premium products then. We have quite a, I would say, good start of the nitrate season in Europe and also quite good start on NPK, where we continue to move up prices in some markets.
Thank you.
Great. Thank you. Your next question comes from the line of Oliver Rowe. Thank you. You can ask your question.
Yeah, thank you for taking my question. We've seen some Chinese capacity shutting down over the past couple of years on both economic and environmental reasons, and we're now hearing that some of the environmental shutdowns are actually being retrofit in order to get them back up and running. I'm just wondering what your view is on that and how much capacity you think could actually come back to the market as a result.
Yeah. Well, according to the Nitrogen Association, in China, the capacity reduction through 2015 was in the magnitude of four million tons. If they cover their official numbers, they've said it's a reduction to 77 million tons, is the number from the Nitrogen Association. We don't know exactly how that goes through 2017. As also trying to understand in the presentation, we believe that most, if not all of the curtailments that are taking place on the urea side is purely economically driven. We do not think that many producers have been, let's say, forced to close of environmental reasons. I think that the issue that you raised there with bringing back capacity that's been closed for environmental reasons is not something we've seen in the urea industry. It's mostly or almost exclusively margin driven.
Right. Okay, excellent.
I don't know exactly how much of that capacity that is now out. I don't think there's much that has come back. How much of that will really come back and how much will be permanently closed, I think you'll just have to kind of wait and see. We only hear some reports and we could maybe start to add up some plants that have announced permanent closures. I think I prefer to just wait and see. I think the Nitrogen Association probably have a good overview of this, and they give an annual update on this into the new year.
Okay. Looking at your capacity outlook chart on slide 19. I realize that this is from a consultant and not necessarily your internal outlook, but it looks like some of the tail end projects in 2020 plus have been removed, specifically Iran and Russia. I'm just wondering what's changed to take them off the outlook.
I think all of them, both those that are included here and those that have been on the list in and out a little bit are tentative and not for sure. I think it's just an assessment that we or you and others are doing on what to include, what not to include. Maybe the information flow changes a bit. There are some pieces of new information that makes them maybe take in a project or maybe remove it. I think from 2020 and onwards, there are none of these projects that are definite. It's kind of an assessment that changes a little bit from quarter to quarter. Of course, the current pricing is not positive for the development of these projects.
Right. Thank you.
Thank you. Your next question comes from the line of Stephanie Lazarou. Can you please ask your question?
Thank you very much. I have a couple of questions. I'll start by taking them one by one. On the EPS Improvement Program, you've obviously set the guidance based on 2015 market prices, and since then, we've obviously seen quite a decline in the market environment. I wonder if you could share with us, if you take current spot prices today, whether or not that EPS Improvement Program would have actually driven net cost savings through to the bottom line during the course of H1, given that a relatively large portion of that savings program is from variable costs. That's my first question.
Yeah. As you correctly point out, the Improvement Program is based on 2015 figures as we have as our basis for when we put together all the initiatives. We are rolling these out now and based on where we're at through the second quarter, we're at NOK 120 million. That also includes the negative impact that we have from the fire in Porsgrunn, which negatively impacted our figures by NOK 150 million in the quarter. We're progressing quite well. Still, this is based on 2015 prices, which are higher than the current prices. I think we made an estimate that about half of our program, if we look towards 2020, is impacted by price development.
I don't have the exact figures in front of me now on the impact to date, but I think you could estimate that about NOK 60 million would be the impact at current prices.
Okay. That NOK 60 million includes the NOK 150 million impact from the fire?
Yeah. That's also including that impact, yes.
Okay, thanks. The second question was on the cash flow. If I look at the H1 cash flow statement, you're actually negative at a free cash flow level. I wondered if perhaps you could take us through some of the moving parts in that cash flow, in particular, the NOK 1 billion cash outflow at the other line, just to give us some color in terms of what's in there.
Yes, I can do that. You could say the NOK 1 billion on the other line is cash elements in the operating results. In the second quarter, we pay out quite a lot of holiday salaries, holiday pay, and also last year's bonus, both of which have been provided for through the year. There are also some adjustments on the pension funding then. Those are the major elements in the other line.
Okay. Generally speaking, we should expect a similar salary adjustment every year?
You could say it's a seasonal effect in the second quarter. Hopefully, we will have holiday payments also in the second quarter next year. With the current profitability, bonus schemes may be lower next year.
Okay, that's clear. The final question was just on the Chinese export situation. You obviously flagged in your release that China exports are down year-to-date, but are being replaced by low-cost tonne from elsewhere in the world. I wonder if perhaps you'd give us some sort of indication in terms of where you saw the next marginal urea producer in terms of their cost base outside of China, so whether that be Eastern Europe or elsewhere. Could you give us some sense of where that cost of production is?
In general, you could say that the fact that the gas prices around the world are much closer now than some years back, it's much more an even playing field now than it used to be when the oil price was above 100 and then gas prices in many parts of the world were above 10. Now the supply curve is flatter, there are some areas that's Eastern Europe, as you mentioned, and Ukraine, there is hardly any nitrogen production, producing at the moment, only for their own domestic demand. There it comes. Some other European countries as well, because it's an export region, those regions are hit the most.
We also see, not so much this year, last year when prices were at the floor, we saw that Indonesian production also came because it's kind of pricing through LNG export price and so on. Relatively expensive at it. They chose to import some urea instead. Of course, it's more a question mark on how would it politically is handled, let's say, in India, Pakistan, Bangladesh, places like that could potentially source cheaper urea from the global market than to produce it themselves and so on. We also see that China is a big country. There is a surplus of urea in the north, there's a deficit in the south. There are talks now about potentially importing some urea to those deficit areas instead of sourcing from the north of China. This could also support the market.
Of course, it's off-season right now, so there is without, let's say, an urgent, immediate need for urea. Maybe it hasn't really happened there yet, but it's also a possibility. It is difficult to pinpoint, let's say, one obvious segment or producer that is our second in line after the Chinese.
Okay. That's clear. Thank you very much.
Thank you. Next we turn on the line of Thomas Rygelsford. Thank you. Please ask your question.
Hi, thank you very much for your presentation. Just focusing on the margins and the specialty products, could you just unravel the fact that your charts for NPK premiums, so the NPK premium went up, yet when I look at volumes, they're unchanged. I'm guessing what's happened is you've sold more in Brazil than Europe. Is there a margin effect? Can you explain the margin effect, the mix effect that's rolling through on that basis? That was my first question. Thank you.
On the mix effect, you're right that we are selling more in Brazil, we are also in the second quarter selling more in Europe. That's a seasonal effect. Second quarter tends to be a peak season there. We have, on average, better net backs for some of our NPK sales flows to our plants in Europe. You could say European peak season also tends to lift a little bit the NPK premiums. We also have good sales in overseas markets in addition to Brazil. Our Head of Proposition mentioned China, where we have had a destocking of NPK earlier in the season in China, and they have been struggling with some of the cash crops there. That has come back, we have increased significant sales in China over the last half year, which has very good margins there.
We also have markets like Thailand that have done quite well. In general, the turnaround in crop prices has been helpful for NPK premiums as well as seasonality and continuous growth in markets like Brazil.
A second question, if I may. Obviously, it looks like you've lost market share in North America. Are those volumes that you think you'll have to effectively ship elsewhere forever, given the growth in supply in North America, noting the market was down 3% and your volumes are down 16% in the quarter? If you are expecting not to ship to North America, where will those volumes go, and what kind of pricing should we expect?
I could say the development in North America over the last half year has been the average of two worlds, you could say. On commodity products, meaning urea, UAN, we have seen quite depressed prices due to all the new capacity coming on in North America. What we have done there is have been selling less urea into North America. Also, the last part of the urea we sell is based on third-party products. We have just reduced our sourcing on that. What we have been able to do, and this is the other part of North America, is that we have quite a lot of premium product sales. We have NPK, and we have nitrate and calcium nitrate into the East and West Coast, more for cash crops. They have done pretty well.
We mentioned in our webcast this morning that if you look at North America results and crop position in North America, they actually have a slightly better result this year than last year due to continuous improvement in premium products. For instance, California, which were more affected by drought last year, have done better this year on nitrates and NPKs.
Thank you very much.
Thank you. Next question comes from the line of Paul Walsh. Thank you. Please ask your question.
Yeah, thanks very much for taking my questions, and afternoon, everybody. I'll take them one by one as well, if that's okay. My first question is back to what Stephanie was asking before. Given the current prices sit, two questions. That $60 million that you referred to, is that on the $500 or just simply the $120 annualized in the quarter? That's my first question.
The $60 is based on the $120 annualized in the quarter. That would be where we're at the first half.
Okay. If I was to extrapolate at current prices, the net saving should be more like $250 versus the $500. Is that the way to think about it?
No, not really, because the timing of the various parts of the improvement program would be different over the whole period. At the end, if you talk to the mix of the different components, summing up to $500 million, will be different than what is sitting on $120 million now. In the beginning of this program, there will be more on the-
On the price side
yes.
Okay, fine. Just maybe the same question on the CapEx plans. You talk about NOK 700 million of earnings contribution from that. Again, maybe you don't have the numbers to hand, but if I was to run current prices, I'd be interested to know what that 7 would be. I don't know if you have that now, or maybe someone could get back to me.
With the current prices, that would be approximately 4.
About four. Okay, thank you. My second question is just a sort of conceptual one around the business and the nitrates premium and the NPK premium. It doesn't look like this at the moment, but is there any evidence that farmers are increasingly reluctant to pay for premium product given how weak crop markets have been and stock-to-use ratio is sitting at relatively high levels? Like I say, it doesn't look like we've seen any evidence of that yet, but are you picking up any signals that farmers are increasingly reluctant to pay that premium just because they don't need the yield advantage it brings?
I would say that they are maybe increasingly willing again to pay somewhat higher premiums on those products. You're right, of course, that food prices influence these premiums, because what the farmer gets is higher yields and higher crop quality. In addition, that also gets a lower environmental footprint. Nitrates, which is predominantly a European product, is quite heavily influenced by wheat, but also, let's say, grassland fertilization and wheat prices, as you certainly have seen, have improved quite significantly over the last couple of weeks. I think that will support nitrate demand. Also dairy products is doing quite well, which is helpful for Northern Europe and nitrates as such. It's a more Actually, given a negative element the previous year on wheat prices, but it is expected and is maybe starting to turn around a little bit now.
That helps also for nitrate order book and pricing.
Based on that, sounds like you're expecting higher nitrates and NPK premia for the second half versus the first half. Is that fair?
I said that earlier on this call, we don't give price guiding. We just try to give some facts.
I was asking about premium guiding, not price guiding.
Okay. Of course, we are now by the beginning of the European season. We are aiming to have a price increase normally through the season to motivate distributors and farmers to take early. I think it goes without saying that expectation-wise, you should expect an increase over the season. It will of course depend on commodity prices also. They are increasing prices also. I think some of you maybe picked up that we made a slight price increase in France, as we made that yesterday.
Yeah.
Not a dramatic increase. We pushed up prices another % on delivery is now opening up for September. It shows that we have a good order book. We are able to gradually lift prices as we speak there.
Okay. Last question, if I may. Thank you. The industry is certainly the upstream, so the ammonia urea market, they look somewhat oversupplied now for the foreseeable future. I know a number of you trying to get more positive on the outlook, but it doesn't feel to me like there's any real incentive for pricing to move higher given the supply and demand dynamics that are in place. I just wondered if you guys were seeing anything in the upstream business that could give you more optimism medium term. I'm struggling to see it. Also whether or not, we've seen a lot of M&A in chemicals globally, but on the agricultural side, fertilizer side has really yet to spark up. Could the kind of market conditions we're seeing here now lead to further M&A?
At what point would you guys actually consider closing upstream capacities given the current supply dynamics?
Well, when it comes to the capacity situation, I think that is quite well illustrated by the CRU numbers that we presented. As you see in 2017 and 2018, there will be more capacity additions than underlying demand growth. However, when we look further out, I mean, touched upon it earlier in the call as well, there are fewer projects, and the certainty of these projects are much less. Of course, it has to be like this with the current prices for urea. If we use a U.S. plant as a proxy to look at the business case, let's say that if you set up a 1 million ton urea plant, it would probably cost about $2 billion. If you also then say that there should be a 10% capital return on this, that's $200 per ton of urea.
Then it doesn't matter what your gas cost is or labor cost, it doesn't make more sense. I suppose this is obviously reflected in the lack of new announcements at the moment. At some point, this needs to come back in balance. Again, as we indicated in 2017 and 2018, it's still an oversupply situation. When it comes to consolidation, and certainly in the broader space, there has been a lot of consolidation with ChemChina acquiring Syngenta, Bayer, Monsanto. We have the DuPont merger-
Dow
Dow. Within the fertilizers space, the merger between PCS and Agrium, and Mosaic's acquisition of the Vale's business. There is a lot activity. On our side, it's always shareholder value first. We have made one acquisition, or an announcement of an acquisition in India with the acquisition of the Babrala plant that we expect to close in third quarter. Of course we are evaluating options, but again, it needs to make sense from a shareholder value point of view. When it comes to drastic closures, on our side, we do look through our portfolio, and we have made an announcement that we're looking at our options when it comes to the Factoty site in France. We are doing whatever we can to improve our operational performance and reducing our costs all over our portfolio.
That's really comprehensive, guys. Thank you.
Thank you. Next question comes from the line of Neil Taylor. Thank you. To ask your question.
Good afternoon. A couple more from me, please. Firstly, sticking with the topic that Paul just asked about, perhaps with M&A while we're on that. Given your outlook that you mentioned on the webcast this morning for more better availability of gas worldwide and the, I suppose, unstranding of a lot of previously stranded gas. Presumably that then leads to a much flatter global production cost curve. I wonder if you could talk around sort of your thoughts around potential M&A and whether between production assets and distribution in growth regions, whether the opportunities on the former of those two are likely to be much less attractive now for some time because of the flatter cost curve. That's the first question, please.
If I give the quick summary of what is it that we have done in Yara in the recent years. I think what we have seen for some time that the amount of new builds in the upstream part of the business has been significant and higher than underlying demand growth. For that reason, we have avoided making significant incurs to our upstream production. Rather, being an integrated company, we have opportunities through the whole value chain from mine to farmer. We have focused our M&A within the downstream part of the business with the acquisition of Bunge and also of OCP in the rest of Latin America, and used that as a basis for expanding our reach to the farmers.
I think this has paid off quite well and demonstrated especially through the results that we're demonstrating in Brazil now, and how we've been able to build a premium offering on top of a large scale, to begin with, commodity base. Also, a lot of our investments in the upstream part of the business has been tailored to differentiated products and also to create a supply going into these markets. Now, with the, say, a flatter or more equal prices across the regions for gas means that there are less geographic differences when it comes to production cost. That means that commodity new builds that are in need of exports are now less attractive than the ones that have a home market. Still, again, we are positioned to make acquisitions across the value chain.
Our latest large-scale acquisition was actually on upstream, the acquisition of the production plant in Babrala in India.
Thank you. Second question. There's two parts to it. More financial, so probably one for Thor here. In the variance analysis for the second quarter, the NOK 200 million of other, it seems to me that there's lots of moving parts in both directions within that. Can you give me an indication or help us understand what the underlying fixed cost inflation component was? Because I understand that there's probably a negative of NOK 50 million from the sale of the CO2 business, NOK 150 million from the fire, and then going the other way, efficiency savings. When I strip all those things away, what do you think the underlying cost inflation is? Then second part to that, this morning you talked about your Digital Ag strategy. Can you clarify whether we should expect or anticipate additional CapEx or OpEx as a consequence of that?
Is that already wrapped up in both your savings plan and your CapEx plan? Thank you.
Yes. To start with the other element of the variance analysis, as you say, one part of it is the sale of the CO2 business and the EBITDA that was included from that business previous years. We have said, as you indicated, over the last couple of quarters, that there was roughly an EBITDA from that business of NOK 50 million per quarter. We sold that first of June last year. Second quarter last year only included two months, just roughly about NOK 30 million in that order, which is explained by the sale of the CO2 business then. As you may get in an older element, there are lots of pluses and minuses. The biggest plus in it, or what is taking down the results is fixed cost development.
We have an increase in fixed cost in the quarter year-over-year of about NOK 120 million. That is lower than inflation. If you look at the complex way Yara is, it is an increase between 2.5%-3% or total fixed costs. You can say that our fixed cost is increasing, but we are able to beat inflation on it, and we are growing because those numbers of roughly NOK 120 million also include the increased fixed cost that we take on as part of the improvement program. Where I said that so far, we have taken on NOK 36 million, roughly half of it this year. That's the main explanation.
On that, just to make sure I understand. Those additional fixed costs of NOK 36 million are within the NOK 120 million that you just split out of kroner, which you just split out. That component will leave as you get further through the efficiency program. Is that right?
That's true. That part of all 36, which was in this quarter, you could say it was NOK 20 million, by end of last year, 36 now, is roughly NOK 8 million in the quarter. Explains, you could say close to half of that cost increase. That will ease over time. We said that we'll have some costs this year and next year, and then it will ease down. You also asked about Porsgrunn. The Porsgrunn effect is not in the order. That is mainly actually in the margin effect, because what happened there is that we have bought more ammonia instead of producing it ourselves. The Yara improvement program benefits are not in the order. It is in the volume element due to increased volume.
It is in the energy part due to energy saving, and it's in the margin part due to a better procurement mix.
Perfect. Thank you.
Your question on digital. This is not a revolution. It's an evolution where we continue to work on digital tools. We are also, as Head of Proposition indicated, now doing some step up in that and employing also more resources to it. That will over time need some more cost. In a Yara context, it's not huge relative to our cost of goods sold, and we'll do it step by step as we start also to see benefits of it.
Thank you. That's very helpful. Thank you.
Thank you. Next question comes from the line of Andrew Stott. Thank you. Please ask your question.
Good afternoon. Thanks for taking the questions. First one's on second half production schedules. If I look at Q2, in fact, the whole of the first half, clearly production is running well ahead of your deliveries. Equally, I could take your balance sheet measures as well when I divide inventory by last six or 12 months sales, you've got quite an elevated level of inventory. Is it right to think that you need to sort of reduce your operating rates as you go through Q3, Q4. Should we say abnormally? We're looking at a more pronounced move down, and therefore I need to think about your fixed costs. That's the first question. Second one is on nitrates. You've obviously signaled a more positive move into the newer season for Europe. I'm trying to understand what's behind that.
Is it that you just discounted too much and this is a consumption response to that pricing regime? Is it that the wheat price recovery we've seen is starting to dictate order books? Is it both? Just sort of get a better feel as to why you're confident now about nitrate. My final question is on urea. Looks like India is going to dictate a lot of the next six months in terms of import demand. There's been a lot of reports about too much inventory in India. I just wondered if you had any thoughts on that. Thank you.
If I start with the inventory, then yes, you're right. We have a higher inventory by end of this quarter than we had by end of first quarter or last year. It's an increase of 6%. If you look at where is that increase, that increase is fully explained by Brazil, which is sourced by third-party products to a large extent. It means when it comes to our own production, it doesn't really influence it that much. It's quite the contrary if you look at our own production, places like NPK, where I would say a more slow market a year ago than we built inventories. We have been able to sell more of those inventories due to a good take-off in many markets as we talked about before. The increase is mainly linked to Brazil, and a lot of it is mainly linked to third-party products.
It wouldn't have such influence directly on our own production there. When it comes to nitrates, and as you say, why are we a little bit more forward-leaning and sounding more comfortable now than a couple of quarters ago? I would say that a couple of quarters ago, we clearly had a negative, I would say, facing effect where we sold those autumn-winter nitrates late last calendar year. When urea prices increased, we ended up with quite slim nitrate premiums in the first and into the second quarter. Another element is that in Europe, you ended the previous season, the season ending summer 2016, with quite high inventory levels as urea prices were dropping and farmers ended up buying slightly more urea than nitrates. We haven't had the same development this year. We are ending this season with much more historical normal inventory levels on markets.
Then the last one is on crop prices, which we've already mentioned also, wheat and grassland products with a positive effect on this. Last, we could mention also, which is more a structural ongoing process, is that we continue to grow our nitrate market outside Europe, which is also helpful on the European balance, mostly in Brazil, but you also see positive development in many other markets on nitrates. On the India question, it's correct that it's reported relatively high stocks in India, but that was also the case one year ago. Indian urea imports have also gone significantly second half 2016 compared to earlier. I'm not convinced. I don't think it's a given that India will be a negative factor in the market, let's say, compared to last year. It remains to be seen.
Okay, thanks very much.
Thank you. Our next question comes from the line of Patrick Lambert. Thank you. Please ask your questions.
Thank you. Good afternoon, everybody. Three questions on my side. The first one pretty easy. Could you update us on all the short-term projects, the Pilbara TAN ramp-up, the ammonia in the U.S. in terms of startup, if everything is on track for either the end of this year or beginning of next year? That's the first question. Maybe you want to answer that first.
I start with Pilbara, then, and the TAN plant there, it has started up in the quarter. It produced roughly about 25,000 tons of TAN. That is telling you also that it's not running at full block. It will take some time to ramp it up also commercially as a big part of that sale is through GP contract to mining companies and tenders gradually come after. It is up and running there. On the Freeport, then, we will expect then commissioning of the plant around end of this year.
Start up next year?
Yeah. End of this year.
Second question, again, coming back on Brazil and outlook for the new season in Brazil. Could you give us any of your views on acreage on crops being discussed at the moment? Also, do you see any issue with the meat production bans and scares around the safety of which could be affecting the grain business? That's question number 2.
Yeah. I must say that we don't have any clear figures. It's off-season now, and they are busy harvesting. They're taking grain crop or corn crop, et cetera. I think for us it's a little bit early days yet to give very clear guidance on, let's say, crop mix and acreage for the coming year. I think internally to us, we felt that that's a bit too early to focus on.
Okay.
On your meat question, I don't really have much information there either to add to that.
That hasn't come up at all in terms of discussion with farmers?
Not to my knowledge, no.
Okay. I think the last one is again on European and nitrate markets. Do you see increased pressure from Eastern Europe/mostly Russian imports going into Europe? Are the duties still in place and protecting you? The dynamics of a recent development of nitrates in Europe.
There we have some more information. Not with opposite. It's actually less nitrogen going from East to Western Europe, clearly evidenced through the Fertilizers Europe numbers and the Europe plus import numbers as well. I think you can find that the fertilizer consumption or nitrogen consumption is increasing in Eastern Europe while production is relatively flat. Most of the volatility or, let's say, on the import side, has been from the rest of the world and not so much from Eastern Europe, where it's been declining.
Okay. Thank you, guys.
Thank you. Next question comes from the line of Lasantha Srihahl. Thank you. Please ask your question.
Thank you. I think I've just got one left, this is technical, I didn't listen to dial into the webcast this morning. You talked in the presentation about the lower prices impacting the production segment mainly, which is I think what we'd all expected. When I look at the sort of drop in the bar between that and the production, there isn't really that much difference. I just wondered what else is going on there.
The major explanation of the drop in crop nutrition is the lower sales in Europe, which is very much of a seasonal effect by the fact that Europe was quite far ahead of the three quarters of the season, volumes are 10% down in the last quarter of the season. There we also have to take good profitability there, having sales of premium products flow to our plants. They're also not only crop production, also crop nutrition is benefiting from. That's the major explanation there.
Okay. It's purely a volume. Okay.
It's mainly volume, but actually related to mainly Europe, yeah.
Okay. My other question just relates to the improvements and investment program. You've given some clarification already on what the effect would be at current prices. I just wondered whether, given the movement in prices since 2015, as we progress into coming quarters, will you be able to update us on what the effects are at prices prevailing at the time?
I think also in the additional information in the slide pack that we sent out, that there are some price sensitivities included in this. We'll continue to give an update on the actual impact as we report by quarter, but I thought it would also make sense to give it the input into this that you can make some sensitivities ahead of time.
I just wanted to check on those sensitivities because obviously you've mentioned what the effect of an increase in prices is. Is it the same effect the opposite way, if there's a decrease?
Yes.
Is it not so linear? Okay.
That's correct.
Thank you very much.
Thank you. Next question comes from the line of Martin Evans. Thank you. Please ask your question.
Yeah. Just following up again on that profit improvement program and the $500 million. I remember when you announced it initially, there was a little bit of confusion as to what it might comprise and how you were going to get to your $500 million. Just looking at the slides, you're giving a little bit more details. You're talking about plants through their diagnostic phase and the 2nd wave of category teams on procurement about to start. Could you give us some sort of real-time examples of what this profit improvement is involving and how you're achieving these efficiencies, and therefore, essentially whether they're real and that you won't have to give some of it, well, a lot of this back when you come on climate? Thanks.
Yeah. Where we're at, say year-to-date then, there are, say two main contributors. It's within production and it's within supply chain or procurement. If we start with procurement, what we're doing here is using our scale in order to improve our conditions for purchasing. Then we're tracking that and seeing what we can achieve compared to reference prices so that it should be very independent of spot price movements, but rather what we can achieve through scale. That should be possible to sustain over time. You could argue that it's a bit easier to do it in challenging times than in more positive times. Still, I believe that this is a systematic way of working, and where we are achieving significant results from that already in the 1st phase. The other part is through becoming more efficient in our production.
It's mainly two factors on this. It's the consumption factor, meaning that we use less energy to produce, and the other one is just getting more volume out of the existing facilities, and that's also what is happening. We're doing this First it was done through a top-down analysis where we made certain assumptions of what we thought we could achieve at each of the plants, then we spent significant time at the plant with the whole organization, with the operators, to go through what this means and how we run the plant and how we do shift scheduling, how we do communications across shifts, how we do preventive maintenance and so on. It's really changing the way we're working, and this takes some time, then we will have results that will actually last as well.
As we indicated in the first quarter, we saw significantly more upside potential in the three plants that we had completed at that point. Now we've taken another five plants through the same process, and we're pleased to see that one, progress is very good in all the plants we're going through this, we also see more potential after having done this bottom-up than top-down, which is also quite promising.
Thanks very much.
Thank you. No further questions at this time. Please continue.
I think we're at the end of the call, thank you so much for listening in and also for the questions. Thank you.
Thank you. This concludes our conference for today. Thank you for participating. You may all disconnect. If you could please stand by. Thank you