Yara International ASA (OTCPK:YARIY) Q3 2016 Earnings Conference Call October 21, 2016 3:30 AM ET
Thor Giaever – Investor Relations
Svein Tore Holsether – President & Chief Executive Officer
Torgeir Kvidal – Senior Vice President & Chief Financial Officer
Dag Tore Mo – Market Intelligence
Eirik Melle – Danske Markets
Anne Gjoen – Handelsbanken Capital Markets
Thomas Lorck – Arctic Securities
Good morning. Good morning and welcome to the presentation of Yara’s Third Quarter Results. Today’s presentation will be by Yara’s CEO, Svein Tore Holsether and CFO, Torgeir Kvidal, after which we’ll have a Q&A session.
So it’s now my pleasure to introduce Svein Tore Holsether.
Svein Tore Holsether
Thank you very much Thor. And a very good morning to all of you. We will start with safety, and safety is at the top of Yara’s agenda. I am informed about each and every accident and near miss in Yara, and I, along with my management team and their teams, make sure that we follow up on each of these incidents and – that are behind the statistics and make sure that we take the key learnings from these.
We have seen an improvement in our total recordable injuries rate compared with last year, moving from a 12-month rolling average of 3.4 at that end of 2015 to 3.1 at the end of third quarter this year. So the numbers are showing an improvement, even as we have included both Galvani and OFD into the numbers, and that’s with a 12-month impact from January 1. And these entities had a much higher injury ratio than the rest of Yara, prior to coming into Yara, and they have shown significant improvement.
So we show improvement in safety and that is good, but we are committed to bring these numbers, the number of injuries down to zero. And we have to remember that behind the ratios are real accidents with real people that have been injured at work. And we had a strong reminder of how serious this can be with the accident at the Porsgrunn site on September 28, where a person fell 10 meters during maintenance work.
Turning then to the summary of the third quarter. We delivered weaker underlying third quarter results, reflecting a supply-driven fertilizer market. With lower prices impacting our production margins.
But our crop nutrition and industrial earnings were broadly stable, demonstrating the strength and resilience of Yara’s integrated business model. We had strong NPK deliveries, including further growth in Brazil, where premium product deliveries doubled compared with a year ago.
Adjusting for the divestment of the CO2 business, industrial deliveries were 9% higher than a year ago. Adjusting for special items and the divestment of the CO2 business, earnings per share for the quarter were 53% lower than a year ago.
This decline mainly reflects lower sales prices, which were only partly offset by higher deliveries of Yara-produced products and lower energy costs. Our reported earnings this quarter include a NOK114 million exchange loss, while third quarter 2015 included the NOK3.3 billion gain on the sale of GrowHow UK.
Third quarter nitrogen fertilizer deliveries in western Europe were up by an estimated 2%, with imports down 8%. As domestic producers increased sales of both nitrates and NPK. In contrast, third quarter U.S. nitrogen deliveries were estimated to be 10% to 15% lower than a year ago, as buyers stepped out of the import markets in anticipation of new domestic nitrogen capacity coming on stream this season.
The oversupply situation in our industry is expected to last for some time, underlining the need for the Company-wide Yara improvement program, which we announced three months ago. And several large impact initiatives have started execution with promising results so far. And this gives us confidence that we will deliver at least $500 million of annual EBITDA improvement by year 2020.
Other components of the program are being defined and planned during the coming months, in preparation for a full launch and publication of the whole program in connection with the fourth quarter results on February 9. We’re not planning to provide more details on the program in the meantime, but in February we expect to confirm the total target and timeline, details of component parts, phasing of financial benefits and also our estimates on needed investments and costs to achieve these targeted improvements.
The baseline for improvement measurement will be 2015. And although we’re not providing more numerical detail at this stage, I wanted to briefly describe one key part of the program within our production organization. So I can give you a better feel of our way of working with this.
The production part of the improvement program consists of several streams of initiatives, where a key element is the productivity improvement program, which has already started to be rolled out. Based on a systemic assessment already carried out across a number of our plants, the program will deliver improvements across a range of categories, including technical equipment, work processes, material flows and also maintenance.
And we have started the execution in our largest plant in Sluiskil in the Netherlands. This was started in September and with promising results. And we will roll out this program to our other parts in three parallel implementation groups over the next two-and-a-half years.
The assessment and initial rollout phase includes external resource support, but a key part of the program is to train Yara employees along the way to a level where, towards the later stages of the rollout, this will not require external support. This is and has to be a Yara-driven productivity program.
Fertilizer demand growth continued this quarter in Brazil. With a growing export-oriented agriculture sector and also improved credit availability, compared with a year earlier. Total industry deliveries in Brazil were up 6% for the quarter and 10% year-to-date. While Yara deliveries were up 11% for the quarter and 16% year-to-date. Yara’s premium product deliveries showed the strongest growth, doubling compared with a year earlier.
A brief comment then on the trade volumes. We have deliberately focused more on domestic sales, where we typically have both higher profitability and better credit risk-management compared with the trade sales. And we have basically stopped doing trade sales in Brazil now.
Our position in Brazil is the result of dedicated work over many years and it is consisting of acquiring, building and optimizing production and distribution infrastructure and developing a farmer-centric strategy. Including high quality products and agronomic competence in our salesforce.
We continue to expand the footprint in the country with both the expansion in Rondonopolis unit and the acquisition of the blending unit in the Goias estate, where Yara was not present before. This allows us to increase volumes in a market that will continue to grow steadily over the next years.
One example of our close interaction with customers to develop better solutions is what we’re, in recent years – that in recent years have significantly increased the use of micronutrients from the YaraVita line. Both for foliar applications and through Procote, a coating that we apply to solid products.
The result is a product which is much more added value than the blends of micronutrients and giving a better quality and higher yields to the farmers.
I will shortly hand you over to Torgeir, who will take you through the financial results in more detail. But before that, I would like to show you a short video which captures the span of our crop nutrition business and farmer-centric strategy. Including how we work with the digital tools, soil testing and a range of other elements, to provide farmers with a full solution comprising a lot more than fertilizer.
[Video Presentation] (10:52) - (13:21)
Good morning to all of you from me too. As Svein Tore said, it’s now my turn to present to you some more financial details after Svein Tore presented the highlights of Yara’s third quarter.
So I would not say that I am presenting the lowlights, but a somewhat more challenged financial results this quarter than what we have seen over the last years from Yara.
If you look at the EBITDA development, we reported an EBITDA in the quarter over NOK3 billion. That’s down from NOK7.9 billion last year. A big part of that decline is due to the sales gain that we had last year with the sale of GrowHow UK.
But if you take away that and measure our so-called cash return on gross investment – or taking away that special items, we have a CROGI in the quarter of 7.5%, below our long-term target of 10%.
If we then go into more detail on the decline in EBITDA from last year. As I said, a big part is the special item of last year. This quarter we only had a small positive special item of NOK37 million related to positive effects on our gas sourcing contracts and ammonia contracts with embedded derivatives.
If you take away that, our EBITDA is down 35% from last year. And you see all of that decline of roughly NOK1.6 billion is explained by lower fertilizer prices. Our nitrate prices, realized nitrate prices are down 27% from last year. Urea prices are down 23%, while NPK prices are down 15%.
Then that drop in prices are partly compensated by some other elements. Partly compensated by higher sales volumes. We increased our sales of own-produced fertilizer with 10% compared to last year. The biggest growth was in Brazil, as Svein Tore has pointed out, where the increase was 11%. But we also increased especially NPK sales in most other regions.
Our NPK sales were up 33% from last year, but also nitrate sales were up, were up 5% due to higher sales outside Europe. Not only in Brazil but also in Latin America, Asia and Africa.
Then we were further somewhat compensated by lower energy prices. Globally our energy prices declined with 25% from last year. Then we have a small positive currency effect this quarter. The dollar has – we have strengthened compared to the Norwegian krone over the last years.
That strengthening had mainly happened already in the third quarter last year. But it has strengthened 1% this quarter compared to last year. So we have a small positive currency effect of NOK156 million this year.
Of the negative other element, one part of that is the sale of the CO2 business, where we last year had an EBITDA of NOK50 million, but which is now out of our book. But at the same time we have a gain of the sale of NOK1.5 billion in the second quarter of this year.
If we then briefly look upon how this decline in EBITDA is split between the segments, you can see that the big drop, or the drop as such, is in the production segment. They are influenced by the lower fertilizer commodity prices.
While you can see that our two marketing segments, crop nutrition and industrial, are much less exposed to those commodity prices and have kept up their EBITDA. Crop nutrition is slightly down, but as you see, very stable. And what we see there is that increased sale in Brazil and the good margins and the change in product mix there have more than compensated for lower earnings in other business units.
And the main business units that have reduced their profitability this quarter compared to last year, is Europe, which is influenced by lower – particularly by lower nitrate prices. Industrial is doing very well. As I said, we have taken out the CO2 business. We have taken out NOK50 million in EBITDA there. So if you adjust for that, actually industrial have improved their EBITDA from last year to this year.
They have both been able to improve slightly their margins. But they have also improved their volumes. They are 9% up in volumes. The fastest-growing part of industrial continued to be Ad Blue, the application where we use a urea solution to remove NOx emissions from trucks and cars.
But also other business units in industrial have increased volumes. Like the TAN business where we sell explosives, where we have a pick-up from last year. And also sales in base chemicals, particularly urea sales.
If you then look at the CROGI of these segments. I said Yara in the quarter have a CROGI of 7.5%. While crop nutrition, if you look at them in isolation, they have a CROGI in the quarter of 18%, very much in line with the previous quarter. So strong profitability there.
Industrial, after having sold CO2, they don’t have that much assets themselves. They are happily living on the back of production assets. But if you look at their CROGI as such, they have a CROGI in the quarter of 35%. While production then has a significantly lower CROGI than the 7.5%, so they are really influenced by the lower commodity prices.
One minor compensating effect for the production system then is gas prices. Gas prices are significantly lower than last year. I said that on global level our gas prices are down 25% and the biggest drop has been in Europe. Where average gas prices in Europe have declined from $7 per million BTU last year to $4.9 this year, a decline of 30%.
While outside Europe, the reduction in gas prices were 19%, both by lower gas prices in North America from last year, where we benefit from our Saskatchewan plant, but also lower gas prices where we have price links to ammonia. That is of course the only gas price reduction we don’t really like. But at least it compensates for ammonia prices in our plants in Trinidad, where the major gas link is.
So we see here then that – or we saw on the previous slide that we have a gas price reduction of NOK857 million from last year. And the European and the Canadian effect where we have a spot exposure, was a reduction of NOK704 million.
If we use the forward market in Europe and in North America to estimate how our gas cost will develop the two next quarters, what we see then is that we see a further year-over-year decline in the fourth quarter of NOK300 million. While if you use the forward market for the first quarter next year, you’ll see that gas prices will NOK350 million, higher than the same quarter last year.
Having said that, we often see a contango in these forward prices. We often see that realized gas prices are lower than the forward market. And we saw that as an example this quarter, where we realized a gas price in Europe of $4.9. While when we guided based on the forward price a quarter ago, we guided on $5.1.
So we saved more than NOK50 million by not hedging for this quarter. As we said, we do not hedge our gas cost in Europe. Over time, we have saved a lot of money on taking that risk; being able to take it and stay spot.
If we look a little bit back on our sales price then, and let me start with nitrates. Nitrates is an important product for Yara. About 25% of our own-produced fertilizer, including own blend, is nitrates.
And as you see on the left-hand side there, we reduced our nitrate price significantly by end of last season during May this year. We were able to keep it up during the high season of the spring, but with the declining urea prices, through this spring and also with the rather disappointing crop, especially with the wheat market in Europe, we reduced nitrate prices substantially by the start of this season to motivate sales to farmers and distributors in Europe.
Also remind you then that the third quarter is seasonal the lowest nitrate price quarter in Europe. We are at the beginning of the season where we need to incentivize farmers and distributors to buy early.
And then we typically aim to gradually increase nitrate prices through the season, to reward those who buy early. And some of you who follow us very closely may have seen that we actually increased the nitrate price, list price, in Germany with roughly 2% this morning. So we are steady aiming to increase prices through the season.
Another important product for Yara, as you know, is NPK. The product which in one kilogram will contain all three nutrients in a uniform grade. And we generate profit by producing NPKs in several ways.
We have of course our nitrogen value, where we have produced ammonia and upgraded to nitric acid and into NPK. But we also have a significant phosphate-upgrading margin in our NPK fertilizer. And that phosphate upgrading margin can be approximated by the margin of a DAP phosphate fertilizer and that’s what you see on the left side of this slide.
And phosphate fertilizer, as the commodity, phosphate fertilizers have been declining during the year due to lower demand. For NPK plants, that decline is partly offset by lower ammonia prices and sulphur prices. But still we had roughly a 30% drop in that upgrading margin on phosphate.
But on top of that – on top of that commodity value our NPK are able to generate significant premiums. It is a better quality, more precise fertilizer than commodities. And that’s the so-called NPK premium.
And if you look very closely at the figure on the right side, you may see that the NPK premium this quarter is actually slightly higher than the NPK premium a year ago. It has increased 5%.
I think that’s quite an achievement by a crop nutrition organization to be able to keep up and even to being able to expand that value-add premium at the same time as they’ve sold 33% more product this quarter, compared to last year.
Then shortly, on our cash position development and how our net interest-bearing debt develop. We start the quarter with a net interest-bearing debt of NOK9.7 billion. And that gives a debt equity ratio of 0.13.
Then we have cash earnings in the quarter of NOK2.9 billion and we spent that in investment; invested NOK3.1 billion. So with that and some other minor elements, we end the quarter with a net debt of NOK 10.4 billion. So still a very strong balance sheet, a debt equity ratio of 0.14.
Let me then, as my final slide, have some comments on our ongoing investments. We see in this quarter we invested NOK3.1 billion. We estimate to invest NOK14 billion this quarter. And based on our announced growth projects and average maintenance level, we expect to invest about NOK16 billion next year, based on what have already been announced of growth projects.
So we have, over the next couple of years, quite a significant step up of new projects starting to produce and generate profitability. And that’s what we have tried to illustrate on this slide. On the left hand side here we have listed the growth projects that we have announced over the last years and which is now in the start-up phase or going to start up over the next couple of years.
And then to give you some guiding on the earnings of these projects, we have to make an assumption on fertilizer prices. And we don’t guide as such on fertilizer prices, so just let us make an assumption. And as a modest start, let us start with current fertilizer prices, which in general is far below what we would say is replacement costs in general for new greenfields or brownfields.
So in this example we have started with the current urea price of $190, with the current ammonia price of $170 and with a phosphate DAP price of $345. And then we put that into our investment cases. That gives an EPS effect in 2020 when all these facilities are up and running full blast of NOK5.3 per share in earnings or NOK5.1 billon in EBITDA.
Then, as some of you may think and may hope that some years ahead fertilizer prices may get closer to replacement cost and you would like to calculate on other scenarios than current prices, we have given you some sensitivities on the commodity prices.
So if we increase the ammonia price – or let’s start with the urea price with $100 from $190 to $290. Or ammonia from $170 to $270, or DAP from $345 to $445. Then you’ll see the following change in that EPS.
The urea effect is NOK0.8, the ammonia effect is NOK1.2 and DAP is NOK1.5. So if you take that in combination, if you take that NOK3.5 per share and put it on top of the NOK5.3, you get closer to NOK9 per share in EPS effect. And these current announced projects are running in 2020. And you also see the step-up over time in EPS to that.
So based on that scenario-based guiding, I give the word back to Svein Tore again for him to summarize our prospects.
Svein Tore Holsether
Thank you, Torgeir. So let me then start to round up with some comments on the prospects going forward. The global farm margin outlook and incentives for fertilizer application are supportive overall. While grain prices are lower, prices for several key crops like sugar, coffee and oils are higher than a year ago.
We see the ongoing capacity increases in the U.S. and North Africa gradually displacing Chinese urea exports. And the significant ongoing capacity additions mean that there will likely be oversupply of urea globally for the next few years.
In Europe, pre-buying incentives are improved for 2016/2017 season, given significantly lower nitrogen prices and premiums. Although some markets are financially impacted by poor harvests.
In Brazil, fourth quarter industry deliveries are expected to be broadly in line with a year earlier, following a 10% increase in deliveries year-to-date. But longer term, we see continued growth in Brazil, including increased sales of Yara premium products.
Finally, applying current market prices, our pipeline growth of products, as Torgeir just pointed out, are expected to generate approximately NOK5 per share of incremental earnings by year 2020, when fully operational. At which point, we also expect our improvement program to be delivering at least $500 million of annual EBITDA improvement.
Finally, I wanted to briefly comment on our recent acquisition of Tata Chemicals’ fertilizer business in India. This acquisition provides Yara with a world-class production asset as well as increased distribution footprint in the world’s second-largest fertilizer market. Enabling us to further accelerate our sales of premium products.
We will most likely not take over the assets until mid-2017. But I’ve already had the opportunity to visit the plant. And I have to say that I was very impressed with both the workforce and the assets that we are taking over.
In addition to getting a high-quality production asset in a growing market, we are excited about the potential to grow premium products over time, as we have already done on a smaller scale in India and, of course, to a much larger extent in Brazil.
However, it’s also important to say that this growth will take time. But we’re using the time now, before completion, as well as we can. Preparing detailed integration plans to ensure we hit the ground running and lay the foundation for another profitable growth initiative for Yara.
So with that, I thank you so much for your attention. And we will then move on to the Q&A session.
A - Thor Giaever
Okay. Time for Q&A then where we will also be joined by Yara’s Head of Market Intelligence, Dag Tore Mo. So if you have a question, please raise your hand and my colleague Kjetil Storas will hand you a microphone. And please state your name and company when you ask the question. Okay, I think we can start with Danske.
Thank you. Eirik Melle, Danske Bank Markets. I have a few questions regarding the nitrates in Europe. As we’ve seen, crop yields have been reduced and global prices are at low levels, seem to be pegged at – remaining at low levels. Do you see the current environment being more challenging for the seasonal upswing in prices than previously?
And another question on – and just to – another thing on that nitrates. Could we see, due to the farmer economics shift from nitrates to urea which is a cheaper product? Depending on the yield gain you, of course, will get from the nitrate product, just a comment on that.
And next one on investments; could you just comment a bit on the changes from the Q2 chart that you showed and this one. Thanks.
Maybe I’ll start with the investments then. You’re right; there are changes in that for 2016, where we previously have guided a $16 million investment, now we guide a $14 million investment – sorry in Norwegian kroner. A small part of that is currency. As the Norwegian kroner has strengthened again, most of these investments are in currency, so that’s roughly about NOK300 million.
Other elements are, you could say, delay in payments. There are more delay, you could say, in payments – or invoices, to make it more correctly – invoices than delays in projects. And this is something we work on. As we have started to give this guiding externally to be, you could say, I give you a 50/50 estimate. Because we see that there is maybe a tendency in our planning and when the project’s set up, that it’s better to be on the safe side and estimate the investments coming in too early than too late. So you will see that, both on the maintenance element, that it’s slightly reduced, and on the project element.
Svein Tore Holsether
On nitrates premiums, at this point of the year they are normally at their lowest. And as Torgeir also indicated in his presentation, we have started to make increases. But I think I will hand over to Dag Tore to give a more – the broader picture on it.
Dag Tore Mo
Well, like what the numbers now show for the third quarter, the fact that the nitrate premiums are lower than a year ago in – particularly then in absolute terms, but also slightly lower in relative terms, but not that much lower – nitrates has gained quite a lot of market share. And the domestic industry has sold more nitrates this quarter. And imports, as you say, is down 8%, which is very dominated by the urea product.
So I would say that this – the development in the premiums this quarter has had an effect. As you say, of course, the premium itself, I agree with you, is depending on the farmer economics. So when the farmer economics gets more stressed, lower returns on the farm, there is, of course, also then a lower willingness to pay the extra premiums.
On the nitrogen season in total, at least what we’ve seen historically, is that nitrogen consumption in Europe is very stable because the variable cost of running the farm is low compared to most other regions in the world due to high yields and usually good precipitation et cetera.
So it’s hard to see a farmer in Europe not trying to optimize his yield, regardless of the wheat price. Well at least within a certain band, and certainly at today’s prices. If you look at the current prices are not that different actually from the prices for wheat one year ago. It’s getting closer and closer.
So I don’t think we can give an estimate exactly on the nitrate pricing; we never do that. But I don’t see necessarily huge changes in the pattern. As I said, so far nitrates have actually gained some market share.
Okay. If you actually pass the microphone backwards, we have the next question from Handelsbanken.
Anne Gjoen. A question to Torgeir. This time we see EBITDA is better than consensus. We’ve also seen that it’s a rather significant volume increase in nitrates as well as NPK. But the deviation comes actually on the other element, because, as far as I can see, it’s not production or crop nutrition that is better than expected. So have you any thoughts about that?
You’re referring back to the EBITDA split between the three segments then. And of course, if you add that, you see there is a difference and that difference is elimination in inventory then.
So we have a smaller elimination in inventory this quarter, so we have a positive effect. And that’s because values in inventory is down then. So when you look at the segments as such, that is the explanation.
When it comes to – you referred to consensus, and of course we try to understand how we can guide you even better to get closer to consensus. Even though I think that the deviation isn’t big. So if it becomes even smaller, there are less and less and less excitement about these presentations.
But at least, if we think about where would we be surprised and where we maybe are on the positive side, if we thought back a quarter, is probably the one big explanation is Brazil then.
Their sales have been very good; 11% up, as Svein Tore pointed out. And even more, the increase in the doubling of the volume of what we call premium products. Which is mainly NPKs, but also nitrates and calcium nitrate, which has a substantial higher margin than the bulk plant.
So that’s probably the main explanation when you look at the Yara totality. But I’m of course not the expert to say what you were thinking when you made the calculation.
Okay. Are there more questions? Yes, we can go to Arctic.
Good morning. Thomas Lorck, Arctic Securities. Just an observation going forward; you seem to expect an oversupply market for some time, as you said? And you also have a fairly high CapEx commitment next year. My question is, how should we think about your focus on credit rating, which I believe is net debt to EBITDA below 2 times, versus your dividend policy? And interesting M&A opportunities that could emerge in this part of the cycle?
Should I start? [indiscernible] At least I have a strong view on it. Of course, it’s a well-put question in the way that earnings are lower now. And Svein Tore – as Svein Tore alluded to, we have to be prepared at least for a lower level going forward, shorter term as such. And we have significant investments coming up.
Having said that, when we look at that – those metrics that the rating companies use, we feel very confident in keeping our mid-investment-grade rating, our BBB from Standard & Poor’s now. So that is a strong ambition and target for us to keep it. And with the current investments, we feel very confident to do that.
We also feel that we still have some room for further investments. But of course the capacity as such is smaller on our own balance sheet today than what it was if you go some years back. But also that’s due to the fact that we have done, and is doing significant investments.
And even if you, in hindsight, can say that you knew what’s happening, you may be had had picked somewhat different portfolio, we are overall very pleased with the portfolio we’ve picked, as we’ve commented upon before. We haven’t invested in a lot of projects largely exposed to the urea market where we have seen the biggest dive.
We have more invested in upgrading our projects – upgrading products like NPKs. We have invested into industrial products and in sales and marketing, particularly in Latin America, which is not that exposed to that.
But we are confident with the credit rating. When we look at our growth portfolio and also with the cash return policy where we say that we will typically, over time, return back to our investors 40% to 45% of net income as dividend and share buybacks.
The last years, based on the very strong balance sheet, we have even been somewhat above that. Where we have a cash return last year of 57%. We’re leaning strongly forward on that. Yes, so we have also some room inside our dividend target, as such.
Svein Tore Holsether
And building on what Torgeir just said, there certainly we have a lot of CapEx this year and going into next year. But Yara has shown strong capita discipline over a long period of time. Certainly large investments now, but we have also made divestments with GrowHow UK and the sale of the CO2 business. Now, at this stage, or at this part in the cycle that there are opportunities for acquisitions – and I think you saw one of them that we were able to move on with the acquisition that we just announced, in India. So when opportunities arise, we will look at them. But it has to be based on the fundamentals, that it has to be value creating and not just growing for the sake of growing.
Okay. I think we have another question from Danske.
Yes, please. You mentioned the – and you’ve also shown the increase in premium products in Brazil, which are up 100%. Could you just comment a bit more on that? Is this the new level; are we going to see continued growth on that level? And can that still be supplied from current assets elsewhere or could this push forward new builds in Brazil to cover such an increase in premium products?
Svein Tore Holsether
Well I think we’ve demonstrated very strong growth now quarter to quarter, but don’t use that as a projection for the sales going forward. We were very pleased with the development, but it’s the result of a lot of work out in the field with the farmers.
We have 800 people, a combine of agronomists and sales people, working with the farmers to demonstrate the yield impact and the profit impact that we have can have on the farmer. And I think we’ve been able to do so successfully.
At the capital markets day, I think we indicated that we had a target of reaching 2 million tonnes per year of premium products. Which means that the growth rate going forward will be lower, but still there will be a significant increase from today’s level.
But you could say Brazil is ahead of that plan for the time being then, that I should maybe not put more pressure on them on that. Maybe I’ll comment on the investing – or the sourcing of that product as you said then. We are sourcing quite some product from Europe, from our European NPK plants there. And we are expanding those plants.
We have already made an expansion up and running in Uusikaupunki. That’s our biggest Finnish NPK plant, expanding from 1 million to 1.25 million tonnes. And we are expanding our NPK plant in Porsgrunn.
But we are also increasing production of NPKs in Brazil. We have the plant in Rio Grande where we have possibilities to partly switch between, you could say, more standard phosphate products like SSP, TSP, to more NPKs. And we have done that, some of that switch over the last year and we are being able to sell more NPKs, also locally produced, into the market as we develop that.
And one of the growth projects that I showed on my last slide is an expansion of the Rio Grande site. Where we consolidated and improved efficiency of it, increased blending but also increased of what we call granulation with 50% increasing 400,000 tonnes, which can also be a capacity to produce more NPKs.
Are there more questions? We have one at the front here. We can pass the microphone just forward I think.
Can I ask a question about Russia? According to the Financial Times, Russia is now the biggest wheat exporter. Are the Company hit by sanctions anyway? Or what do you think about maybe looking at Russia may be the main agricultural land – country in the future?
Dag Tore Mo
Yes. It’s been a very positive – sorry. We are already seeing in the way that it’s a very positive development ongoing. Fertilizer consumption this year we believe are up than more than 10% in Russia. Deliveries are currently – the domestic market is strong.
It’s from relatively low levels compared to where they were historically, but still quite strong growth. So Eastern Europe, in general, actually this year has been very positive, with good climatic conditions and increased nutrients application.
So we definitely agree with you. We see that Eastern Europe, and including Russia, is definitely a place in the world where there is a huge potential for increased agricultural production and also increased fertilizer consumption.
And you can just look at – if you look at the ammonium nitrate price, which is – ammonium nitrate is the main product which is used in Russia for nitrogen consumption. And we are used to having – we have talked to you earlier about nitrate premiums in Europe.
But if you also look at the global market today, and that’s to a large extent driven by the positive developments in Eastern Europe, the nitrate price also globally is more than 20% in today’s market. The AN price in Baltic or Black Sea today is around $175 while, as was mentioned in the scenario here, while urea price is $190, and adjusting for the nutrient content, that’s more than 20% difference, so very clearly positive.
Then you could say that Yara today doesn’t sell much in Russia. We don’t have plants there. But Russia, or Former Soviet Union in general, is a big exporter of fertilizer products. So – and they become that after the collapse of the Soviet Union, because then they had huge production of fertilizer and huge misuse or ineffective use. So when the economy there collapsed, they continued to produce, but started to export. Which was a shock for the fertilizer market in the early 1990s.
What we see now is that, as Dag Tore said, consumption start to pull up. And that may also limit or take away some of the export over time. So the immediate effect for Yara is that it may help a little bit on the global market. And then of course, longer term, could also start to develop into marketing opportunities. But today they are quite small.
And it’s not only into the global commodity market, as Dag Tore alluded to, or – but what we also say is that they are exporting quite a lot of the more nitrates and NPK products that we are producing also. So that could also strengthen, even further, you could say, the supply-demand balance of those premium products.
Russia produced quite some NPK and nitrates. For instance, on NPKs, they are based on old noshkiedro technology which were licensed out 20 or 30, 40 years ago.
But there are no sanctions? They are not hit by any sanctions?
Svein Tore Holsether
There are no sanctions as such on fertilizer export out of Russia, no.
Any further questions? Should you think of further questions after you’ve left the room, there is another chance at 2:00 PM Oslo time when we have a conference call, which you’re welcome to dial in to. But with that, thank you very much for attending our presentation.
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