Neste Oyj (OTCPK:NTOIF) Q1 2021 Earnings Conference Call April 29, 2021 8:00 AM ET
Juha-Pekka Kekäläinen - VP, IR
Peter Vanacker - President & CEO
Jyrki Mäki-Kala - CFO, Strategy & IT
Matti Lehmus - Executive Vice President, Renewables Platform
Marko Pekkola - Executive Vice President, Oil Products
Panu Kopra - Executive Vice President, Marketing & Services
Conference Call Participants
Nick Konstantakis - Exane
Joshua Stone - Barclays
Iiris Theman - Carnegie
Artem Beletski - SEB
Erwan Kerouredan - RBC
Henri Patricot - UBS
Peter Low - Redburn
Henry Tarr - Berenberg
Sasikanth Chilukuru - Morgan Stanley
Matthew Blair - Tudor, Pickering, Holt
Matthew Lofting - JP Morgan
Henri Parkkinen - OP Financial
Monika Rajoria - Société Générale
Michael Alsford - Citigroup
Thank you, and good afternoon, ladies and gentlemen, and welcome to this conference call to discuss Neste's First Quarter Results published this morning. I'm Juha-Pekka Kekäläinen, Head of Neste IR. And here with me on the call are President and CEO, Peter Vanacker; CFO, Jyrki Mäki-Kala and the Business Unit Head, Matti Lehmus, of Renewables Platform; Marko Pekkola, Oil Products; and Panu Kopra of Marketing & Services.
We will be referring to the presentation that can be found on our website. Please pay attention to the disclaimer since we will be making forward-looking statements in this call.
And with these remarks, I would like to hand over to our CEO, Peter Vanacker, to start with the presentation. Peter, please go ahead.
Thank you very much, JP, and good afternoon to all of you around the world, also on my behalf. I know it's a very busy results today, this day. I appreciate you for joining us to discuss or first quarter 2021 results.
And as you can see, I mean, our people have done, again in Q1, an excellent job in -- all the areas in our business. Of course, the uncertainty caused by the COVID-19 pandemic still continues, but the vaccination schemes are proceeding and giving people new hope. Under these circumstances, we are very pleased to be able to share with you our good overall performance in the first quarter.
The year 2021 started in the same way as the last one ended. Our Renewable Products continue to be very resilient that the challenging markets in Oil Products continues. At the Group level, we posted the comparable operating profit of €302 million. The two main deviations to last year's results were the weak performance of Oil Products, which represented €82 million of the difference and a weaker US dollar, which had a €57 million overall impact.
In the first quarter, our Renewable Products was able to deliver a healthy sales margin, with high production and sales volumes. As expected, the feedstock markets remain tight and feedstock prices continued their way up. We've been able to increase our sales prices for 2021, and the sales allocation worked very well as a result of our sales optimization model. Hence, we were able to deliver a healthy sales margin of US$699 per ton. Although, the hedging -- the markets -- the margin hedging contribution was lower than in 2020. I considered this to be an excellent achievement. Also, our production made a new quarterly records of 829,000 tons due to the very high operational performance.
The Oil products continue to suffer from a very weak refining markets, that is, as you know, caused by the global pandemic related demand distraction and oversupply. The reference margin that is reflecting the general market conditions averaged only US$0.9 per barrel in the first quarter. It was about US$3.4 per ton lower than in the previous year, which had a negative impact of €59 million on the comparable operating profit year-on-year.
Also the sales volumes were some 18% lower than in the first quarter of 2020 due to the weak demands and preparations for the Porvoo major turnarounds. Substantial cost reduction measures have been successfully taken in Oil Products.
Our Marketing & Services segment performed very well. Sales volumes were still impacted by the COVID-19 pandemic, but we were able to improve unit margins, partly supported by inventory gains. Marketing & Services has also continued to do well in managing their cost basis.
As always, we continue to focus on our strategy execution and I will come back to that at the end of the presentation.
Neste continues to take the risks related to the COVID-19 pandemic seriously. Our primary objective is to ensure the health and safety of our employees, customers, and other partners, as well as to ensure the continuity of our operations and secure supply -- secure supply of products. This is particularly important during the Porvoo turnarounds and at Singapore capacity expansion projects. We are performing mass testing during the Porvoo turnarounds with already more than 24,000 tests done as of today.
Our occupational safety performance was very good in the first quarter and the total recordable incidents frequency was 0.7 incidents by million hours. The process safety event rates was a disappointing 5.9 and several actions have been taken in the organizations, having the biggest challenges. Our systematic safety work continues every day.
Despite the challenges in Oil Products, our financial position remains solid. We reached an after tax ROACE of 15.3% on a rolling 12-month basis, exceeding the 15% target. At the end of March, our leverage ratio was 7.8%, and this solid financial position enables the implementation of our growth strategy going forward.
Now with these initial remarks, let me hand over to Jyrki to discuss the financials in more detail. Jyrki?
Yeah. Thank you, Peter and good afternoon. Like Peter already mentioned in his opening quarter one continue with the same road where quarter four 2020 ended. Oil Products, it's solid performance with helps the margins and the Oil Products still suffer the weak market.
Let's look the financial figures. Our revenue in this quarter followed very much the quarter one 2020 correspond by reaching €3.1 billion, basically with higher sales prices in the background. Our IFRS EBITDA was much better than last year, and that is mainly coming through the higher inventory prices in both our RP and OP. Our main P&L KPI comparable EBIT was €106 million lower than 2020 first quarter. And I will describe this difference via the bridges with the next few slides.
Our cash flow before financing, it was clearly negative by €645 million. And it basically has two elements. We had a higher working capital roughly €800 million compared to the year-end, and also our cash capital expended in quarter one 2021 was close to €500 million compare, for example, 2020 first quarter of roughly €300 million.
A little bit about the working capital, these three elements in the working capital and inventories basically why the working capital was higher. It was really about higher product and inventory prices. We were building some contangos also this year 2021, and certainly we were making preparation for Porvoo turnaround 2021. And all these elements meant €450 million. So that may -- some of this will be gained back during the year, but we'll see that later 2021.
We had higher receivables coming from the higher product prices. And, of course, the increase Blender's tax credit quarter-on-quarter is adding receivables in our balance sheet. And then slightly lower trade payables, but that is more like a timing issue, nothing more.
If you look the CapEx is certainly the biggest CapEx is in our quarter one was Singapore turnaround and, of course, the M&A acquisition concerning the Rotterdam Bunge.
If we then look at the first bridge, meaning the -- by business area and like discussed already and mention here, the Renewables really solid resilience with both higher sales volumes and sales margin. There €36 million lower comparative, came mainly from currency rate relating to US dollar and slightly higher fixed cost and depreciations. In Oil Products, basically the biggest element inside was the total margin. It was €78 million lower. And, of course, the lower sales volumes had an impact like mentioned already earlier, but on the other hand, their fixed costs were lower. And of course, depreciation as the Naantali refinery, the money sorted out [ph] took place at the end of quarter one. And also remembering here that the Marketing & Services basically doubled there quarter one 2020 comparable EBIT. So, an excellent achievement
But then if we look the item, then relating to -- P&L items, the next slide. And here you'll basically see three negative elements why this €106 million lower comparable EBIT came through. We are talking about volumes, mainly relating to Oil Products and Marko Pekkola will certainly talk more about those sales margin. That was around Oil Products total refining margin was lower. FX changes overall that hit basically both RP and OP. And then we have the two positive items. We have a very tight focus on fixed cost in the quarter one, and then other items, as an example, we had a very strong quarter with the base oil business.
But with these words, basically, I then leave the floor to Matti Lehmus, who will continue to talk about the solid Renewable Products.
Thank you, Jyrki. Good afternoon also on my behalf. So, indeed, the Renewable Products had a solid EBIT level of €294 million, some 10% below previous year's first quarter. And for me, this reflects again, a strong operational performance in spite of increasing feedstock prices. I know that the sales margin was at a healthy level of $699 per ton, slightly actually above last year's Q1. And behind that, we have the fact that the feedstock market was tight, but we were successful in optimizing our sales performance.
The sales from volume was at a good stable level of 743 kilotons, very close to the previous quarter, which reflects solid demand. However, from the operational performance, I would like to highlight in particular, the record high production volume of 829 kilotons, implying a 104% utilization. And this is really a good demonstration of the result of our continuous improvement efforts in our production.
The final one I would raise from this slide is that our feedstock optimization continues. The share of waste and residue increased again by 3% versus the previous quarter, and now reaching 90%. And I'm very happy with the trends and the continued development of our global waste and residue sourcing capabilities. So, overall, good quarter.
If you briefly look at the waterfall, I would briefly comment that the comparison towards Q1 2020 illustrates that the results year-on-year was supported by a slightly higher volume and a slightly higher sales margin, with these two drivers having an overall positive impact for €50 million.
The most significant change, though, was the FX change as the US dollar weakened from 110 last year to 121 in this first quarter. And this has a €37 million impact. This was partially mitigated by our FX hedges, which are included in the margin in this picture.
And finally from the waterfall, I would mention that our fixed costs were €6 million higher than in Q1 of last year. And this is driven mainly by our increasing staff and support function costs as we prepare for our upcoming growth projects.
If we then turn to the feedstock prices, I would characterize the Q1 feedstock markets by a very steep increase of vegetable oils. And this was led, especially by soybean oil in the U.S. Demand for vegetable oils has been solid, and weather has impacted the short-term production. So, for example, for palm oil or the [indiscernible] phenomenon has been there, and this has led to low inventories. It's worth mentioning that the forward market for veg oils is backwardated, as the production output, for example, for palm oil is viewed constructive for the rest of the year.
As in previous quarter also the waste and residue markets continued to be tight. Following the vegetable oils market movement, animal fat used cooking oil prices increased significantly across all regions. And if I take one example for used cooking oil, the supply continues to be impacted by the COVID situation. And we are estimated to be approximately 80% of the pre-COVID supply level globally.
If you then turn to the products market and especially the U.S., I would like to make following highlights. So, the LS -- LCFS credit averaged $195 per ton in the first quarter, which is just a few dollars below the previous quarter. The more significant move was in the D4 RIN values, which clearly strengthened over the quarter from 887 -- $0.88 per gallon in the previous quarter to $1.20 per gallon. And they have continued to increase also in April. The RIN market values responded to the soybean oil price rally in the first quarter.
Finally, I would like to comment on the sales margin development in the first quarter. And if I compare the development versus the previous quarter, I would highlight three main factors. So, the first one is that the average feedstock price increased significantly, but at the same time, we had a very good sales performance and also increases in product related market prices, such as diesel or rinse. And these were a significant driver in compensating the feedstock price increase and together mitigated more than 50% of the impact.
The sales performance included, for example, price premium increases, but also a very successful continued geographical sales mix optimization, with a continued high share of U.S. sales at 35%.
The third factor I would like to mention is that the contribution from margin hedging was positive. It mitigated approximately 20% of the feedstock price increase. However, it's also good to note that the impact from margin hedging was clearly lower than in the previous quarter.
In general, it's good to note that the sales margin in the first quarter was, again, supported by a very good operation performance, no unplanned shutdowns. So, we had, again, a very high utilization of 104% in our production.
With these words, I hand over to Marko Pekkola, who will discuss the Oil Products results.
Thank you, Matti. I'll comment on the Oil Products. First quarter dominated again by the continued weak and oversupplied market, resulting comparable EBIT totaling out minus €8 million compared to the €74 million last year. During the quarter, the reference margin was low only US$0.9 per barrel as sales volumes were 18% lower compared to the Q1 2020 due to the weak demand preparation for the Porvoo turnaround and Naantali refinery closure. Refinery utilization rates were 83% mainly due to the market conditions.
Moving then onto the EBIT bridge between Q1 2021 and 2020, where the impact of exceptionally weak product market and our sales is visible. These had a negative impact of €97 million on the comparable operating profit year-on-year. Additional margin and a weaker US dollar had the negative impact of €39 million. Main positive impacts in Q1 2021 €55 million came from successfully implemented short-term cost reduction measures and improved profitability of specialty product business, lower depreciation related to the Naantali closure and an insurance compensation.
When having a look at the markets, we could see the continued impact of COVID-19 pandemic on physical product demand and low margin specifically in diesel during the quarter. Urals-Brent differential was very volatile, but improved during the quarter, averaging on the level of minus $1.5 per barrel for the quarter.
When taking a look on at our margin performance, our total refining margin was low at $6.70 per barrel. Additional margin was supported by currency hedging, but negatively impacted by other things like retroactive adjustment related to the SAP system implementation. Production -- refinery production costs were higher than 2020 in -- due to increase natural gas and emission right price -- the emission rights prices. All-in-all, strategy execution in Oil Products is proceeding. And we announced closure of Naantali refinery operations. We're successfully completed and transforming Porvoo refinery operations to coal processing, renewable and recycled raw material will proceed after that turnaround execution. Turnaround execution is proceeding as planned, according to the state health and security plan due to the pandemic to ensure safety for all the people joining hand through the turnaround [ph].
With these comments, I would like to then hand over to Panu to talk about Marketing & Services.
Thank you, Marko. This is Panu Kopra speaking. All-in-all, Q1 was very good rock solid in Marketing & Services unit. We actually -- like Jyrki said, we actually more than doubled our result compared to last year. Outstanding result was outcome of element cost control and excellence net working pricing. Our return on net assets was more than 35%, which is indeed in retail, very healthy level. Unfortunately, still aviation and marine volumes are low, gasoline also slightly behind the last year. But diesel volumes even a bit higher than the last year.
We have expanded Neste MY availability to more than 130 stations. And now we have started the active marketing for Neste MY here in Finland. First results for advertising campaigns are promising. And the awareness of Neste MY in Finland has increased. However, it is not yet there where it should be, and therefore, we continue to work hard to get in Finland even more well-known.
This was shortly about Q1 in Marketing & Services, handing over back to Peter.
Thank you, Panu. Let's now move onto the current topics. The very good progress on our strategy implementation has, of course, continued. The Singapore renewable capacity expansion project is proceeding according to the renewed schedule. We currently have about 4,000 people working at the site and in our workshops. We continue to take all precautions and follow the development of the COVID-19 situation in Singapore very closely.
The Bunge refinery acquisition in Rotterdam was completed in March. It will increase our pretreatment capability for renewables productions in time for the next capacity expansion step in Europe. After a thorough study phase, Rotterdam was chosen as the location for the possible next world-scale renewable production facility. We are now focusing on the detailed engineering and the preparation for the final investment decision later this year or early 2022.
A final investment decision has been made on a 500,000 tons SAF sustainable aviation fuel optionality project in Rotterdam. This about €190 million projects will be completed by the end of 2023 and further strengthened our leadership position in the sustainable aviation market, by enabling the production of at least 1.5 million tons of SAF by the end of 2023 globally.
In March, we established a Green Finance Framework and successfully issued the first €500 million green bonds under the framework. The funds are planned to be used primarily for the ongoing Singapore capacity expansion project.
During the first quarter, several commercial agreements have been signed in both renewable aviation and renewable polymers and chemicals. In the area of efficiency, the shutdown of the refinery operations at Naantali were successfully completed in March. A lot of short-term cost reduction measures have been successfully implemented. Preparations have been made for the Porvoo refinery major turnarounds to ensure safety, efficiency and productivity of the refinery for years to come. And as you know, this is currently ongoing in Porvoo.
In the area of innovation, our applications for renewable hydrogen and lignofuels have been invited for the second round of the European innovation fund applications. For research and co-innovation projects in the Neste elite ecosystem have been approved by Business Finland and we will receive approximately €8 million funding. This funding from Business Finland is for the research partners. These are universities and research institutes in our VTT [ph] ecosystem. These are just some of the highlights that I wanted to mention. We have a clear strategy and continue moving ahead.
As an outlook for the second quarter, we see the following. The sales volumes for renewable diesel in the second quarter are expected to be on the same level as in the previous quarter. The waste and residue markets are anticipated to remain tight, and we expect continued lockdowns in several countries. Sales margin is expected to remain healthy. The margin will not be supported by similar hedging gains as in 2020, and the hedging rate is expected to be lower than normal. Utilization rates of our renewable production facilities are forecasted to remain high in the second quarter, except for the scheduled Porvoo refinery turnaround, which is estimated to have a negative impact of €30 million on the segment's comparable EBIT.
In the second quarter Oil Products market demands will continue to be depressed due to several extended lockdowns as a result of the COVID-19 pandemic. The reference margin is expected to remain low and volatile. The scheduled 12-week major turnaround at the Porvoo refinery is expected to have a negative impact of €110 million of the segment's comparable operating profits, mainly in the second quarter.
In Marketing & Services, the sales volumes and unit margins are expected to follow the previous year's seasonality pattern in the second quarter. Some negative impact on demand and sales volumes is also anticipated due to the ongoing COVID-19 pandemic.
Some other topics 2021. Our strategic projects proceed as planned with the Singapore expansion and Porvoo turnaround being the major projects. Our cash out capital expenditure is still estimated to be approximately €1.2 billion in 2021, and that excludes M&A.
Regarding the Renewable Products, we have currently scheduled a seven-week turnaround at the Singapore refinery in the third quarter, which is estimated to have a negative impact of approximately €80 million on the comparable EBIT. Additionally, we have scheduled the four-week catalyst change at Rotterdam refinery in the fourth quarter, which is estimated to have a negative impact of approximately €50 million on the comparable EBIT.
This concludes the presentation, and we are now happy to take your questions.
Thank you. [Operator Instructions]
And your first question comes from the line of Nick Konstantakis from Exane. Please go ahead. Your line is now open.
Hi, guys, and thank you for taking my questions. A few, if I could please, and starting with the margin and your sales guidance. Obviously, it’s a -- wide range $600, $700 a ton on the upper end today. Can you just explain on this and moving parts Q-on-Q, including feedstokes, how much of the hedging goes away seasonality? Just trying to understand if sales in the second quarter would be on the upgrade or the lower end of the range.
Secondly, very good operational performance you flagged on the Renewable Products, good utilization. You're going into catalyst changes usually, or sometimes you have some surprises for us in terms of the bottom loading. I know you have already achieved your 200,000 targets, but is there any room for a -- surprise there before that's what comes on-stream.
Yes. Hello, Nick. This is Matti. Thanks for the questions. So, I will start, first, with margin question and perhaps first looking back at Q1, indeed, we came at $699 per ton, which is at the upper end of the $600 to $700 per ton range. If you look at Q1, I would indeed -- what I mentioned in my speech also say that yes, feedstock prices clearly increased. And at the same time, we were able to have -- let's say compensation from the fact that if we had very good sales performance and at the same time also product market prices such as the diesel quotes, such as the RIN quotes moved upward and this mitigated more than half of the impact of the feedstocks. And also then, our margin hedging, even though it was at a lower level than last year, had a positive impact and helped mitigate some of the impact.
If you look at Q2, we are not giving any -- other guidance than saying that we expect to be in the healthy range. If you look at some of the drivers, you can, of course, see that the feedstock market is expected to remain tight. Hence, it's -- well possible that average feedstock surprises could continue on an increasing trend. At the same time, it's clear that we will continue our sales optimization both in terms of geographic sales mix and the premium. And it's also good to know that these product market parameters play an important role. So, for example, RINs currently are higher than the Q1 average, as also the feedstocks have increased. And then, we do not have any major changes in the hedging level expected.
The second question was on the operational performance. And exactly like you pointed out, if you look at the history, we have very systematically being able to creep the capacity and also in the first quarter very good operational performance, so that we reached even 104% utilization rate. It's, of course, continuous effort. At the same time, it's clear that the low-hanging fruits have already been taken advantage of. But it's something we will continue looking for every opportunity.
Thank you. And your next question comes from the line of Joshua Stone at Barclays. Please go ahead. Your line is now open.
Thank you and good afternoon. Three questions, please. Firstly, just on the hedging gains you mentioned in 1Q. Are you able to quantify that a bit more on? You said no major changes in the hedging level. So, are we tracking similar hedging gains for 2Q, do you think?
And then, secondly, on the sales allocation, are you able to increase your sales to the U.S. to take advantage of higher prices over there? I'm just thinking if you -- are you restricted in any way from the time of contracts you've locked into, perhaps in Europe.
And then just the last question is on the regulatory announcements. Do you have any insights on potential timings for any announcements, either from the U.S. or European government from our mandates? Thank you.
Yes. So, thanks, Joshua. I'll start with the hedging and the sales allocation questions. So, on the hedging, we haven't quantified like you know the exact impact. I mean, just to give you a feeling, I mentioned that, while feedstock prices increased significantly in the first quarter, the fact that we had hedging off roughly 35% in place off the total sales mitigated roughly 20% of that impact. I mean, that gives you something to make an estimate.
And I'd like mentioned indeed in the second quarter, the level is only slightly higher on the hedging ratio. And then, of course, the hedging results will also depend on the market movements. That's clear.
On the sales allocation, I would just say that it's always something where our sales team has worked very systematically create that optionality. When it comes then specific to the question whether we could further increase sales share of the U.S., it's good to note that we also have a high share of term sales in place. So that is, of course, something that sets a limitation to how much we can optimize, but obviously something we are -- we continue fine tuning the share depending on the market.
Yeah. Joshua, thanks. I mean, very good questions as usual. Let me give a couple of comments on the regulatory side. There is, of course, a lot happening both in Europe, as well as in the United States. If I go a bit into the countries, I mean, Sweden has moved ahead then -- the proposal is in front of the parliament on that ambitious greenhouse cash reduction targets, which is 65.7% by 2030 for diesel, and then, the updated roadmap. And so, we expect that that will be voted in the parliament during the session June, 2021.
Of course, there are other countries like Germany and the Netherlands, they have already indicated very concrete ambitious mandates. I mean, for 2030, Germany plants, I mean, 22% greenhouse gas reduction mandate by 2030, Netherlands actually also even above that, I mean, 27%. So, you see that these numbers are substantially above what currently is being defined in the renewable energy directive too. RED II is enforceable during the course of this year. So, we will see that will continue to drive, I mean, demand in Europe.
You also know that RED II is reopened for a revision to meet. And you saw also that there was an agreement on the greenhouse gas emission reduction target by 2030, between the parliament and the commission. So that minimum 55%, which in reality is actually more 57%. If you look into the details, that has been confirmed. And now, of course, RED II needs to be changed because if you do a bottom up analysis of all the communicated targets that the member states have, you already come above 20% by 2030. We are pleading for 26%. I've mentioned that in previous calls. And we hear some rumors that such a percentage is being taken very seriously, but of course, there is lots of DGs currently involved in these discussions.
I hope that we will see during the course of 2021 some more clarity on what direction this is going. Of course, there needs to be alignment then with parliament and council. So that may take a little bit more time so that the final outcome could be, I don't know, 2024, something like that. But the direction is clear. The direction is not going down, but the direction is actually going up to meet that minimum 55%.
In aviation, lots going on as well in Europe. We expect, I mean that, rather -- sooner than later, which could be Q3, that there will be more news coming out from the commission on a regulation or a directive for a mandate. We are anticipating that as you saw from our announcement this morning, so we are proceeding with -- having taken the final investment decision in our board meeting yesterday, we're proceeding with the investments to build up that optionality in -- having 500,000 tons, which is a bit higher than what we originally were looking at, but having gone through the detailed engineering, we believe we can get 500,000 tons out of the existing Rotterdam capacity.
If I go to the United States, also, there are lots of discussions ongoing. You probably noticed that now in the Washington state, both the Senate and the House have now agreed upon the installation of a cap and trade system. And immediately also connected to that, which was the first time in history that the state actually decided this in combination. So, the LCFS credit system has been approved and that is no expected to start at the beginning of 2023 and probably starting with a low percentage like we saw in Oregon now 0.5%. And then the legislation aimed at reaching 10% carbon intensity reduction by 2031.
There is further discussion on going on a state level for road transportation in New Mexico, New York, Massachusetts, and Canada is still working on the federal LCFS bill. So that could eventually also be implemented in 2023. So also here the direction is very clear that it is moving and the Biden administration has made, I mean, very clear statements on carbon intensity reduction for the United States.
On the aviation sector, the opt-ins in the LCFS, this is also included in Washington States in this bill, with an opt-in and a multiplier just like in California. So that is creating demands, but also on a federal level, there is quite a lot of discussion actually ongoing. There are different mechanisms that are being discussed. Mechanisms on a text level, mechanisms on the dedicated Blender's tax credit, I mean, for aviation, as well as mechanisms that are more going into the direction of mandates. We don't expect, I mean, to see, because this goes a little bit slower, anything, I mean, during the next couple of months, quarters, but who knows maybe, I mean, towards the end of this year or the beginning of next year.
Thank you, Peter. Very clear. Thank you.
Thank you. And your next question comes from the line of Iiris Theman from Carnegie. Please go ahead. Your line is now open.
Hi. This is Iiris Theman from Carnegie. Thank you for taking my question. I think I have a couple of questions. So, still on your sales margin, as you guided to remain healthy. Is it fair to ask you that there is not going to be a big drop quarter-over-quarter?
And then secondly, does your sales margin, as in that waste feedstock prices will start to decrease in late Q2, or how are you able to keep your sales margin at a healthy level as to several sales -- feedstock prices are up still more than 10% in the Q2 so far quarter-over-quarter.
And then thirdly, how do you expect new taxonomy to impact you, or is it going to have any impact? Thanks.
Yeah. Let me just make a couple of comments. And then, of course, if Matti wants to add to that, so, I mean, he already leveraged, and give a bit of an explanation on the sales margin. I mean, Iiris, it's very clear that, of course, I mean, we are still, I would say, relatively early, I mean, in the quarter, so we have not -- the full visibility on what is happening in the waste and residue it's continues to be, of course, very expensive. But also I would say, a bit volatile, and lots depends of course, on the availability of the waste and residue with the current lockdowns that are going on.
So, I'm rather careful in the sales margin and keeping it that the level as we said them in healthy, managing the expectations also here a little bit because lots of things, I mean, can still happen during Q2. I believe, I mean, with Q1, we have, again, proven that our model -- how we are running the business and margin management. As I would say, the only company that has such a global footprint, that we can see our more to central Europe. We can see our more to the United States, or we can see our more, let's say, to the Northern European, and we will continue to do that to maximize, let's say, our margin and then, try to offset.
Matti also gave already a comment on the hedging. Hedging continues to be, of course, very expensive. Yeah. So, we have been very prudent in building up those hedging positions, that prudency has let them in Q1 to some help in offsetting these high waste and residue costs. The sales performance Matti said has impacted, I mean, mitigated about 50% of that impact coming out of feedstock. The margin hedging impacted approximately, I mean, 20% of that feedstock price increase. So that gives you a little bit of an indication, maybe also, I mean, for your model. But I am again, repeating, very prudent on the sales margin for Q2. And we rather don't predict, let's say, -- yeah, very healthy, because there is a lot, I mean, still happening in this market.
And then as we said, I mean, in previous calls also, if we are looking at the second half of the year, of course, not -- full visibility for the second half of the year, but you see that palm oil, gas oil should come down in terms of the differential, that's why we have buildup a strong hedging position. I mean, we have a little bit for the second half of the year out of prudency, but nothing more than that. As it continues to -- we continue to receive, I mean, the messages that the palm oil harvest seem to be delayed, but very good.
And then the same also on the soybean side, delayed in South America, but seems to be very good. So to the soybean oil price spike that you're seeing today has probably factoring in, I mean, the availability, very good demand on one hand side in China, India. And on the other hand side, I mean, still, not really -- I mean, South America hitting the markets as that is coming with a certain delay.
On taxonomy, I mean, we're very pleased with the outcome of taxonomy. Of course, as you can imagine, we were coming very hard on this. And if you look at the taxonomy, there is a much better alignment with RED II. And in terms of road transportation, biofuels, it's not a 100% alignment, but it's a very good alignment. We've already do that means that for us, I mean, the waste and residue based biofuels will be counted for as a sustainable.
Another element on taxonomy is that biofuels are not considered to be transitional. I think that was a very big and important gain, I would say, I mean, for us and the entire industry, that it is now being considered as one of the solutions long-term to reduce greenhouse gas emissions.
And then the third point that I would like to point towards is that, as you know, we work a lot on the waste and residue based polymers, as well as chemical recycling. So a circular bio-economy by combining these factors, and this is being recognized and will be fully accounted for in the taxonomy. So, in the future, all the renewable hydrocarbons that we are selling to polymers and chemicals, as well as all the -- things that we are undertaking in the chemical recycling will be accounted for as sustainable in -- based upon the taxonomy.
Thank you, Peter. Very helpful.
Thank you. And the next question comes from the line of Artem Beletski, SEB. Please go ahead. Your line is open.
Yes. Good afternoon. This is Artem from SEB. Thank you for taking my questions. Actually, I have three to be asked related to renewables. So, first, start in the speech book, so basically over recent years, you have been heavily investing on this side, basically doing more vertical integration. What comes to your internal cost impletion relating to feedstock? Do you see basically same changes as public quotes on the market, or you see in-patient less significant on your side.
Then the other question is related to geographical mix. So, indeed in Q1, your sales, the Nordics has increased and they reduced in Central Europe, is it more sort of a structural change or just what the volatility, how we should think about it? And maybe lastly, on this strong production volumes of renewables in Q1, do you have any timeline of when you might come back this, basically update in nameplate capacity, which is currently 3.2 million pounds. Thank you.
Yes. Hello, Artem. Thank you for the questions. And I'll start with your feedstock question. So, obviously, how I would describe our feedstock strategy is that we, first of all, have built a very global platform, which enables us to look into different regions. And then you, like, you know, we have also a large variety of waste and residue feedstocks that we are using -- more than 10 different feedstocks currently, which again means that we can also optimize the mix. So, I would say the most important lever for us to optimize the feedstock is indeed in using this flexibility and then adapting our sourcing to the market situation at any moment. That's really, I think, where we can optimize the feedstock mix.
On the sales mix, I think Peter alluded to it in his previous answer very well. I think it's an important part of our business model that we have, --the flexibility to look at different regions, different customer segments. So, it's not something that will stay structurally fixed forever. We can always fine tune that mix. And that's actually something we do continuously when we plan our forward-looking sales.
And then finally on production, typically we have only updated nameplate capacities after having a more extended period of increased production. So, of course, it's very promising what we saw in the first quarter, but we will continue driving sustained performance like that in the coming quarters.
Okay. This better clear. Thank you, Matti.
Thank you. And your next question comes from the line of Erwan Kerouredan at RBC. Please go ahead. Your line is open.
Hi. Thanks for taking my questions and congratulations on the robust quarter. I've got two questions on feedstock and one on SAF. On feedstock, in waste and residue and palm oil. Can you clarify to what extent the situation in India impacts and whether it impacts in any of your feedstock? That's my first question.
And the second question is on palm oil, the share of palm oil in feedstock further reduces, are we keeping 2025 as a phase out target year? And what are the odds of like bringing this year earlier like 2023 for E&I, for example?
My question on the SAF is on the economics. You've recently referred to as three to four times premium versus jet fuel, regular jet fuel when it comes to prices. Are you optimistic on like short term, like near term reduction of that premium? And if so, what other drivers? These are my questions. Thank you.
Thank you for the questions. It's Matti Lehmus. I'll start with the first two one. So, let me first start on the feedstock. Obviously, I mean, when I -- when we commented on the palm oil, on the soybean oil, it's a very global picture, where the global weather phenomenon, the harvest outlook has a big impact. When we look at the significance of India where we unfortunately have a very difficult COVID situation at the moment, it is, of course, something, which may have some impacts, for example, on demand level going forward. But that really depends on how the COVID situation unfolds. So, hopefully the situation is better soon.
On the question on palm oil, like you correctly noted, we have been increasing again, the share of waste and residue in our mix in this first quarter. We were now at 90%, and we have indeed, in our last year, CMD stated that target to be a 100% waste and residues by 2025. So, you can clearly see that by that time, we would have phased out palm oil. Of course, if you look at the speed and where we are now, we will see whether there are opportunities to do it earlier.
Yeah. And I want, Erwan, also highlight this. I mean, this has be major achievement, because we have been growing over production volumes on one hand side and reducing, let's say, the share of crude palm oil or increasing the percentage on waste and residues. So, there's a double whammy so to say. We've also said, I mean, by 2025, which is at the latest. And as you see, I mean, this is a bit typical, I mean, for the culture that we have in the company. We work on items, we implement them and then, we talk about them. So you may expect the same and here rest assured we are working towards the Capital Markets Day in September. If we have a change in our wording, then you will hear that at the Capital Markets Day, that's the promise.
On SAF, three to four times premium versus kerosene, of course, that always depends on how expensive, I mean, oil based kerosene actually is. We -- asset, I mean, we do see some very good opportunities and very good movements in this market, albeit at, of course, still at low volumes. Because first of all, the depressed situation that the aviation industry is in, and then on the other hand side, of course, we only have a hundred thousand tons of capacity available. And we continue -- these are expensive molecules, as we have alluded to I mean, in previous calls.
As we don't have the right economics yet, we will have them. I mean, when the Singapore facility is up and running, but we see very good movement on the regulatory sites, and some opportunities that -- if you look at these investments in Rotterdam, with the final investment decision that we took -- well, if you think it through, then you may assume that we have seen a very positive business case otherwise, we would not invest, I mean, €190 million in this. So that gives you a little bit of an indication and how we see the opportunities also in terms of our margin management, so that this is -- then not at the expense of the margins that we can realize in renewable diesel.
Thanks a lot. That’s very helpful.
Thank you. And your next question comes from the line of Henri Patricot at UBS. Please go ahead. Your line is open.
Yes. Thank you for the presentation. I have two questions, please. The first one is a follow-up on all the points you mentioned just on sustainable addition and investment in Rotterdam. I was wondering if you can get a sense whether your six-year sale agreement, some significant volumes, which makes more comfortable to invest in Rotterdam with higher capacity as well. And how would you expect Rotterdam demand to come through?
And then secondly, you mentioned that just some -- you're putting in some contango trades, so I was wondering if you can give us a sense of some significant what it like to be overall after the year. Thank you.
Okay. Thank you. Let me take, I mea, again, the question on the investment on Rotterdam for sustainable aviation fuel. We have always been a front runner at Neste. It has been our history and we have created the market for renewable diesel. And this is the same attitude that we have in sustainable aviation fuel. So this is not an investment that is based because we have now long-term sales contracts in place. Actually, as you see from the press release, that capacity would only be available towards the end of 2023. We said the second half of 2023. Yeah. So you can't sign them sales contracts, I mean, in beginning of 2021, that would start, I mean, then, let's say 2024.
But we believe it's extremely important also in creating this market that we lead by example, and that we are actually demonstrating to the regulators that the industry is following, even if today the regulation is not clear yet in terms of, for example, mandates that are in place. Of course, I mean, if we look at what we have done during the last couple of years, you know that we have 15 customers. Our business to business model is proceeding quite well, which means in this case, that is the business model I'm referring to whereby we have leading OEMs, leading consultancy companies that are directly in contact with us, because they want to reduce their scope three emissions when people start flying again. And as such, the physical product is split up from the certificates and these companies would then buy the certificates and the physical product of course, would then be supplied to the airlines. So we see good traction on that.
We see good traction, of course, also from the partners that we have, where we are selling our SAF, and these are Air BP and Shell. We see, also, very good traction from the side of the airlines, at this point in time funded mainly out of sustainability budgets or leveraging upon the current regulation that is in place so-called the opt-ins, the multipliers that you have on an LCFS site in California, Oregon, and in the future Washington, and then in Europe on the RED II, or for example, in countries like in the Netherlands where you have a bio credit system, which can also be used for SAF.
Marko here. I can comment then on the contango cases we have good storage capacity in that sense to do it. And I would divide it into two areas. One we would be doing on the crude side whenever the contango, the market is in contango so depending on the market structure and same applies also then on the product side. So whenever there also possibility. So we are following up the market and whenever possible to do that.
But it's very clear, I mean, that we don't have the same situation in terms of potential, I mean, for contango deals like we have seen in 2021, that may change, of course. We don't have a crystal ball on this, but I want to manage the expectations a little bit also here, as we got some very interesting benefits when we unwind it, I mean, our contango deals towards the end of 2020.
That’s it. Thank you.
Thank you. Thank you. And your next question comes from the line of Peter Low at Redburn. Please go ahead. Your line is open.
Hello. Hi. Thanks for taking my question. The first one is on the California LCFS. It seems to pull back a bit in recent weeks. It's quite hard to find much market commentary on it’s out there, as market participants appreciate your view on kind of what's caused that pull back and how you think that develops going forward.
And then the second one was just to kind of reconfirm the hedging structure you're using this year. I was little bit surprised you had a positive hedging result in the quarter. As I thought, the gain on the feedstock side of the hedge would have been offset by higher diesel prices. Can you just confirm that the way you're hedging is the same as last year i.e. if that's the beginning long vegetable oil and short gas oil prices? Thanks.
Yes. Hello. Thank you. This is Matti answering. So, first a couple of comments on the LCFS. So indeed like you know, there is a system behind where the carbon intensity reduction changes over time. We had last year a target of 7.5% that has now gone up to 8.25% from the beginning of the year. And the target is to reach 20% in 2030. So, that in itself, of course, means there's a growing need for reducing the carbon intensity.
At the same time, of course, if looking back at last autumn, for example, it's clear that the COVID situation has had on -- then impacts on the gasoline and diesel demand, and that has been lower. And our read of the situation is that the short-term situation with lower demand has been, of course, led to a situation where there is less deficits being created than you would otherwise had. And indeed, like you said, the recent LCFS price has now been, I think, around 175 in the recent history.
Then there was -- the question on the hedging strategy and indeed, our hedging strategy has not changed. We continue to have the same approach that we basically want to use a proxy hedge that is based on vegetable oil on one hand, as a proxy for our feedstocks. And here we typically use palm oil as an instrument. And then on the other hand, we use gas oil typically as a instrument to reflect the petroleum complex movements. So, that is the logic of our hedging strategy.
And I emphasize it's not the perfect hedge, of course, neither on the product nor on the feedstock side. It's exact, but it -- the assumption is, it reflects the movements, so that it has a hedging impact.
But it shows you also a little bit, Peter, I mean, the quality of how we are dealing with this and the specialists in our organization and then, of course, in the decision-making. Matti, Jyrki and myself are deeply involved in that. So, we have been able, I mean, to leverage. If we had -- even if it was a very small period of time where you had some little decreases, I mean, at the palm oil, gas oil differential, we were able then to quickly execute, I mean, some hedges. So, we're really having our -- the expertise and then our finger on the pulse, that we actually lock in whenever we can, when we see that there's going to be a beneficial. So, it worked out very well. I must say.
That’s very helpful color. I appreciate that. Thank you.
Thank you. And your next question comes from the line of Henry Tarr at Berenberg. Please go ahead. Your line is now open.
Hi, there. And thanks for taking my question. Two questions, really. One, on the waste and residue side, as you say, you now up to sort of 90% waste and residues for the quarter. How much of that feedstock that you're using, do you think you have sort of privileged access to, or is the captive in some way by your networks that you've built or vertical integration versus how much essentially you're sort of buying on spot? I guess that's the first question.
And then on the second question, for the term sales, and the premium, it looks as though you obviously managed to increase the premium through the negotiations last year. How much -- what's the -- within those term negotiations, is there any hedge to exposure to movements in the spread? So what's -- is it linked to either the diesel price or the raw material prices moving? And so, in some way you get compensated for that spread moving. Thanks.
Yeah. Maybe on the waste and residue side, I mean, 90%, -- sorry to disappoint you on this one, Henry. But you can imagine as -- this is a core element of our strategy in going more upstream and being very fast and bold, that we are keeping that very close to us.
How much has captive and how much are we buying in a -- on a spot market? The only thing that I want to refer, again, to is if you look at our yearly reports in 2020, then you could see that we have increased, I mean, from 50 -- 40, 50 suppliers, I mean, to more than 400 suppliers, that gives you a little bit of an indication how we are dealing with that. Of course, about the Mahoney situation, more than 40,000 restaurants that we are collecting from. And we've also said strategically, it's a core element. So, therefore, we keep on looking further, I mean, on opportunities and expanding this -- it's not just the collection part, but it's the whole supply chain around it.
On the term sales, if I understand your question right, then of course, yes. our sales team has done an excellent job, I mean, in the negotiations. While on one hand side, keeping the customer intimacy, the relationship as strategic partners. On the other hand side, haven't been able to substantially increase our sales prices. Multitude, I mean, the vast majority, I would say of these term deals, they have a link, I mean, facile base diesel prices because that is what is relevant, of course, I mean, for our customers, because normally that is what they are buying and replacing them by renewable diesel.
Thank you. And your next question comes from the line of Sasikanth Chilukuru at Morgan Stanley. Please go ahead. Your line is open.
Hi. Good afternoon. I had one question left please. I just wanted to understand that now that you have selected Rotterdam as the location for your next possible the new diesel plan. And at the time of the announcement the cost differential between Rotterdam and Porvoo was highlighted as one of the key reasons for choosing Rotterdam. Just wanted to check whether does this eliminate now Porvoo as a potential future renewable diesel plant option, or is it still economical or is it still available as an option for the future growth? Thank you.
Thanks Sasikanth for your question. It's clear that, all our attention currently is going in the renewable area to building up the Singapore capacity, flexibility lighting that the capacity that we currently have in Rotterdam is that half a million tons of SAF plus, we have some other investments in Rotterdam that we are currently undertaking as well, plus then, of course, I mean, preparing the detailed engineering for readiness for the final investment decision on the world-scale facility.
Our current strategy, I mean, for Porvoo is that we are moving Porvoo to make it one of the most sustainable refineries at least, I mean, in Europe, by going to scope one, scope two emissions net zero by 2035 and then, undertaking quite a lot of actions and projects that we are certainly in study phases in terms of co-processing. So this can be co-processing, so replacing crude oil by waste and residues, and that, of course, portfolio of waste and residues may includes, as we have said before liquefied waste plastic, it may include, of course, lignocellulosics residues that are coming out of the forest. So that's the current focus and I must say 80 projects, something like that we have ongoing on the net zero site. And then, we have somewhere between 10 and 20 projects ongoing on the co-processing site, that keeps our organization extremely busy.
Sure. Thank you everyone.
Thank you. And your next question comes from the line of Matthew Blair at Tudor, Pickering, Holt. Please go ahead. Your line is open.
Hey, good afternoon, everyone. Thanks for taking my questions. First question is on the D4 RIN in the U.S., you mentioned that it's moved up in April, but it looks like it just hasn't been keeping up with the entire feedstock costs. So just hoping if you could just walk through that? And do you have any insights on why that might be and what the implications are?
And then the second question is on, you're crafting a pretty unique position here in SAF, but there are some competitors on the horizon. As you look across the industry, how long do you see your advantage persisting? Should we think about this as like a one-to-two-year headstart, or is this something that you can maintain for, call the next five to 10 years? Thank you.
Yes. Thank you for the question. So, I'll start with the D4 RINs. Let's say, just as a general comment like you observed obviously, it seems like there is -- the increasing RIN price is reflecting the very steep price moves on the soybean oil side in particular in the U.S. and that is -- if you look at the first quarter, for example, where it seems that the RIN price has reflected that movement.
If you think of the difference, or let's say, just looking at why it's not following immediately, it's of course, also good to note that the soybean is a short-term future, whereas the RIN doesn't have a time bar. So, that is, of course, one thing that probably RIN market also takes into account. So, it can't follow all the short-term moments of the soybean market.
And your second question on SAF competition. Let me -- first of all, I mean, again, outline the size of the opportunity, pre-pandemic kerosene consumption was 55 million tons in Europe, 340 million tons approximately on a global basis and 1% mandate in Europe would lead to a bit more than half a million tons of demand. You can do the math. I mean, if it would go up to 5%, and then I have not talked about the B2B business models, or I have not talked about the opt-in mechanisms and so on. So, this is a huge market opportunity. We have been and want to be of course, continue to be the first mover in creating this market. It gives us, of course, I mean, the customer intimacy, but also, I mean, there is a lot of things that need to be done along the value chain, including then also the supply chain set up to get access, I mean, to the airports.
It's very clear as this market opportunity is, of course, enormous and the pressure on the aviation industry will continue to increase to directly reduce their greenhouse gas emissions, that we will not be alone in this market. And actually we may not be alone in this market, because you would get into a monopolistic situation, which eventually as history shows, is not good, I mean, to accelerate the implementation or the construction, let's say, of mandates. If there would only be one that can offer the product, you can imagine what the regulators -- what their thinking would be.
So, yes, of course. I mean, we see some other companies moving and we're not unhappy about that. But if you look at how many companies are moving in that, then it's clear, it's just a very limited amount of companies that are moving ahead with announcements that they would invest. And, of course, this has a bit to do chicken and the egg. Some other companies probably are waiting until there is a regulation and mandates, I mean, in place and then would eventually start moving into that direction. Of course, then you still need to build up, I mean, the capacity after you have taken the decision.
So, I believe we have a unique chance to be a market leader on sustainable aviation fuel, and continue to build up, not just the opportunity, to grow, but also this optionality between diesel sustainable aviation fuel and renewable hydrocarbons for polymers and chemicals.
Thank you. And your next question comes from the line of Matt Lofting at JP Morgan. Please go ahead. Your line is open.
Yeah. Hi, gents. Thanks for taking the questions. Two quick ones, please. First on hedging, apologies if you gave the numbers earlier and I missed it. But looking beyond Q2, which sounds like the ratios broadly similar to Q1, could you be more specific in terms of where the hedge ratios currently set and whether they change relative to your last update with full year?
And then secondly, just coming back to the earlier comments around waste and residue understood that any structural or longer term guidance changes we'll wait until September. I just wondered if there was anything, let's say, quarter specific in the feedstock mix in Q1 around the sort of a step up to 90%, or is 90% plus now a sort of a base level that we should think about looking forward? Thank you.
Yeah. On the hedging, I mean, beyond Q2, if that was your question, Matt, I mean, Q2, we said, I mean, as Matti already alluded to that approximately on the same level in terms of hedging percentage, as in Q1. We have some hedging position for the second half of the year. But it is substantially lower than what we have in Q1 and Q2 due to the fact that -- if we look at all the indicators, we take the assumption -- we don't have the crystal ball, but we take the assumption that the palm oil versus gas oil differential would not widen in the second half, but on the contrary would eventually decrease on the waste and residue structure.
I mean, we are working towards that target of being 100% waste and residue. Of course, we do that in little steps. So 90% in Q1 was a very good number, that we had. Will it be 91% or 92%? I mean, then -- when we move, let's say, over the entire year, it's possible. I mean, we continue to work on it, but I would not make any promises now.
Okay. Very clear. Thanks.
Thank you. And your next question comes from the line of Henri Parkkinen, OP Finance. Please go ahead. Your line is open.
Yes. First of all, good afternoon for everyone. I still have two -- one -- two week questions. First of all, about the overall market growth in Renewable Products, what do you expect regarding 2021? How much this overall market will grow?
And the second one is to relate it to your presentation page number 19. And it's about Oil Products, additional margin. The refinery production costs were up by some $1.40 per barrel. And if I understood it correctly, part of this was related to higher CO2 emission rights prices. I wonder if you could give a little bit more detail, what the impact -- was it a small or a big part of this $1.4 per barrel increasing costs. Thanks.
Yes. Thank you, Henri. This is Matti. First on the question on renewable diesel demand outlook for 2021. So, I think we've earlier estimated that global renewable diesel demand growth could be in the range of 1.5 million to 2 million tons in 2021. And just in a way, given the continued impact of the pandemic on traffic, on people movement, we would probably currently estimate that the demand growth would be in the low end of that range. And at the same time, it's probably good to know if you look at just supply and demand that -- in the same way, if you look at supply growth this year, we would assume that both demand and supply growth are quite balanced, because also here we have seen some delays in some project. So, the overall picture looks quite balanced.
And then Marko here. I can, Henri, comment on the additional margin and then the emission right price impact. The other thing there is, that's one element that impacting to the additional margin. And then the other one is on the natural gas prices comparing to the Q1 2020. And I think that they are on the same volume impacting due to the additional margin -- in that sense the production cost what we are reporting there. So, both impacting on that.
Okay. Thank you very much. Very helpful. Thank you.
Thank you. And your next question comes from the line of Monika Rajoria at Société Générale. Please go ahead. Your line is open.
Thank you. My question is regarding the feedstock, so I think -- so you alluded to the fact that you continue to build that. Could you just give us some more color? Can we expect any more M&As going forward this year? Thank you.
Yes. Hello, Monika. Matti. Thanks for the question. So, I would refer to the general strategy that we have to expand our feedstock sourcing. So, we are, of course, in the existing markets that we are active in, continuously looking to develop our aggregation capability to grow the platforms that we have, like Mahoney in the U.S. This is part of the work. And in parallel in some of the markets, which -- where we have over the last years entered, like for example, last year we announced China as being one of the markets, we continue here also developing both the partnerships that we have and our capabilities for the collection. So, these are important parts.
And I would say the third element is that we, of course, continue working on continuously developing our pretreatment capabilities, enabling more difficult feedstocks, lower quality feedstocks. This is something that happens in, let's say, cooperation between production, between our innovation department, which is also an important lever. So, it's all these three things that we are doing.
Great. Thank you.
Your next question comes from the line of Michael Alsford at Citigroup. Please go ahead. Your line is open.
Hi, good afternoon, all. I've just got a couple of housekeeping questions, if I could left. Firstly, fixed costs in Renewable Products increased, I guess, as you guided. I just wondered whether you can give a bit more color as to whether you think that will continue to increase, given work plan at Rotterdam, and for the SAF and also the world-scale facility.
And then secondly, on Oil Products, again, you've guided the 110 million EBIT impact from the turnaround. I know it's difficult given COVID clearly to give a precise number, but as a base case, what do you think is the split -- or the impact between 2Q and 3Q? Thank you.
Yes. Hello, Michael. I'll start first on the renewable diesel question on the fixed cost. So, like you have noted with the development of our resources and the supporting functions to support our upcoming growth projects, the fixed costs were increased in Q1 versus the previous quarter. And I would say it's expected that this type of trend will continue also in the coming quarters, as we are continuing to build up the resources and the supporting functions for all the upcoming growth projects.
And then coming back on the impact for the OP or the impact, I think, mostly it be -- of course, taken into -- the volatility into account, but mostly it would be the hit on Q2.
Would 80/20 be a good base case, would you say?
No. Not to give you exact numbers, but yeah. It's really hard to estimate, but I would be -- we would be landing around those numbers.
Okay. Thank you very much.
Yeah. Michael, and of course, I mean, the first and foremost, that is of importance is executing this turnaround in a safe, and of course, that means also healthy way. We do have the pandemic also in Finland. We have all the precautions, I alluded to 24,000 tests. I mean, mass testing and so on and so one, that we are undertaking. But the first criteria is safety.
So, if that leads then into the fact that we don't have a 12-week shutdown, but it's a 14-week shutdown then, so be it. But we need to execute this shutdown in a safe way and take into consideration that this is a huge undertaking seeing the current pandemic. We're well-prepared. I mean, we took all the measures that we have, but still, I mean, I want to make sure that you understand that as well, that this is not now okay, 12 weeks and then whatever your assumption is, 80/20 in Q2, Q3 in terms of impact. There is a chance, of course, that it's more than 12 weeks.
I completely understand. And I wouldn't expect anything less for you guys, so thank you.
Yeah. Thanks, Michael.
Thank you. And there are currently no further questions.
Okay. Very good. As usual, excellent questions and very active participation. So, thank you very much, I mean, for that. So, of course, I mean, as I just -- at the last question, I said that the pandemic is not over yet. But we see already positive signs in many areas. For us, I mean, the second quarter will be a turnarounds quarter. You can have the numbers up. I mean, then you come to 140 million impact and that would be all -- I mean, in Q2.
And as I said, then we were focused on the safe implementation of the Porvoo major turnarounds. But, of course, I mean, we continue to push forward. Like we have done, I mean, during the last year. So, in our chosen strategy and on the journey to become a global leader in renewable and circular solutions. And, of course, if we have M&A activities -- to come back to Monika's question then -- we will then definitely at the right time communicate them.
So, thank you very much for your continued interest in our company. Stay safe and above all healthy. Goodbye.