Yara is not a household name in the global gases business but is indeed a major player in the European CO2 business. There have been significant changes in Yara’s business in the past decade and the company has uniquely built up a successful CO2 business, while focusing on being fully integrated upstream into fertilisers.
Times are changing and so is the fertiliser business, with the availability of CO2 leading to a number of challenges for both Yara and peer group companies.
The CO2 market is experiencing different growth dynamics – especially across Europe – but the availability of liquid CO2 from traditional sources may decline and so new sources of CO2 are being sought. Jon Reutz is one person well placed to comment on the future of CO2 in Europe and how Yara will adopt and invest to maintain its No.1 producer status.
Firstly, we turn our attention to the company Yara International ASA. The new company was spun out of Norsk Hydro in 2004 from the former Hydro Agri, with the well known Viking ship as its logo and the new name Yara.
“The company undertook an IPO which was completed in March 2004 - at the time the capitalisation of Yara International was put at only $3bn and now, it’s reached $20bn in only 4 years. So that means there has been a phenomenal performance increase, but also driven by a global fertiliser market change from supply driven to demand driven market.”
The restructuring of Norsk Hydro’s businesses occurred from 1999/2000 with the formation of the Hydro Agri Group and included a sub-division, Hydro Gas & Chemicals, which was established to manage the industrial gases and more specialised nitrogen chemicals division.
Reutz explains, “Around 2000, the performance of the global fertiliser businesses was very poor and with a lot of challenges ahead, and the reputation of the industry was not that attractive for investors. The fundamental big issue for Agri’s future and for Hydro as owner was what to do with it?
Should we divest it by selling it for a very modest value, should you fix it, or should you do something else?”
“Thorleif Enger became the CEO of Hydro Agri and he developed a very demanding turnaround plan as a solid, but painful strategy to fix it. The fixed cost was reduced by strong de-manning at all levels and by closure of surplus plant capacity in Europe.”
“The European fertilisers business in general was in tough times, with most companies experiencing small margins in 2000 and all strongly exposed by cheap, imported fertilisers based on low gas cost production outside Europe. The market and performance improved steadily and the Board of Norsk Hydro decided to spin-off the Agri group in 2003. The IPO was successfully executed in March 2004 with Thorleif Enger as CEO of the new company, Yara International.”
So where is Yara at today and how does business currently fare?
Value-added services – Yara in 2008
Yara International, as Jon Reutz explains, is fundamentally divided into three segments – Upstream, Downstream, and Industrial in a unique business model built on complementing strengths and risk profiles.
All of which are closely linked via nitrogen chemistry and provide a strong platform for future growth.
At present it seems this structure is reaping rewards, as Reutz reflects, “So it is now that Yara is in very good shape and still we are forecasting to have good results over the coming years because the global growth in fertiliser demand is higher than the supply.
In the Industrial segments some environmental applications are growing very fast too and especially, NOx reduction with SCR technologies requires a lot of nitrogen chemicals distributed into the coal & gas-based power stations and into new trucks in the transport sector. Yara’s industrial growth is forecast to be 10-15% per annum.”
“The business model that we have is unique, that’s basically based on nitrogen chemicals and the fundamental molecules will be ammonia (NH3), urea, nitric acid and ammonium nitrate, and additionally a lot of intermediates and refined high quality products for certain applications. So everything is based on converting energy and air into nitrogen products.”
“Upstream is the global manufacturer with the local sales and distribution of fertilisers integrated in a global downstream operation. The Industrial segment is basically more focused on performance products and applications, as well as including industrial gases and carbon dioxide (CO2). So we have basically three segments inside Yara working together for maximising value and performance, and Yara employees are proud of the recent success stories.”
Yara International recently (July) reported its strongest ever quarterly results so far (Q2 2008) and as we sat calmly crunching the numbers, Reutz confirmed the company’s healthy position.
“So if we look at year end 2007, we had a revenue of US$11bn, we have operating income of around $1bn and an EBITDA of around $1.6bn, so the company is performing very well and has a lot of cash.”
Ammonia still significant
As one of Yara’s three segments, Yara Industrial represents a thriving area of business and is responsible for managing its CO2 value creation. The company’s CO2 industry is intrinsically linked to its Upstream segment, from which the ammonia production provides an efficient production platform for the CO2 business.
The raw CO2 is a valuable product since urea production requires high quantities and high purity of raw CO2, and therefore integrated liquid CO2 plants inside a fertiliser production complex are the best source for production based on lowest unit cost and best scale factors. To produce urea, approximately 60% of the product is ammonia - but there is also a need for 0.8 metric tons of CO2 per ton of urea.
“That’s very important because in the urea processing you need high purity CO2 on a continuous basis and therefore the front end separation is common both for urea and for the liquid CO2 production. Yara’s plant in Sluiskil is the best example of such integrated plant in Europe and where the combined CO2 liquid capacity of 420,000 tpy is the biggest liquid operation in Europe.”
“In Europe there is a significant level of fertiliser upgrading going on, for example, look what we are doing in Sluiskil (The Netherlands), where we have the biggest fertiliser plant in Europe. We are upgrading the urea capacity by some 400,000 metric tons per year and for that you need more than 300,000 metric tons of CO2. We have enough CO2 for our liquid plants and for all the urea, but this is an example that all the surplus CO2 will be used in the future.”
This priority use of CO2 is partly to blame for the concerns over future supply of merchant liquid CO2 throughout Europe. Upgrading of fertiliser plants and especially de-bottlenecking of urea capacity appears to be the industry trend and as urea production therefore increases, the availability of high purity CO2 gas for liquefaction for the merchant market can decrease as a result.
Yara estimates that of the installed capacity of liquid CO2 in Europe (4-5 million tpy) approximately 70% is based on raw gas from ammonia production. The remaining percentage is derived from reformers at refineries, from ethylene oxide production, and from natural wells, which all demand higher initial investment as well as higher variable cost to produce food-grade CO2.
Challenges to capacity expansion
There’s clearly a trend for ammonia/urea plant upgrades across the fertiliser industry at present, with this having a potential impact on the CO2 availability. But what other dynamics are being felt by Yara and how is the company striving to progress further?
According to Reutz, the lead time to build a CO2 plant can be more or less doubled these days and the price for plants and relevant infrastructure is now significantly higher than before.
So, gasworld asks, why has the time to build a plant increased?
“There seems to be a lack of capacity by engineering companies, strong demand of critical components and then of course most of the fertiliser plants have high quality steel requirements. The special steel market and manufacturing has increased significantly in unit price and delivery time due very attractive market requirements,” Reutz says.
Opportunities for growth are evidently present in the right areas, as is the trend for upgrading sites rather than implementing new ones. This is the case for Yara as it pushes forward with prospective developments and a consolidated market leadership for fertilisers defines its growth strategy.
Additional value for industrial applications is also targeted, but how does Reutz see the company’s vision for the coming years?
“We have our vision that we should we should be between the best 25% of chemical companies in performance and take leadership in the fertiliser market, which we think we have done. Still we have only 7% global market share, but we have relatively ambitious growth - targeted that we should have reached 10% in a few years time.”
On the Industrial segment the strategy is to create additional value from strong growth, 10-15% annually in industrial application, and then by new business opportunity based on scale, synergy and timing - that’s new acquisitions. So there is strong volume growth ambition in Industrial.”
CO2 & Industrial Gases – The future
Yara Industrial considers itself to be something of a leader in the European CO2 market, and with good reason.
As well as operating as a market leader in CO2 in Scandinavia, the company boasts a number of CO2 plants, three ships, eight terminals, and holds both a strong wholesale and end-user position in Northern and Western Europe overall.
It’s in this retail CO2 market that three players dominate a two-thirds share - with Yara lining up alongside Linde and Air Liquide as the major forces. Reutz is keen to point out that Yara is the number one as producer/supplier and number three at the retail market. Yara will grow from its existing position both as leader in the supply chain, but also the retail position in liquid CO2 and dry ice.
A significant event took place in 2007, when Yara Industrial decided to put its industrial gases business in Scandinavia into a joint venture (JV) with Praxair. This was an opportune move for both parties but as Jon Reutz explains, “Yara had good market position both in Norway and Denmark in the air gases business, but for many years we have lacked the ability to grow outside of these countries. Key to industrial gas success, additional to local supply position, is technology and applications know-how and we felt that such a partnership with Praxair would offer a good partnership.”
“On the CO2 side, Yara-Praxair is the retail market leader in Scandinavia. Yara Industrial is exclusively supplying Yara-Praxair with all its liquid CO2 needs and so that means we have the JV as an important wholesale customer and integrated with our ships and terminal structure. We expect Yara-Praxair to generate reasonable growth in CO2 for the food sector, and of course they will also grow in air gases.”
“So we think this was a combined joint venture where the strengths of Praxair on technology and the different type of application, including the network to the global players, were very important to bring into Scandinavia, and Yara brings the infrastructure and our platform to work together in a lot of industries.”
Yara Industrial is itself ideally placed to discuss the trends and dynamics of the CO2 market. It contemplates both an annual European growth in the market of 3% and an assumed reduction of CO2 availability for producing liquid CO2 for the merchant market - prompting cause for concern and equally, presenting opportunities.
Reutz says, “On the Industrial side of the business, you have nitrogen (chemicals), and there is ammonia and nitric acid for various process chemicals like isocyanates which will be produced mostly in Europe for the local demand. We also expect consolidation and revamping, which can have consequences on CO2 availability.”
“We foresee that the (natural) gas costs could force some of the plants in Europe to become swing producers of ammonia and then we have to look at increasing CO2 capacity because the UK at least, is very exposed to ammonia as a source. So we have looked at alternative sources and hence we decided to go for a new raw gas source based on CO2 from a new bio-refinery under construction by Ensus.
The Ensus plant is under construction and Yara will build a 250,000 tpy liquid CO2 plant integrated at the Wilton (UK) site to produce high purity CO2 for the food and beverage industry from the wheat fermentation. That is due on-stream in mid 2009 when the wheat refinery is completed.”
Prepared to ‘supply a growing market’ in the future, Reutz explains, “We plan to also utilise the Ensus plant both for the domestic market (UK) and for export, while this bio-refinery will also give us a certain hedge against European gas cost exposure.”
As the interview draws to a contented close and Reutz underlines both the Six pillars of strength and the assertive agenda ahead for Yara, the fundamental message is clear, “Our concentration for the coming three to five years is to improve our leading CO2 supply position in Europe and to grow our retail business, especially the liquid and dry ice applications.”
With almost 30 years experience in the gases industry, keen golfer Jon Reutz has observed the many changes and developments to the Norsk Hydro-Yara business, including the formation of the Yara brand in 2004.
Having qualified as a chemical engineer and specialised as a Master of Science in polymer technology at the Norwegian Institute of Technology, Reutz joined the gases industry in 1979 after five years in the petrochemical industry and spent his formative years running the Norwegian industrial gas business for Norsk Hydro.
Subsequent years witnessed a number of changes, as he became Head of Gas and Chemicals (Industrial segment) for four years from 2000, and then from 2004 enjoyed two years across the Atlantic as manager for Yara Industrial in North America, before returning to Europe in 2006 to run the CO2 business once more.
He has been a Board member of EIGA since 1990, (except for the two years spent in the US) and represents the smaller to medium sized independent companies in EIGA.
An outdoor activities person, Reutz enjoys a happy family life with his wife and two sons aged 28 and 24, who have benefited from a change of lifestyle by living outside of Norway for certain periods of time.
CO2 – Driving demand in future
Yara believes that the main players in the CO2 market now appear to be striving for ‘controlling their own liquefaction capacity’ and resulting in a trend over time which will likely see liquid wholesale supply go down. Yara notes however, that ‘we are comfortable with increasing sales to the end-user market’.
So what else does the company see as driving CO2 demand in future years?
Reutz explains, “Food and food processing is obviously very important (in the next three to five years) and then there’s a well known application for CO2 that will count, which is the bacteriostatic effect (its ability to limit or prevent bacterial growth in food), its cooling and freezing properties and the ease-of-use in processes. And then it is likely that we will maybe see if CO2 can replace nitrogen, to a certain degree it depends on power costs and possible CO2 taxing systems.
For instance, producing liquid nitrogen generates more CO2 emissions because of energy used in the process.”
“And then there will be, we think, also environmental processes. CO2 will still be a cheap chemical as an asset and there are a lot of environmental applications already developed but not implemented on the market. I think there are so many applications that have already been developed, for a new area of implementation of existing application into the market.”
Six pillars of strength
Core to the ambitious consolidation and growth strategy for Yara is its ‘Six pillars of strength’ business model.
As part of the company’s vision for the future and global industry leadership program, Yara aims to ‘grow profitably and sustainably via its six pillars of strength’.
These pillars are essentially the targets to either maintain or achieve number one status in six key areas or applications, and therefore position itself to increase market share and furthermore, provide a springboard for future development.
The six pillars are:
Global no.1 in Ammonia
Global no.1 in Nitrates
Global no.1 in NPK
Global no.1 in Speciality fertilisers
Global no.1 in Nitrogen applications
Global no.1 in Marketing
Yara is unique in Europe by its operation of three dedicated CO2 ships sailing in the Northern part of Europe between coastal-based plants and specific built terminals for liquid CO2 storage.
The company operates a number of terminals, notably at Purfleet, Sluiskil, Teeside, Montoir, Hamburg, Porsgrunn, Fredericia and Stockholm and while its ambitious growth strategy entails plant upgrades, it does not necessary include the addition of any new terminal sites. Instead Reutz notes, terminal upgrades will comprise part of this consolidation, as the company aims to increase quality systems, make terminals more efficient and increase throughput/storage capacity where required.