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Nitrogen fertilizers to be most affected by tighter ESG policies, warns Fitch Ratings
Published by Nicholas Woodroof, Deputy Editor
World Fertilizer, Tuesday, 27 July 2021 09:30
Nitrogen producers will be the most affected in the fertilizer sector by tighter emission regulations, particularly in Europe, and by closer investor focus, Fitch Ratings says. Long-term costs and decarbonisation CAPEX needs will increase, but companies with credible ESG strategies can offset some pressures.
The European Commission’s new ‘Fit for 55’ climate plan is the latest regulatory proposal that will affect the sector, if approved by the EU Parliament, mostly through the revised terms for the Emission Trading System (ETS), and the introduction of the Carbon Border Adjustment Mechanism (CBAM). This proposal will affect European producers and exporters to the EU, but many countries outside the EU are considering similar regulations. However, the strictest regulatory requirements should come into force outside of Fitch Ratings' forecast horizon.
Carbon costs for fertilizer producers will rise as a result. Manufacturers’ investment needs to adjust their operations and protect their market positioning will also increase. Companies that act first and have credible ESG strategies may be able to mitigate these pressures through access to attractive green financing and an ability to capitalise on first-mover advantages in developing new products and technologies.
Only CF Industries, OCI and Yara have committed to carbon neutrality by 2050, while most other Fitch-rated companies’ commitments are focused on greenhouse gas (GHG) intensity reduction. Only PhosAgro and ICL have incorporated Scope 3 emissions in their absolute GHG emissions reduction targets. Some companies, including EuroChem and OCP, are yet to publish their emissions data and reduction plans. As investors and policy-makers increasingly focus on climate change, Fitch Ratings believe fertilizer producers’ ESG strategies are lagging behind, especially compared to European oil and gas majors.
Ammonia producers are most affected by the drive to cut emissions as hydrocarbons, mostly natural gas, are used as a feedstock in its production. The nitrogen industry is responsible for about 1% of global CO2 emissions. Some manufacturers, mostly from China, use coal, producing more emissions: CRU estimates those to account for 38% of the nitrogen industry carbon emissions. The proposed CBAM will only affect fertilizers containing nitrogen.
When applied to soil, fertilizers containing nitrogen emit nitrous oxide, which has at least 265 times higher impact on climate change than CO2. Also, urea has the largest ammonia losses and its untreated use is banned in Germany. It is likely that demand for some fertilizers, such as nitrates, especially calcium ammonium nitrate, will increase as Europe targets carbon neutrality by 2050.
Scope 3 emissions from product consumption account for the largest part of GHG emissions, representing more than 70% of all OCI’s, CF Industries’ and Yara’s emissions, although they are less significant for phosphate and potash producers. These emissions are the hardest to reduce, particularly in developing countries with less advanced agricultural practices.
However, environment-driven changes also provide opportunities. The importance of green ammonia and carbon capture and storage will increase as carbon becomes more expensive. Extra expenditure required to build a green ammonia plant (powered by renewables) compared to a grey ammonia plant (powered by hydrocarbons) diminishes if carbon costs are considered.
However, production of ammonia using electrolysis of water instead of hydrogen from natural gas will not generate the CO2 by-product, which is used to produce urea. Integrated urea producers will have to buy CO2, potentially increasing costs, although Fitch Ratings believe any cost increases are unlikely to be substantial.
Demand for ammonia and methanol could increase as they are hydrogen carriers and an alternative shipping fuel, which is increasingly important due to the proposed extension of the ETS to the shipping industry. This could raise ammonia prices. OCI, Yara and CF Industries are targeting this sector.