K+S can make German location future-proof

Frankfurt The situation for fertilizer manufacturers in Europe is currently divided: While manufacturers of nitrogen fertilizers such as Yara from Norway, Azoty from Poland, but also the German SKW Piesteritz had to massively reduce their ammonia production due to high energy prices, the potash group K+S will be the best this year bring in the operating result of its company history.

The Kassel-based raw materials group is also hit by high energy prices, but these costs are more than offset by the additional income from the far greater rise in the price of potash fertilizers. CEO Burkhard Lohr expects around 2.4 billion euros in operating profit (Ebitda) this year – two and a half times more than in 2021 and significantly more than in the previous record year 2008, when the company generated almost 1.5 billion euros.

The good development gives K+S scope for necessary investments in the German Verbund plant Werra in Hesse and Thuringia. There, the potassium chloride is mined underground. For around 600 million euros, the company wants to convert the plant to more environmentally friendly production and thus make it future-proof by 2060.

K+S: The “Werra 2060” project is intended to significantly reduce operating costs

Among other things, a dry processing method will be introduced at two locations. This should more than halve the amount of waste water.

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The saline wastewater that occurs during potash extraction and the associated costs for disposal and the elimination of environmental damage make K+S a potash manufacturer that produces expensive products compared to the industry. With prices as low as they were around 2020, not all German locations were able to generate a positive cash flow.

With the “Werra 2060” project, which is also intended to significantly reduce energy consumption and CO2 emissions, CEO Lohr wants to reduce operating costs by around 20 percent compared to the previous mining method. In addition, K+S would like to significantly increase the yield at the site through a new extraction process and offer more fertilizer specialties with which higher prices can be achieved.

In the short term, the shareholders of the MDax group can also hope for a significantly increasing dividend. This is also due to the fact that the company is not making use of the statutory cap on electricity and gas prices as of January 1st.

As K+S recently announced, the group has almost completely secured the price of its natural gas requirements for the coming year and is therefore able to plan its energy costs to a high degree. In addition, K+S covers large amounts of its electricity needs from its own production.

Potash buyers are turning away from Russia and Belarus

Russia’s invasion of Ukraine had pushed up potash prices massively this year. In the spring, they climbed well above the $1,000 per ton mark, according to figures from industry service Argus Potash. Traditionally, the supply and prices on the potash market fluctuate cyclically. In 2020, for example, the price in the Brazilian market, which is important for K+S, had reached a low of less than 220 dollars.

Even before the Russian war of aggression, US and European sanctions against the regime in Belarus caused prices to rise. More than 30 percent of world potash production comes from Belarus and Russia. The two producers Belaruskali and Uralkali are the largest suppliers after the Canadian consortium of companies Nutrien and Mosaic.

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Important buyer countries, including those from South America, have now turned their backs on Belaruskali and Uralkali. But even large companies like Yara, which use potash for their complex and complete fertilizers, have decided to stop sourcing potash from Belarus, says agricultural expert Heinz Müller from Dr. Kalliwoda Research: “This makes K+S a beneficiary of the potash shortage alongside the North American potash producers.”

As the fourth largest provider, K+S has a market share of around nine percent worldwide. In the first nine months of the year, the group was able to achieve an average price of EUR 641 per ton for its potash fertilizers in Europe and overseas, two and a half times more than in the previous year. From January to September, sales almost doubled to 4.2 billion euros, cash flow from operating activities rose from 83 million to 1.1 billion euros.

The K+S share has gained significantly

The situation for the German raw materials group has thus completely turned around within two years. In 2020, K+S had posted a loss in the billions, also because assets on the balance sheet were adjusted in anticipation of lower potash prices in the long term. The construction of the Bethune potash mine in Canada had caused the debt to rise to more than three billion euros, the debt ratio reached a negative record of 7.2 times the operating result.

In 2021, the sale of the salt business in America for $3.2 billion changed the situation. With a focused potash strategy and increasing demand, the key figures improved noticeably. Despite losses since the record high in April of this year, the share price is currently around EUR 19, around four times higher than the low of EUR 4.50 in May 2020.

Burkhard Lohr

The K+S boss wants to keep the German location competitive with an investment program.

(Photo: DANIEL GEORGE PHOTOGRAHY/K+S)

“Werra 2060” is good news for the approximately 4,400 employees in the structurally weak region. General works council chief André Bahn explains that many suggestions from employees for optimization were incorporated into the project.

“In the past two years it has become apparent to us that we cannot achieve that all locations of the Werra plant are cash flow positive even with low potash prices with restructuring alone,” says Bahn. Especially not if the external costs for energy, environmental regulations, disposal and CO2 regulations continue to rise. “In this respect, the transformation of the plant, as we are now undertaking with Werra 2060, is a decisive step forward.”

Now only the potash price has to give further impetus: after the record high in spring, prices have fallen significantly and, according to the industry service Argus Potash, are currently a little over 500 dollars a ton in Brazil and 800 euros in Europe.

K+S boss Lohr speaks of “normalization at a decent level” and is also confident for the coming year. “We expect the global demand for potash to increase in preparation for the fertilizer season in the first half of 2023,” he told Handelsblatt. This should also support prices, “especially considering that significant volumes from Belarus and Russia will still not be available and agricultural prices are at an attractive level,” the manager explained.

More: Expensive fertilizer, Ukraine war, drought – food could soon cost even more

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