EU Fertilizer Industry Faces Rising Pressures

26 April 1999 00:00  [Source: ICB Americas]

By Sean Milmo

Western European fertilizer manufacturers are considering plant closures and other restructuring measures because of a downturn in domestic consumption and dismal long-term prospects for the industry.

Producers have already announced measures to cut costs and improve profitability. But now they concede they will have to take more drastic actions.

"The industry is in bad shape," Helmut Aldinger, director general of the European Fertilizer Manufacturers' Association (EFMA), told a recent chemicals seminar in Brussels.

"It has at most broken even last year, but the final figures will most likely show it was slightly in the red. This compares with a return on investment of 10 percent two years ago."

Demand has dropped because the income of European Union farmers has fallen, triggered by low crop prices. Fertilizer prices have slumped by as much as 10 percent during the past year, and in some countries, like the UK, the decrease has been higher. Nitrogen prices have also been weakened by China's continued absence from the world fertilizer market.

Hopes of a recovery by the European fertilizer industry during the next few years have been dashed by an agreement among EU member states for a new system of government agricultural subsidies. The EU will require farmers to set aside 10 percent of their land, taking it out of food-crop cultivation.

"Set-aside is currently at 10 percent, but we assumed in our latest 10-year forecast that it would drop to zero," says Nick Douthwaite, EFMA's senior agricultural adviser. "Personally, I believe that the set-aside level could go up to as high as 15 percent in some years.

"Initially farmers will take out marginal land, but as the set-aside level goes higher, they will exclude the more productive areas. If it goes up to 15 percent, it could have a serious impact and really bite into fertilizer production."

EFMA is drawing up a new study. But even the previous one projected an 8 percent decline in nitrogen consumption throughout the EU by 2008. The overly optimistic forecast indicated that phosphorus consumption in the EU would fall by 9 percent and potassium demand would drop by 7 percent.

"The fertilizer industry in Europe has to be rationalized," Jacques Puechal, Elf Atochem's chairman and chief executive, told the company's annual press conference in Paris earlier this month.

He noted that with large quantities of fertilizer being imported from Eastern Europe, restructuring is necessary. "Rationalization is needed not just in Western Europe, but in Eastern Europe as well," he said. "Eastern European producers also have to think about the need for profitability."

Analysts speculate that Atochem is seeking a partnership between its fertilizer subsidiary Grande Paroisse, the third largest producer in Europe, and DSM's fertilizer operation, which primarily supplies the Dutch market. Grande Paroisse's main market is France, the largest in Western Europe, and it has a plant in the Netherlands and one in Belgium.

Other candidates for a restructuring include the fertilizer division of BASF, which is only a regional business and a relatively small part of the company's portfolio, and SKW Stickstoffwerke, a division of Viag, which wants to concentrate on specialty chemicals.

Yet an industry reorganization is likely to be smaller than the one in the late 1980s and early 1990s, when the number of fertilizer producers in Western Europe was more than halved to around 12.

Kemira, Europe's second largest fertilizer producer, has seven plants on the continent and is looking at possible closures. Last year, it announced that its Agro division was embarking on a two-year profitability improvement program to raise its annual earnings by a minimum of FM 200 million ($35 million).

"Originally, we did not have any plans for closures," says Tauno Pihlava, Kemira Agro's president. "But now, like almost every other large fertilizer producer, we are having to reconsider what to do, because supply has got so high in relation to demand."

Most of Kemira Agro's plants are in Western Europe, though it has NPK projects in Asia. The company lost money during the last four months of 1998, reducing its profits to FM 111 million, roughly 2 percent of sales.

Kemira is building its NPK business in Europe because pricing for those products is more stable than for nitrogen fertilizers. "It is the nitrogen sector which is having the most difficulties at the moment and is the most likely to be restructured," says Mr. Pihlava.

Norsk Hydro, the leading European fertilizer producer, decided earlier this year to close its last phosphoric acid plant in Europe because of the high cost of complying with environmental regulations. The 160,000-ton-per-year unit at Vlaardingen, the Netherlands, which is due to be shut down in late 1999, supplies Hydro's 500,000-ton-per-year phosphate fertilizer plant in Nantes, France.

"At the moment, we are not looking for more closures," says a Hydro spokesperson. "Nonetheless, it is evident that overcapacity is putting a lot of pressure on prices. Some of our competitors are adopting quite aggressive pricing policies."

Last year, Hydro's European agricultural business suffered an operating loss of NKr 725 million ($98 million), around 60 percent of which occurred in the last quarter. During the second half of the year, fertilizer deliveries in Western Europe fell by 10 percent. The company is trying to become less reliant on standard fertilizers by marketing higher-margin products to the horticultural market.

At a summit meeting in Berlin last month, EU leaders agreed on reforms for the Union's Common Agricultural Policy (CAP). In addition to requiring that land be set aside, the reforms will result in a 15 percent cut in subsidized cereal prices.

The new plan, called Agenda 2000, also obliges farmers to adopt more environmentally friendly farming practices, which will reduce the application rates of fertilizers.

"Farmers are being made into guardians of the countryside, which seems to be what the European public wants," says Mr. Aldinger. "The new scheme should not be a disincentive to efficient farming. It should be both environmentally and economically sustainable."

Before Agenda 2000, EFMA was already predicting a decrease in fertilizer application rates over the next 10 years. For wheat, it forecast that nitrogen applications would fall by 6 percent from 135 kilograms per hectare (2.5 acres) to 127 kilos.

Applications of phosphorus and potassium would both go down by around 10 percent. But overall yields would increase as farmers make more efficient use of nutrients.

The EU is encouraging farmers to recycle more nutrients from manures and slurries. According to EFMA, European soils currently receive 30 percent of their nitrogen, 48 percent of their phosphorus and 63 percent of their potassium from livestock.

"We expect that farmers will now be making much greater use of waste products, particularly livestock waste, at the expense of manufactured fertilizers," Mr. Douthwaite says.

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