K+S, the European Union’s top potash producer, revealed it was bracing for a 25% cut in its gas volumes thanks to the squeeze on supplies from Russia, but held its profit forecast nonetheless, citing further increases in fertilizer prices.
The German-based group said that although it had hedged 90% of its 2022 European gas requirements before the Ukraine war sent prices soaring, an energy shake-up implemented by Berlin in the face of significant cuts in supplies from Russia could still force significantly higher bills.
New laws have created a “price adjustment mechanism” which enables energy groups to pass on higher gas procurement costs “irrespective of any contractual agreements to the contrary”, K+S said.
Furthermore, Germany’s energy regulator can “in the event of a declaration of an emergency… [assume] sovereign responsibility for the distribution and allocation of scarce gas volumes”, which K+S requires for making potash, as well as for its division producing de-icing salt.
Already there had been a “substantial cut in supplies from Russia” through the Nord Stream 1 pipeline, which is reportedly operating at one-fifth of its capacity.
While Russia has blamed the supply cut on a turbine issue, Germany has accused the Kremlin of not honouring supply contracts for political reasons, amid tensions prompted by the Ukraine war.
Gas rationing
K+S said that in its guidance for its 2022 results, it was now factoring in assumptions including a 25% cut in gas supplies, as well as a levy of E50 per megawatt hour, representing a combined hit to full-year ebitda prospects of “a low triple-digit amount” in millions of euros terms.
Fertilizer sales volumes, which K+S had forecast at “a good 7.7m tonnes” this year would now come in “around 7.5m tonnes”, falling some 100,000 tonnes below the 2021 level, “due to availability of gas” as well as logistical setbacks.
However, the company nonetheless restated a forecast of its full-year ebitda hitting E2.30bn-2.60bn, up from E969.1m last year, supported by a further rise in its potash sales prices.
A “sharp rise in the average price” of fertilizer sold “should significantly exceed expected cost increases”.
‘Strong price increase’
K+S forecast its average potash sales price for this year as a whole showing a “strong increase” compared with the E298.00 a tonne reported for 2021, supported by a squeeze on supplies stemming from sanctions on Belarus and Russia thanks to the Ukraine war.
“Due to lower export volumes from Russia and Belarus, the record global potash sales of about 77m tonnes of the two previous years cannot be achieved and will be significantly lower due to availability.”
Meanwhile, farmer demand was being supported by a “high level” of profitability, as “low stocks-to-use ratios and unfavourable climate around the world keep agricultural commodity prices up”.
The potash price would continue to rise in the second half of 2022 to a level “moderately above” the E663.90 a tonne reported for the April-to-June quarter.
This was in turn above the E527.00 a tonne reported for the January-to-March quarter, and the E250.00 a tonne for the April-to-June period of 2021.
Shares rise
The price surge led a 163% jump to E1.24bn in K+S’s fertilizer revenues in the April-to-June period.
Group revenues, including the salt business, gained 127% to reach E1.51bn, driving ebitda up sixfold to E706.4m.
K+S shares stood 3.2% higher at E21.01 in lunchtime deals in Frankfurt.