K+S Group, Kassel, reported a 53 percent drop in second-quarter operating earnings (EBIT 1) to €13.4 million (approximately $15.2 million) on revenues of €811.9 million, down from the year-ago €28.5 million and €742.0 million, respectively. While the company noted a positive effect from higher prices and volumes, earnings were negatively impacted by production limitations in Germany. Group revenues were up 9 percent year-on-year.
The Potassium and Magnesium Products segment saw a 33 percent fall in second-quarter EBIT 1 to €21.1 million on revenues of €440.5 million, down from the year-ago €31.4 million and €387.1 million, respectively. The unit’s revenues were up almost 14 percent on higher sales volumes, due largely to the ramp-up of production at the Bethune potash mine in Saskatchewan.
Potash and Magnesium Products sales volumes increased to 1.71 million mt, up 11 percent from 1.54 million mt. Of this total, potassium chloride sales volumes reached 880,000 mt, up from the year-ago 710,000 mt, mainly due to the higher production at Bethune. But sales volumes of fertilizer specialties were essentially flat year-on-year at 650,000 mt against the previous period’s 640,000 mt.
Second-quarter operating profit (EBIT 1) for the Salt unit showed a significant recovery from a year ago, reaching €4.0 million on revenues of €326.9 million, up from €0.4 million and €315.7 million, respectively. The company noted that higher sales volumes in the de-icing salt business outweighed the impact of negative currency factors.
Six-month group operating earnings (EBIT 1) were off 3 percent at €160.4 million on revenues of €1.98 billion, down from the year-ago €165.9 million and €1.87 billion, respectively. Six-month operating earnings for Potash and Magnesium were marginally higher (0.4 percent), at €73.6 million on revenues of €929.2 million against the year-earlier €73.3 million and €860.8 million, respectively. The unit’s six-month sales volumes increased 9 percent to 3.66 million mt, up from 3.36 million mt.
Sales Volumes by Region
| Million mt | Q2 2018 | Q2 2017 | H1 2018 | H1 2017 |
| Europe | 0.89 | 0.86 | 1.99 | 2.00 |
| Overseas | 0.83 | 0.68 | 1.66 | 1.36 |
| Total | 1.71 | 1.54 | 3.66 | 3.36 |
K+S confirmed a significant EBITDA increase for the 2018 financial year. However, the range of €660-€740 million – against €3.6 billion in FY2017 – is below the capital market’s expectations (GM Aug. 10, p. 29), and also assumes no production outage days. However, the group had some 25 outage days in the first quarter, and according to K+S CEO Burkhard Lohr, the group previously has put the potential cost per outage day at roughly €1 million, but he said that figure would be slightly higher now as prices are higher. While the group expects a “significant” rise in EBITDA versus FY2017’s €269 million for Potash and Magnesium, mainly due to higher sales volumes from the Bethune operation, the chief executive conceded that some challenges were holding the group back somewhat longer than expected.
The Bethune operation is still in ramp-up mode, and Lohr noted that as the first greenfield [potash] mine in Saskatchewan in 40 years, it is “a learning process on production, processing, and shipping.”
In the company’s Aug. 14 earnings call, he said the hardness of the granulated product was “a challenge” until the second quarter, but that it is now fixed. Regarding the product caking issues, he said the group has developed the required binder and is making progress and expects “top-quality” product by the end of 2019 at the latest.
With the quality issue situation at Bethune is improving month-by-month, the group expects to be back on the ramp-up phase by 2020, and said it will reach full capacity of 2.86 million mt/y by 2023 as originally planned.
Still, Lohr conceded that there will be an impact on this year’s Canadian products. Bethune produced slightly more than 700,000 mt of standard and granular product in the first half of the year, and K+S now expects full-year production at Bethune in the range of 1.4 to 1.5 million mt. This is down from the expected output of 1.7 million mt for 2018 that the group cited late last year (GM Nov 17, 2017).
“We intend to start secondary mining at Bethune next year, with a volume of 100,000-200,000 mt, making us confident to reach a total production of about 1.7 million mt to 1.9 million mt in 2019,” said Lohr. He confirmed the group’s previous given target to achieve a positive EBITDA contribution from Bethune already in 2018, and to reach EBIT breakeven in 2019.
But the chief executive said K+S operations in Germany remained “challenging,” and that some issues were taking longer to be resolved.
“Shortage of staff, high interest rates, and the lack of motivation are still issues at the Werra site, which need to be managed,” said Lohr. “After changing the management team, vacancies have been partly filled, and the sickness rate already has been halved.” The group said it hopes to fill the remaining vacancies by the end of this year, which includes moving experienced personnel from Sigmundshall to the Werra site.
The group also hopes to improve production downtimes at the site, following a change in maintenance schedules and the replacement of outdated machinery. Of the latter, 50 percent is expected to be fixed by the end of this year, and the remainder by the end of 2019.
However, the chief executive noted that the overall K2O content of its German mines – all of which are mature mines – is diminishing, and compared to last year, the annualized impact in 2018 will be about 100,000 mt.
But K+S is evaluating counter-measures via an operational excellence program on a site-by-site investigation basis, and already has identified opportunities to increase the efficiency across all sites. The current schedule sees these being implemented starting next year, which Lohr said would stabilize the group’s current production in Germany on the back of a significantly increased efficiency showing compensation of the effect as of 2020.
The group noted that its Neuhof mine lost about 50,000 mt of production in the second quarter due to lower roof stability. New additional safety measures have now been implemented at the site, and production is expected to improve there in the current quarter. The Werra site lost 100,000 mt in the first quarter and the same amount in the second quarter, but production losses are expected to be down to zero in the third and fourth quarters.
In 2018, K+S expects German production of about 6.4-6.6 million mt, plus the expected 1.4-1.5 million mt from Bethune. Next year, after the closure of the Sigmundshall operation – which is scheduled by the end of 2018, with a production loss of 600,000 mt/y – the group said it has scheduled a German production of 6.1-6.2 million mt. It said this latter number includes about 300,000 mt on the back of the planned efficiency measures. As previously indicated, Bethune should add 1.7 to 1.9 million mt to the group’s output in 2019.
Lohr noted that with the impending closure of Sigmundshall, productivity at the site “is far from normal business.” The group already provisioned a negative EBITDA contribution of €40 million at the end of last year for the site closure, and is expecting a €20 million negative EBITDA contribution in 2018.
K+S said it produced some 700,000 mt of potassium sulfate last year, and, given the declining K2O content of the group’s German ore, expects output volumes this year to be around that level. SOP capacity will remain at 800,000 mt/y. It will not be affected by the closure of Sigmundshall as the kieserite, a magnesium sulfate, produced at the site, is not used for SOP production.
The chief executive noted that the record hot summer in Germany was stretching its logistics, mainly at the Werra site, with inland shipping capacities short and freight rates increasing. The group expects the additional logistic costs to impact the group’s profitability this year by about €20 million.