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 said on July 26. Long-term costs and decarbonization capex needs will increase, but companies with credible ESG strategies can offset some pressures, said the New York-based ratings agency
The European Commission’s new “Fit for 55” climate plan is the latest regulatory proposal that will affect the sector, if approved by the European Union (E.U.) Parliament, mostly through the revised terms for the Emission Trading System (ETS), and the introduction of the Carbon Border Adjustment Mechanism (CBAM) (GM July 23, p. 31).
Fitch Ratings noted that while this proposal will affect European producers and exporters to the E.U., many countries outside the E.U. are considering similar regulations. However, the strictest regulatory requirements should come into force outside of its forecast horizon, the ratings agency said.
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, Fitch Ratings said.
But it believes 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 capitalize on first-mover advantages in developing new products and technologies.
The ratings agency pointed out that 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.
It noted that only PhosAgro and ICL have incorporated Scope 3 emissions in their absolute GHG emissions reduction targets, while 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, we believe fertilizer producers’ ESG strategies are lagging behind, especially compared to European oil and gas majors,” said Fitch Ratings.
Emission intensity of nitrogen fertilizer producers – OCI at 800 kg GHG per mt of product and CF Industries at not far off 800 kg – are the highest, while that of potash producers (Uralkali, Mosaic) is the lowest, at around the 150 kg GHG per mt of product level, according to the ratings agency (based on its own data and company data).
OCI is targeting to reduce Scope 1+2 GHG emissions intensity by 20 percent by 2030 compared to 2019, and achieve carbon neutrality by 2050. CF Industries’ target is to reduce total CO2-equivalent emissions by 25 percent per mt of product by 2030 compared to 2015, and carbon neutrality by 2050.
The Mosaic Co. in contrast, for example, is targeting to reduce GHG emissions by 20 percent per mt of product by 2025 (compared to 2015 for North America operations, and 2018 for Mosaic Fertilizantes business).