Yara International ASA (YAR) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Yara Third Quarter Results 2020 (sic) [ 2021 ]. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Silje Nygaard. Please go ahead.

Thank you, and welcome to the telephone conference for our third quarter results. My name is Silje Nygaard. I am the acting Head of Investor Relations. And I am here today together with our CEO, Svein Tore Holsether; our CFO, Thor Giæver; and Head of Market Intelligence, Dag Tore Mo. So we just recently had the presentations. We have no further introductory comments. So then we open up for questions. Operator, will you take the first question, please?

[Operator Instructions] And your first question comes from the line from Joel Jackson.

This is Bria Murphy on for Joel Jackson. You mentioned limited impact on your finished fertilizer production from curtailments, given your ability to source some ammonia from elsewhere? What percentage of this shortfall is being made up with purchased ammonia versus Yara-produced ammonia outside of Europe?

Yes. Bria, this is Thor. This is -- I mean, as you've seen, we have about 40% curtailments on ammonia in Europe at the moment that we have plants outside Europe that are pure ammonia producers like Freeport and Trinidad, also Pilbara in Australia that normally sell ammonia into the market. Our ammonia plants in Europe are all set up to supply our plant. So I think you can assume that the equivalent to sourcing need is required in Europe. I mean in Europe, we are net short. So we -- so at any given time, we do source some ammonia from externally. So on that basis, that means that we are -- it will be somewhat below 40% that we are -- let me think about this. So we are -- we have a higher totality. So yes, the number will be slightly less than 40% additional for the -- from the sourcing side.

Okay. And then just, I guess, as a follow-on, is there any other Yara European production at risk of closure if gas prices stay at these high levels? Can you please elaborate on what -- what's most at risk?

Yes. Of course, as we say, we have to monitor the situation quite closely. It's probably unnecessary to say it's quite unprecedented to see both gas prices at this level in Europe and also the volatility where you can sort of be swinging between $30 and $40 just in the space of a week or less. And then in addition, you have the price side of what the products that the plants are producing. So we -- at this time, we're not going to, if you like, speculate in the developments, we're aiming to produce and supply finished products. We've been able to do that so far. But as we said in the presentation as well, we need to do that in a financially viable manner as well. So it's certainly possible that we'll need to make further adjustments going forward. But that can be both ways. I mean, as you've seen, we've had a strong development for most nitrogen prices as well. And that's why even though the ammonia margins, in some cases or in most cases, these days are negative, the fully integrated margin so far overall has been good enough for us to continue with the finished product.

And your next question comes from the line from Lisa De Neve from Morgan Stanley.

I have 2. First and foremost, how should we think about the fixed costs associated with the European ammonia curtailments? And also, how should I think about the associated costs from sourcing ammonia elsewhere. And I'm not talking about the fact that you buy -- you pay more for a tonne of ammonia because prices are going up, but sort of any sort of freight cost that we have to take into account or anything else? That's my first question. And then coming back to the previous question on ammonia. I'm aware -- and maybe I'm wrong but you normally sell about 0.5 million tonnes ammonia straight into the market every single year. How much of that is contracted? Or is it just all spot? Thank you very much.

Yes, this is Thor again. I mean on the first question on the fixed costs. We are -- I mean these are temporary curtailments, we are making here. So we -- and in those situations, typically, we will take the opportunity to do some maintenance, maybe training and as a rule, we're not doing layoffs, for example. So this doesn't tend to impact fixed costs very much. And as you know, I mean, fixed cost is -- especially today, is quite a small share of the total cost for these units. In terms of the -- I'm not quite -- correct me if I sort of misunderstood the sourcing cost question, but I heard you were maybe asking about freight rates and so of course it's when you need to do more sourcing, especially internationally these days that can incur some extra costs. But probably -- I mean, they're not quite the same proportion of fixed cost. But I mean, overall, these will probably be -- not to be the largest element in the equation compared to the size of cost of sales and selling prices and upgrading margins these days. And so that's -- did that cover your question?

No, no. That's very helpful.

And the next question comes from the line from Sam Perry from Credit Suisse.

Given the current high prices, are you seeing any down trading in finished products? And then I guess related to that, at what level do prices become sort of unaffordable for farmers?

Yes, I can maybe start on this, and Tore, you can add as needed. I mean clearly, I mean, price -- with price increases at this magnitude, it's reasonable to expect that there is some demand of destruction going on, whether that's short term or longer term will depend on how the situation evolves from here. But -- and at the same time, of course, there are curtailments. So there -- as always, the market is using prices to find a balance. And as we touched on in the reports that we think there's probably quite a big difference between the regions there. And for example, in Europe, it's -- and probably similar in the U.S., these are farms are -- will normally be operating sort of close to optimal in terms of fertilizer rates and may make adjustments there in a way that -- where there may be other parts of the world where the cost developments now could mean the difference between whether you're applying fertilizer or not, and that can be also more of a concern with way beyond Yara as Svein Tore also touched on today. Yes, do you guys want to add? Okay. I think that's -- it seems like my comments covered it.

The next question comes from the line from Alexander Jones from Bank of America.

Two questions, if I may. The first one, I think, in your prior quarterly report, you mentioned that gas prices have gone up, but nitrogen prices have gone up sufficiently that your margins were offsetting the gas price. Are you able to give us sort of similar color on how that trade-off is playing out for Q4 so far, admittedly, given pretty high volatility you mentioned on both gas and finished product prices. And then the second question around some of your premium products. You've talked in the past about a sort of value-based pricing approach here, more set on base the yield the farmer is getting rather than necessarily the input cost. How is it going with those products in terms of passing through high gas prices to farmers?

Yes. I can -- Alex, so again look at fourth quarter. I mean, let's -- We can't get into kind of what the fourth quarter overall will look like, as you can imagine, both given our nonguiding policy, and also that it is -- there is a high volatility in the market now. But if we look at the situation now with gas prices around $30 and urea -- you take Egypt, now latest at $845 million, nitrates with a premium over that. I mean there are decent margins for these products now. So without going into sort of this year comparison to last year, I think that's the overall statement. And ammonia, of course, is more problematic, but only in a way, if you're a pure ammonia producer. And as mentioned, that's not really our situation in Europe.

Just to add to that, it's important that we don't see this only as gas price -- Europe in isolation, this is about utilizing the network that we have our global position, our global plant second supply ammonia. We're the world's biggest trader of ammonia. We have ammonia ships and a network that enables us to flex the operation. And that's one of the advantages with a significant part of our nitrate and NPK production is that we can switch to ammonia as we've done now in this quarter as well. And then going forward, it will be the dynamic evaluation of how to optimize our system. And with regards to your point on value-based pricing that is ongoing work, and it's important that in the middle of an energy crisis now that we don't forget about the need to restructure the whole energy system, but also how fuel is produced to continue the road towards decarbonization. And here we are, we get through the progress that we see the farmers have a role to play. It's about creating additional sources of income for the farmers, to create incentives for more than producing kilos, but also how it is produced, how nutritious this is, the quality of the food, how efficient was it produced in terms of land usage but also water usage. And all these are factors where we can combine with our products and economic advice to improve, which makes the farmers more resilient, both economically but also to deal with climate change, and it adds additional revenues in our model as well and it supports the transition to a lower carbon system. And of course, this will takes some time, but definitely, the interest is there. And then I would also like to add that we do see when it comes to green hydrogen and green ammonia, there are many initiatives and interesting discussions with regards to clean ammonia going into the shipping industry, and we've seen some announcements in that as well in the recent weeks, on progress on that.

The next question comes from Truls Engene from SEB.

Yes. Good afternoon. Couple of questions partly been answered or explained, so more of a follow-up. First, on the situation with the curtailed capacity in ammonia in Europe. Are you able to -- if this kind of continues now throughout Q4, will you then be able to replace that ammonia volume with sourcing from your plants or buying ammonia outside of Europe?

Hi, Truls. It's Thor, again.. I mean that's what we're doing right now. And how this plays out for the full fourth quarter, again, it's going to depend on that dynamic both between gas prices and nitrogen. I should also add, there are regional differences there. And for example, on ammonia, you're seeing different levels between the European region and the Americas, for example, and that is something that we can sometimes our charge on. We are better placed than others there because we are the largest and most global producer and trader. So -- but yes, it's -- we can't guide on what this will be because of the volatility and the situation. But we are certainly able to source what we need for the time being.

And of course, this is also a dynamic discussion with a number of our customers as well as we touched on the farmer part or the ag part of the business, but we also have a significant industrial footprint in Europe. And we've been through a very rapid increase in the cost and the structure of some of our -- or the contract or shall it take some time to phase it in, and then we've been optimizing for the short term now. And then as we have dialogues and make products available, it's about pricing that -- at a level that is reasonable for us as well, that takes a bit more time. But then in the meantime, we've been supporting that with having the flexibility on bringing in ammonia. So there are many moving parts on that.

Understood. And then on kind of your -- with the current and curtailment of the ammonia production in Europe. Is that having an immediate effect on your gas purchases in Europe? So now with 40% of the capacity being curtailed also your gas purchases in Europe is currently down 40%, or how should we think about that?

Yes, that's roughly the right way to think about it. We -- of course, we have different plants with different scale and efficiency. So it's -- it won't be exactly like that, but in principle, yes, that's right where is.

Yes. Just I mean, related to your kind of guidance or outlook on gas cost as that is based on kind of stable or normal purchase volume. So I guess, with the current situation then obviously, the negative effect from that will be lower?

And we are already -- we already appreciate you guys trying to model the fourth quarter, maybe have a bit more of a challenge than normal.

The next question comes from the line from Rikin Patel from Exane BNPP.

Firstly, on free cash flows and the negative development you saw there during the quarter. And I suppose you flagged the reversal in prepayments from Q2 before. But maybe if you could just explain why there was such a sizable outflow on inventories? And then going into Q4, should we expect some normalization in those inventories? And then just on CapEx, what exactly are you spending on in Q4? Is it mainly turnarounds? Or are there any other sort of projects in there, which is resulting in that quite high employed expenditure?

Yes, I'll start on the inventory. I think your -- the reason for the inventory increase -- I mean, on the one hand, just for anyone, we do present few set of numbers there. One is the KPI on the improvement program, where our operating capital efficiency has continued to improve quite a lot in the quarter. So the number of operating capital days is down again. That's on an absolute level and quarter-over-quarter, we have a significant increase, partly, as you say, related to prepayments, which was as expected and partly linked to inventory value because with higher both gas prices and product prices, there's typically each tonne in inventory has a higher value. So when you look into the fourth quarter, I guess, again, we can't guide on where we'll be at the end of the quarter. But at least right now, I think it's fair to say that prices have continued to increase. So all other things equal, if anything, probably our inventory values has increased a bit further. But of course, it depends on how we produce some and deliver throughout the quarter. And then Rikin, I didn't quite catch your second question.

It was related to CapEx in Q4. I guess you're having quite a few turnarounds right now. So I'm just curious what's -- what you exactly are spending on in Q4?

Yes. I mean the turnarounds are actually the ones we've taken our scheduled. So as we say, the 40% curtailment is a mix of planned turnarounds and market-related curtailment. So the turnaround are in the, if you like, within our CapEx guidance, there's also some planned growth projects in there. And then you may have seen we've reduced our full year guidance, saying that there's about $200,000 -- so we have $1.3 billion for the full year. We've reduced that to $1.1 billion, but it's basically phasing into next year. Some of the projects -- not the turnarounds, but some of the other projects that are -- where at least the spending is moving, at least in part of next year.

The next question comes from the line from Adrien Tamagno from Berenberg.

Is this current situation with natural gas pricing spiking made you think again about your policy around hedging and forward purchasing of natural gas?

Yes. Thanks, Adrien. I mean, we've had a very consistent long-term, I should say, based policy, not just within gas, but also within most parts of currency and in general, but we are the largest and most international and diversified fertilizer company. There is a strong correlation over time between food, energy and fertilizer prices. And we have a high operational flexibility. And that -- those factors underpin our sort of low to no hedge policy. And that, of course, is not to say that there -- I mean you'll always find times where isolated you could have done something clever, but over time, we then therefore view hedging as a other cost rather than a benefit. And I think in the situation so far, we feel that particularly the operational flexibility here -- well, and the correlations, the gas prices -- as gas prices increase with Europe clearly being the swing region now, that brings up nitrogen prices as well. And we have assets that generate higher returns in that situation. And then combined with the flexibility that we can use in Europe, this is a situation that we are managing quite well in our view, without going into hedging.

Okay. And in terms of your European capacity, the fact that you have to shutdown, does this trigger any impairment testing going forward?

This is, in principle, we do impairment testing continually. And we have done that also for this quarter and have not any assets that we've flagged for this. You can see -- I mean, we have in the past flagged them in our annual report, some units that are sensitive. But I think, again, I mean looking at the overall situation so far, a bit related to the previous question, energy price -- higher energy prices have come with higher nitrogen prices. And when we can use our flexibility to basically keep operating and keep achieving decent margins on upgraded products then overall, that should mean we don't necessarily have impairment indicators. I mean, that -- just to add, of course, that doesn't mean that from time to time, you can have plants than we've had in the past or operations where you are challenged, but that is often maybe more linked to -- rather than the global development, it's linked to, for example, whether you have sufficient scale, whether you are upgrading products or not. So as mentioned earlier, it's an advantage, especially these days to be upgrading rather than purely producing, for example, ammonia. And it's also linked to market access and our plants and our system generally has more options for market access than maybe some of the -- maybe smaller or more local players.

Thank you. The next question comes from the line from Bengt Jonassen from ABG Sundal Collier.

I have a couple of questions on following the steep price increases on nitrates. Do you see NPK following those price increases? That's the first question. The second question, do you see any order book destruction, order book, at this time compared to last year, is it quite normal or is it lower? And the final question would be on your natural gas cost guidance. Given that you have reduced purchases as of today, is there a one-to-one relationship between the reduction in percentage and your gas cost guidance?

Thanks, Bengt. I think probably the main observation on NPKs versus nitrates is that clearly on the cost side, it's within gas and nitrogen that you had the steepest cost increase as well. So I think there's a logic and that nitrates along with other nitrogen products have risen far more than P&K. So from that -- but as you know, our P&K prices have been rising as well. So it is an environment where virtually all product prices are rising and that there is a difference between fuel nitrogen, straight nitrogen and the others. In terms of order book, I mean, as we touched on, yes, I mean, there are price increases at this level do leads to demand destruction and we, I think, like yourself will need to see when the season is over, how much this has been because as mentioned, we think in the more mature regions like Europe and the U.S., it's probably going to be more on the margin. I should say, more marginal than maybe other parts of the world. But bear in mind that we started the season with quite low inventories and also not very high prebuying. So it's not like there's a big overhang in the market. And the last thing I would say is that right now, it's a bit of -- we could have had a much longer order book. But we -- given the volatility, we don't want to sell far forward. So it is a dynamics between the buyers and the sellers are, and this is mainly about Europe. In terms of the energy guiding, I think, yes, in principle that you can sort of reduce it pro rata with our curtailment. I think the only comment to that is that we tend to curtail a bit more in the smaller units with a bit lower energy, but directionally, I think it's the right way to think about it.

The next question comes from the line from Morten Normann from Carnegie.

Lot of my questions have been asked already. But you mentioned that you have a net short position in Europe, you got ammonia. What's the size of that in, let's say, in a normal year? And you also said that you're able to source the ammonia that you need? And what do you think is the mix between sourcing from third party and your captive production outside of Europe. And if you have any flavor of how much volumes you have sourced for the fourth quarter?

Yes. Morten, I think some of this we can probably revert to you after the call. But you can -- in terms of our -- we are structurally, normally long in the range of 0.5 million to 1 million tonnes globally. The European short within that is probably a bit larger than that. So let's say, around 1 million thereabouts, maybe a bit more. But you can also -- you can kind of analytically get to this by looking at our production capacities by product. Yes, and in terms of the mix right now between own plant and sourcing, I mean that's commercially a mix that we're -- that we don't want to go into granular detail on.

And just to add, this is part of the strength of our mode in trading and shipping as well that we have both our own captive plants, but also a huge network of other suppliers as well. And then it's about optimizing that. So the physical movements are optimized from a logistical point of view. So the isn't one to one, but clearly with -- we've tested our system with a rapid increase in prices now in the third quarter. And we have been able to maintain production in Europe at full capacity, almost -- so it's been a test. And I'm really pleased with how our organization has responded to this.

And just while we're on that topic and Lisa, if you're still on the line, I know you -- I realized relatedly, you did ask about our contract structure on ammonia sales, but I would place that in the same category that this is commercially a sort of level of granularity that we don't want to go into extend.

The next question comes from the line from Andrew Stott from UBS.

Good afternoon, everybody. So I've got 3 things I wanted to tackle. One is clearly the topic that you're on in the Q&A so far, which is the mitigation strategy. I had a reasonably straightforward question. How durable is this? I mean it's working at the moment. You're cutting enough production to boost pricing. You can source ammonia anywhere between $600 and $850 according at least to my data. So it works. Why wouldn't you do that for a sustainable period of time on the -- obviously, on the condition that European prices of gas remains so high. Are there any practical limits? Are there certain sites, I'm thinking Germany and Italy, for example, where you couldn't import ammonia? So I totally understand what you're saying on the flexibility, but just how durable is it, is the question. Should I stop there or do you want me to ask the other 2?

Yes, we can complete that one first.

As you see in the increase in the gas price this quarter came quickly. And we've been able to deal with that with a combination of increased prices and using the flexibility that we have in our ammonia sourcing system. And then for longer term, of course, we will continue to source ammonia from elsewhere, but in parallel with that in order to maintain production at the highest level possible and optimize profits where we are also then in constant dialogue with customers as well to ensure product availability, whether that is to serve charges in the short term to contract negotiations and formula-based pricing that will then go into the pricing of the products as well. So this will be a combination of -- what we're doing right now isn't exactly how we will deal with it going forward, but we haven't been able to deal with it in a good way now in the short term, and then we're working in the mid term -- mid to long term as well to maintain and utilize the flexibility that we have in our system. Tore, I don't know if you want to add in.

Yes. Yes, I think maybe the comment is appropriate to that sort of a longer-term scenario where we are -- and others are sourcing a lot more ammonia from Europe, it's probably not -- there may not be capacity for that in the market. I mean, right now, it's clearly tight through on the urea than ammonia. That probably over time, some kind of leveling out that could involve both the ammonia price from the gas price. And especially as we get into spring, probably most of us are expecting gas prices to come down.

Okay. Second question was on NPK. I mean when you consider how discretionary the P&K is relative to the end, do you have to rethink a bit on how you supply the LATAM market in particular or not?

Well, in many of these markets, we are also helped on the NPK side by a very tight market conditions for P&K. I don't know if you observed in the publications also that other NPK producers are actually talking about very strong sales through Latin America on NPK as an example, just because it's difficult for the Latin American to source directly. So there are many elements of it. There was also a question earlier about NPK. And of course, if you depends also a little bit on when you take a relative pricing perspective on an absolute pricing perspective because, of course, when we get to the nitrate price levels we have in Europe now, which may not be that applicable outside Europe, get -- having a relative premium compared to historic norms is totally not that easy, right? So there is a reason that -- yes, because of course, these are things that we are working on continuously. This is kind of -- we have a separate unit, but it's handling all these issues.

And you have to keep in mind that for Latin America, the types of crops that NPKs come into our high-value crops as well and there has been a responsible pricing. So this is not happening, it only a nutrient increase in isolation. We are seeing increased food prices and as we indicated in our report and our press release as well with rising fuel prices, there are some concerns on how this will impact vulnerable communities as well.

Okay. And then last question was on China. What's your information on China's export strategy now? I mean, obviously, we've all read that supposedly, there's no exports till next June, but is that your working assumption?

Well, it's currently assumption in the market. And I guess that has set most of it. I mean just you have a domestic price level in China or, let's say, just below $500 or so and you have a global market value of more like $700, maybe in a several under urea or above $700. So there is already a huge disconnect between the domestic market price in China and the global market. So players now acts as if there was more or less an export ban, but they probably hasn't been an announced export ban. It's just that the NDRC, the government agency type have asked players not to exports or introduced some measures in the ports, approval systems, they've asked ports through the province also to receive urea, or fertilizer into the ports, so rather than just putting on an export tax or banning export there are a number of other measures that in effect are now stopping the exports. And that's, of course, what the market expects now when -- if you look at the relative pricing of course, the players if they can get us anything, they will probably try for it because there's so much money to be made, right? So they have already sold for the current India tender, and there are talks of some cargos maybe being stopped, but most of it is being allowed through customs before these new inspection rules came into force on October 15. So if you say the kind of the general expectation is through June. I think that hasn't been said to be monitored, I would say particularly interested on -- particularly interested on the [indiscernible] side where they have certain large exportable surplus because then they don't really have an exportable surplus now just because they have a lower production. They have high gas cost, high coal prices, they have allocation issues on power they have an energy crisis also in China. So that certainly makes sense, right? But on the [indiscernible] side, it's more -- it's also interesting that they are restricting exports there. So this is -- yes, we are just trying to follow that of course. But to your question, the market is not acting as if there is an export ban practically.

The next question comes from the line from Mubasher Chaudhry from Citi.

Just one question here, please. Could you provide some comments around the premium on NPK, the compound premium, it seem to be narrowing again in the third quarter. Just some thoughts around if and when we should expect that to stop and coming back to a premium and what the contract structures are around that to allow the pricing to be pushed through? Just some color around that would be helpful, please.

I think -- hi, Mubasher. This is totally -- I'll reference a bit what Dag already mentioned earlier, but is -- I think we need to be aware that the price levels we are at now for particularly nitrogen but also P&K. I mean the higher you go I guess, without an equivalent stream price increase, which I think is the case now, food prices have increased, but not as much as fertilizer prices, then the relative premium you -- all other things equal, will tend to compress. In addition to the fact that our NPK prices tend to the more sticky, do not react as fast as the spot prices, particularly for nitrogen now. So this is -- but it's important to underline. I mean, these are -- these products have pretty decent margin that's just that on the premium measures compared to the strong price increases we're seeing normally in the premium accounts are smaller, particularly in percentage terms. But as always, I mean, we -- in a way, our main role for the regions commercially here, particularly for the NPK is to constantly be trying to improve our market and crop mix, in other words, to move more and more towards the sectors that have the best ability for demand-driven pricing rather than cost plus.

And for the last question for the moment comes from Brian Kuzma from Thomist Capital.

Can you guys hear me?

Yes, yes, sure. Please go ahead.

Okay. Okay. Great. Yes. I guess I just wanted to understand what -- as you look out at the nitrogen market, like what percentage is -- I mean, the prices are where they are, they're really strong. Everyone is going to keep using nitrogen at these levels. What portion of the ammonia market goes to more price elastic markets where you actually can see demand destruction?

I'll hand over to market intelligence. You may look at the 3 nutrients -- I mean nitrogen. There's a bit to it in the presentation as well. The impact of not utilizing natural fertilizer is immediate and large -- so if you take grain, if you don't apply natural fertilizer for the season and first by nearly 50%. So that demand will be there. But I'll now hand over to Dag Tore.

Yes, I think a lot of other sectors also probably have fairly low price sensitivity when you look at AdBlue market in Europe, not emission reductions and other industrial sectors are probably also doing quite good.

Yes. So if you take AdBlue as an example, you needed to run the trucks, and it's a minor cost in totality. But if you don't have it then trucks don't run. So clearly, there is a demand need in that segment as well and same for several other sectors as well, including CO2, as we've seen, they call the shutdowns, ammonia production is one of the most efficient way to get food grade CO2 as well. And that also has [indiscernible] a number of sectors that are completely dependent on having the supplies.

Okay. I mean that makes a lot of sense. I guess what I'm struggling with is like I've noticed like there's a negative -- a little bit of a negative tone to the call and the questioning, but it looks to me like there's going to be like a multiyear shortage of nitrogen and nitrogen products as a result of all of these bottlenecks along the supply chain and the inability to pass price along. So it seems to me like it's like a multiyear boom for the -- to be in the nitrogen business. And I'm trying to see why that doesn't play out. How do you guys not crush it for the next 1.5 years based off of inventories being low and as long as crop prices and end use prices are strong, like you guys are going to be able to pass all the stuff through and there's going to be shortage as a result of all these curtailments are there?

I think that's certainly what we're seeing for now. Having said that, we are cautious on Northern Europeans. So we tend to not guide and guarantee things too far out in the future, and there are parts of this, which are quite an unprecedented situation. So I think we're -- it's perfectly understandable in this situation that there are a few questions also around potential negative effects. But as we said, I mean, the situation you described is what we're seeing for now.

We have a few more questions now. The next question comes from the line from Morten Normann from Carnegie.

You sell a lot of third-party products, more than 12 million tonnes in a year maybe. Are you able to crank out a higher margin now? So my question is are you selling this product at a pure dollar per tonne or partly a percentage of the price?

Yes. Most -- we tend to secure. There's quite a lot more than we did. We had in the past experienced, should we say, the negative side of having large open positions on third-party products. So that's -- our business model these days is more based on the own produced core. So I mean, it's not to say that there can be some position effects here, but for much of the time, we are -- we have quite a tight risk management on the third-party business.

Yes. But that is elevated prices, are you able to sort of take the higher margin on average on the sales?

Well, when I say risk management, it means, for example, that we do a lot of back-to-back sales, so then your -- it doesn't necessarily create a margin opportunity in the scenario.

Thank you -- The next question comes from the line from Chetan Udeshi from JPMorgan.

My first question was on Slide 27 of the pack, which actually shows the energy cost dynamics. And I'm just curious here is, so historically -- so Yara's global cost has aligned pretty well already at least closely with the TTF price, but it seems at the moment, the gap between what you guys talked about for Q4 versus the TTF price? And what's the same in Q3 as well? Is the gap probably seen at least higher than in the past. And I'm assuming this is not yet taking into account the production cuts. So maybe it would just be useful to understand why that is the case because I think at least my motto has higher gas cost in Q4 versus what you guys are guiding to? And it seems this chart explains it that the -- let's say, the transmission of the current spot price on DTS is not as much as we've seen in the past. So I was just curious to understand why is that case. And the second question was -- there was some communication from European Union just a few days back, noticing or noting rather that the pollution of water bodies because of overapplication of nitrate, et cetera, is still a problem in European Union and seems they are going to take some further action on it. What implication does it have on Yara and just the overall demand for nitrates in Europe?

Yes. I think maybe starting on the gas. I mean we are -- what we've put on the curve there is, I think, 7th of October forward prices.

Very close to today.

Yes, which as Thor has just said, very close to today. So there isn't -- at least we haven't intended to put anything else from out there. But if you're seeing any differences...

Just, I don't know, generally maybe with the detail, but you maybe have seen already. But in the graph on page 27. Just keep in mind that the market prices are for Henry Hub and TTF are not lagged while we have a lag in the other average cost.

So the Yara line is trying to show our cost of sales, which is normally lagged by roughly a month versus spot gas.

Okay. That explains it. Thank you.

In terms of EU, I mean, as you're aware, I mean, the Europe is the region with the highest focus on environmental footprint for -- across all industries, not just fertilizer. We see this as just as much an opportunity as a challenge. We are -- our products and solutions are geared towards higher efficiency, and it's not about sort of maximizing consumption as such. But yes, I don't know, we -- this is core to our strategy really.

The last question is a follow-up question from Andrew Stott from UBS.

Sorry. Yes, thanks for the follow-up. It was a question as well similar to Chetan on gas prices. It was comparable as being much higher than your guidance. So can I just confirm it is based upon normal production? So in other words, the curtailments are not part of the $850?

Correct.

Thank you. And with that, we have no further questions at the moment.

Okay. So thank you all for participating in the call today, and have a nice day. Thank you.

That does conclude the conference for today. Thank you all for participating. You may now disconnect.