Fitch Ratings: EU’s 'Fit for 55' climate plan to fuel long-term costs of fertilizer producers

Fewer free carbon allocations, a lower annual emissions cap for the Emission Trading System (ETS), and an introduction of the Carbon Border Adjustment Mechanism (CBAM) are key policies that affect these sectors. Fitch Ratings expect cost pressures to be limited in the medium term with most impact coming in the longer term.

Last week the European Commission unveiled its new interim ‘Fit for 55’ plan, which will help cut emissions by at least 55% by 2030 (compared to 1990) on its road to carbon neutrality by 2050. The proposal is subject to approval by the European Parliament. EU domestic metals and fertilizer producers will be most affected by a steeper free annual carbon allocation reduction of 4.2% – instead of 2.2% currently – and a lower emissions cap. Carbon prices have already reached new records this year and are likely to increase further as the policies are implemented.

The CBAM should help avoid carbon leakage from imports and will mirror carbon costs of domestic producers for importers in polluting sectors, including iron and steel, aluminium, and fertilizers. The CBAM will be rolled out in stages from 2023, with actual payments by importers starting from 2026. This move may spur EU trading partners to consider their own carbon trading systems.

Fitch-rated producers could mitigate the impact from cost increases on their credit profiles through the decarbonisation programmes implemented by many producers, financial policy flexibility and the availability of funding to invest in further decarbonisation. Furthermore, high commodities prices in 2021 helped companies to materially reduce leverage. Fitch Ratings do not expect any significant medium-term impact on companies’ leverage profiles.

Some northern African and Russian fertilizer producers will be exposed to the CBAM as the largest exporters to the EU. Russia’s PhosAgro and EuroChem sell just over a quarter, and Morocco’s OCP about 20%, of their production in the EU. Some fertilizers, including phosphate rock and muriate of potash (MOP), are not covered by the CBAM. EuroChem, PhosAgro and OCP have very low cost bases and are well positioned to absorb new carbon costs. At least some costs will be passed onto consumers.

The proposed ETS expansion to shipping may benefit fertilizer products, such as Yara and OCI, currently investing in green ammonia and methanol, which will be used in shipping fuel decarbonisation.

Read the article online at: https://www.worldfertilizer.com/environment/23072021/fitch-ratings-eus-fit-for-55-climate-plan-to-fuel-long-term-costs-of-fertilizer-producers/