Future challenges and scenarios

Tailor-made products

In each area of our business, we intend to produce more specialty substances, customised for specific groups of users. Our expertise and experience in the agricultural sector allow us to consider offering crop-specific fertilizers, and even ones formulated specifically for individual farm fields.

We will be developing our specialisation in plastics as well. We have been ramping up production of high-margin specialty plastics used in the manufacture of food packaging. Polish engineers are at the forefront of Europe’s innovation in such technologies.

At the same time, we do not forget about the traditional production profiles of our chemical plants, seeking to accommodate the country’s continued strong demand for such products as nitrogen and compound fertilizers. It is our responsibility to ensure the uninterrupted availability of commodity chemicals to agriculture and other industries.

Developing cooperation and innovation potential

We aim to forge and develop lasting, regular cooperative links between the chemical industry and scientific or academic institutions specialising in related fields. We believe such links would allow the entire chemical industry in Poland to quickly and effectively respond to the needs of customers. We support areas where such cooperation is already a fact, for example the plastics segment.

Developing business potential

In order to diversify its revenue sources and become less dependent on business cycles in agriculture,

the Grupa Azoty Group will step up its efforts to expand non-fertilizer business lines. The key directions of business expansion will be in petrochemicals and plastics.

 In Police, we have launched one of contemporary Poland’s largest chemical projects to produce polypropylene, called by many experts the most forward-looking chemical. Apart from the production unit itself, the ‘Police Polymers’ project will involve the development of a port with a base of feedstock tanks, as well as auxiliary and logistic infrastructure. More information on the project can be accessed here.

A HANDFUL OF NOTEWORTHY FACTS

We are among the largest consumers of raw materials in Central and Eastern Europe. In 2016–2017, we spent over PLN 7bn per year to purchase raw materials needed to support Group-wide production. Accounting for about 30% of the cost of all raw materials purchased was natural gas, used to produce nitrogen fertilizers and ammonia.

We strive to ensure security of supplies of our strategic raw materials. We want to be sure that the continuity of our manufacturing processes is maintained, and that our capacities are fully utilised. We diversify our sources of raw materials, looking for new and alternative suppliers. Forming equity links with some of them is also an option.

By integrating our procurement function, we have minimised the cost of procuring supplies.

BEST PRACTICE

In 2017, Grupa Azoty Police imported PLN 135m worth of phosphate rock from Morocco under a contract which, after several months of negotiations, was signed with Office Chérifien des Phosphates (OCP), the company controlling the world’s largest phosphate resources.

Where our raw materials are sourced:

With climate change recognised as a global phenomenon, the Grupa Azoty Group has to remain in compliance with changing regulations, related mainly to CO₂ emission allowances.

In order to reduce the impact of greenhouse gas emissions at Grupa Azoty S.A., the energy intensity of processes was consistently reduced in 2016–2017, resulting in lower emissions of greenhouse gases into the atmosphere. In addition, the company has deployed a system for monitoring and reporting CO₂ emissions.

At Grupa Azoty Kędzierzyn, demand for emission allowances exceeded free allocations in 2016 and 2017. However, given the company’s environmental protection projects (construction of a new CHP plant), it additionally received another tranche of free allowances in each of the two years. 4.5% of the company’s actual, verified emissions for 2016–2017 were settled with cheaper CER units. The balance of allowances were purchased on the market in spot and forward transactions in accordance with the Group’s common ‘CO₂ Emission Allowance Trading Policy’ followed by its main companies. The main objective of the policy is to spread the price risk over time, with plans to purchase emission allowances made yearly for the next three years.

For Grupa Azoty Puławy, climate change is a factor driving demand for fertilizers that can be applied in a fertigation process, combining fertilization and irrigation. The company is working to improve the availability of this type of fertilizers. In order to minimise its greenhouse gas emissions, Grupa Azoty Puławy uses highly efficient catalysts to reduce nitrous oxide (N₂O) emissions and increase energy efficiency. Work is also under way to reduce the consumption of natural gas and energy utilities, particularly high-pressure heating and process steam.

Grupa Azoty Police’s situation with regard to greenhouse gas emissions has largely stabilised. In the second trading period (2013–2020), the European Emissions Trading Scheme covers five of the company’s installations. Every year, the missing allowances are purchased by the company on the secondary market.

From 2013, the company was engaged in an energy efficiency project under the name of Azoty Pro, which was completed in 2017. As a result of these activities, it was able to obtain white certificates, which were then redeemed in connection with its electricity sales and gas purchases as required by law.

To begin with, what is the role of the Corporate Procurement Department?

Andrzej Skóra, Head of the Corporate Procurement Department at Grupa Azoty S.A.: The key task of the Corporate Procurement Department is to manage the purchases of key production inputs, or in other words – strategic raw materials. Our overall Group-wide purchases are in excess of PLN 2.5bn (excluding gas, coal and electricity, which are purchased by other organisational units). Moreover, we make so-called technical purchases, mainly in Tarnów and Kędzierzyn-Koźle, which account for a lower share of total costs, but are also extremely important to support manufacturing processes. From the point of view of the procurement process and strategies, the thing of key importance is to ensure the optimum availability of raw materials for the Group companies on the most favourable commercial terms. We are a service provider to the internal customer, i.e. Business Units/Production Units.

Let us recall what raw materials are needed to make the plastics and fertilizers manufactured by the Grupa Azoty Group? 

AS: Key raw materials for the production of plastics include phenol, benzene and methanol, making up the category of oil derivatives, which also includes propylene, a major item in cost terms, which is consumed in Kędzierzyn-Koźle for the needs of the OXO Business Unit. For the fertilizer area, ammonia and nitric acid are of key importance, as are phosphorites and potassium chloride in the case of compound fertilizers (procured for the Police and Gdańsk plants). Liquid sulfur (consumed by four Group companies) and sulfuric acid are also a crucial category. The Group’s great asset is that we ourselves produce several of the key raw materials, including liquid sulfur, which is used in the production of both plastics and fertilizers. In line with the adopted strategy, we have identified the most strategically important raw materials for the Group companies, drawing up the so-called priority list of raw materials, representing more than 90% of all purchases made by our department, with a dominant share of feedstocks for the production of plastics and fertilizers.

TA: What are the main sources of raw materials for this production? Are they Polish producers or rather suppliers based abroad? 

AS: For purely logistic reasons, the most natural sources of supplies are the domestic market and neighbouring EU countries, in several cases also countries of the former Soviet Union. Thanks to its location, Police is also able to receive a major part of its supplies by sea, some of them imported from Africa. Overall, two-thirds of all our supplies come from Poland and EU countries, but Africa also accounts for a fair share (about 15–20%). Supplies are mainly delivered by rail (some of them handled by the Group company Grupa Azoty KOLTAR), or by sea in the case of Police and Gdańsk. The majority of markets where we source our raw materials are highly or very highly concentrated, as is typical of the B2B sector. An added constraint may come generally from logistics, which must be adequate to the (logistic) capabilities of the recipient companies. This is why developing an optimal, long-term procurement strategy for this area is a considerable challenge for our procurement teams.

TA: Have you managed to diversify your sources of raw materials needed by the Grupa Azoty Group to manufacture plastics and fertilizers?

AS: Diversification is of course among the priorities of our procurement strategy, vital from the point of view of both the security of supplies and cost reduction. As I mentioned earlier, we purchase raw materials in highly concentrated markets, but we make every effort to achieve the highest possible degree of diversification, optimal in terms of the Group’s requirements, but only if there is economic rationale for doing so. As we know, competition, or in this case diversification of supplies, is the best market regulator, its absence hampering growth. We purchase raw materials from all available domestic sources, being Poland’s largest consumer in most cases, and we additionally work with major foreign suppliers, predominantly producers, many of them Europe’s or the world’s leaders in their respective market segments.

Is there a threat to the continuity of supplies of these raw materials? Or a risk that these materials might simply fall short of demand one day? 

AS: Continuous production entails a specific context, and it is in a way a normal thing in our industry to adjust or re-schedule production. Therefore, one of the main tasks of the Corporate Procurement Department is to develop a supply strategy that would meet the Group’s production needs to the fullest extent possible. There are a number of mechanisms we employ to minimise attendant risks. Close cooperation and coordination of deliveries with our internal customer, i.e. Business Units, are vitally important, as is optimal logistics. Supplies of key raw materials are guaranteed under long-term trade contracts based on our well-established business relationships with some of the leading European and global producers. At the same time, in some cases we try to partially meet demand with spot purchases to bring down costs and take advantage of periodically occurring oversupply. It also needs to be noted that the Group is self-sufficient with respect to many raw materials, a factor significantly contributing to the optimum security of supplies to meet its production needs and reducing the risk of unpunctual deliveries, while ensuring ‘market flexibility’.

Do we hold any reserve stocks of raw materials to provide a safety net in case of any supply shortages? Is it necessary to hold such reserve stocks at all? 

Maintaining optimal stock levels in our industry is a complicated process, especially in the context of logistic constraints. However, the Group’s procurement teams – drawing on their expert knowledge and extensive experience – are able to perfectly cope with that challenge. Of course, there are certain standards in place to ensure that adequate stock levels are held, but in practice the competence of our staff, their ability to anticipate future needs and proper organisation of supplies are all important. This is particularly true in those areas where our storage capacities are limited, such as ammonia and phenol, where we are often forced to accept just-in-time deliveries, as well as in areas involving significant punctuality risks (e.g. in the case of imports from across Poland’s eastern border). Internal synergies, related to the fact that the same raw materials need to be supplied to several Group companies or that the Group has its own feedstock resources, may certainly facilitate the process, ensuring a relatively high degree of flexibility in several strategic areas. Coordination of such synergies at the Group level is one of the key roles of the Corporate Procurement Department.

This means that some raw materials for the production of plastics and fertilizers are ordered within the Group. What does such intra-Group cooperation look like? 

One of the main intended outcomes (as well as benefits) of building the Grupa Azoty Group was to achieve and fully leverage Group-wide synergies in raw material supplies. The most important of them for the Corporate Procurement Department are seen in ammonia, liquid sulfur, nitric acid and PE packaging, as well as intra-Group supplies of caprolactam and ammonium sulfate. Among the Group’s companies are sulfur mine operators, which gives it a major competitive advantage and security in sulfur supplies. The Grupa Azoty Group is one of the region’s leaders in ammonia production. Apart from being internally consumed, significant volumes of that raw material are sold on the external market, some of them in reliance on our own terminal (the only one in Poland) to handle shipments by sea. In addition, a large group of raw materials are consumed by more than one Group company. For these materials, we carry out a joint procurement process with a view to accumulating volumes, achieving economies of scale and per-source synergies (the latter where various raw materials are purchased from the same supplier for several Group companies). All these synergies are a significant factor in strengthening the Group’s competitive edge, materially improving the security of supplies, while being a source of meaningful cost savings.

Can we thus conclusively state that the Group is able to sustainably source all raw materials it needs to produce plastics and fertilizers? 

Yes, we can generally confirm that we have secured sustainable access to raw materials, especially on the supply side. The real challenge however, in addition to strategies defined for the key areas, has to do with the ability to properly read the market, and to forecast and analyse the macro environment. After the crisis in 2008, raw material markets have changed significantly, with more risks emerging, associated with turbulence in the oil market, increased speculative trading, rapid short-term changes in supply and demand, strong volatility of major currencies and many other aspects that we need to take into account when implementing our procurement strategies. But this is exactly what makes our work so exciting!