PESTLE

Political and legal conditions

Nationalization of commodities, climate disasters, civil wars, stronger environmental initiatives and changes of national- and regional laws are examples of risk factors affecting companies worldwide.

Not following national laws can affect the performance of companies. This happened when Yara faced the biggest corruption scandal for bribery in India and Libya, which led to the legal director being convicted to seven years in prison (Kallestad, 2017). Another example affecting companies is the recent trade war between the US and China. This surprisingly increased Yara’s earnings, since the fertilizer trade moved from the US to Brazil, Yara’s second largest market. However, the impact of trade wars might as well turn out the other way around (Hopland, 2019).

RemainCo:

National and regional agricultural- and trade policies affect the fertilizer industry that can both threaten and create opportunities. While EU regulations push for lower greenhouse gas emissions (Yara, 2018a), increased subsidies to farmers in developing- and emerging markets can provide access to new markets. Organizations, such as UNFAO (Food and Agricultural Organization of the United Nations), are influencing the market to increase these subsidies.

NewCo:

Due to an increase in stricter environmental policies imposed by countries, new markets arise such as reduction of NOx- emissions- and wastewater. In fact, Europe is expected to progressively implement stricter NOx-emission limits (Yara, 2018a), while the United Nation’s IMO (International Maritime Organization) conducted new regulations to reduce SOx emissions from 2020 (IMO, n.d.).

As NewCo is one of the largest suppliers of scrubbers for ships that “clean” the SOx level, the high demand for these scrubbers prior to the activation of IMO 2020 contributed positively to the

suppliers’ profitability (Argus, 2019).

Economic conditions

As mentioned in Section 4.3.2, both RemainCo and NewCo are strongly affected by changes in fertilizer- and commodity prices, which in turn are affected by other economic factors. Further, currencies, interest rates and the global economy in general are economic factors affecting the earnings of global companies. The currently weak Norwegian Krone (NOK) has a positive effect for the Norwegian export, while negatively affects production cost and the margins for Norwegian

negative, such as the federal rate in Denmark, EU, Japan, Switzerland and Sweden (Danske Bank, n.d.). These economic risk factors, in addition to the earlier mentioned historically longest bull stock market (Chen, 2019), makes the global economy currently in an uncertain time where economic cycles are expected to turn.

RemainCo:

Farmers may be affected by recessions leading to less access of funds to finance investments in fertilizers, resulting in reduced demand for fertilizers. However, different from other nutrients, nitrogen fertilizers are essential for crop growth and need to be applied each year (Yara, 2018a), allowing one to assume that the demand is less harmed by recessions. This stability of demand is also supported by the fact that fertilizers are considered necessary for agricultural productivity and thus important for feeding the world’s population, compared to luxury products that are more vulnerable during recessions.

NewCo:

NewCo experiences many of the same risk factors as RemainCo. However, the impact of

economic recessions may be more complex, as the customers’ markets are more diverse, which in turn can create diversification benefits. NOx- and SOx reduction, wastewater and explosives for different industry projects, are markets often regulated by the authorities, and are assumed to be prioritized and protected during recessions. However, although these markets are often protected, economic downturns are difficult to predict as these markets could face unexpected challenges.

Social conditions RemainCo:

Customers are willing to pay more for products with higher levels of sustainability and quality, which benefits RemainCo as they offer these products to “premium” prices (Yara, 2018). Recently, there has been an upward trend for organic food, that does not allow mineral fertilizers applied to the plants (Matmerk, 2019), which endanger the fertilizer industry. On the other hand, the demand for fertilizers is mainly driven by global population- and economic growth (Yara, 2018a). The global food production must increase by 70% from today’s level until 2050, in order to fulfill the gap between the expanding population and accessible food (FAO, n.d.). In fact, the cereal- and meat production need to rise by 50% and 75% respectively, to meet the food production goals for 2050.

These increased production levels are dependent on a crop yield which is only possible to reach with heavy use of fertilizers (FAO, n.d.).

NewCo:

The industrial consumption of nitrogen is mainly driven by economic growth and environmental legislation, such as the reduction of NOx (Yara, 2018a). In developing countries, economic growth changes people’s food habits, such as increased meat consumption leading to higher meat production (Yara, 2018a). The production of meat requires large amounts of animal feed, e.g.

grain, exemplified by the requirement of seven tons of grain to produce one tons of beef (Yara, 2017a). As a result, the animal feed industry is expected to grow, and nitrogen required for meat production is estimated to account for 20-30% of the total nitrogen consumption (Yara, 2018a).

Technological conditions RemainCo:

Digital solutions and upgraded technology change the agricultural production of how farmers operate, requiring the fertilizer producers to cope with this change to deliver digital farming

products (Yara, 2019b). To compete in the industry while simultaneously incorporating stakeholder demand, fertilizer production needs to be both more efficient and environmentally friendly. The figure below illustrates the development of technological methods, showing that the current

production is approaching a level from which it is difficult to obtain any further efficiency. Due to the high energy cost in Western Europe, ammonia producers in this region have invested heavily in energy-efficient technology (Yara, 2018a). Furthermore, there is an increasing demand for technological solutions providing higher water use efficiency and prevention of wastewater in farming, as increasing food production levels leads to global water scarcity (Yara, 2018a). In fact, Yara is constantly developing new knowledge and innovative technology to improve water use efficiency offering solutions for water-scarce agriculture (Yara, 2018).

NewCo:

The development and competition in the industrial nitrogen industry has been driven by innovative solutions from heavy investments in technology and R&D. Solutions for reducing NOx- and SOx emissions are based on the Selective Catalyst Reduction (SCR) system, which has been granted higher focus in recent years. Due to the technological pressure, Yara has developed control processes from calcium nitrate to reduce Hydrogen Sulphide (H2S). This prevents health hazards and reduced efficiency in wastewater, oilfields and pipelines (Yara, 2018a).

Environmental impacts RemainCo:

The efficiency of fertilizers contributes to high production per area, preventing major forest areas, and thereby reducing the total carbon footprint from global biomass production. The efficiency of mineral fertilizers may, however, be reduced by climate change and other external environmental conditions. Although the ammonia production is energy intensive, using natural gas rather than coal, which is used in China, is more climate friendly as the use of coal almost doubled the greenhouse gas emissions per unit (Yara, 2018a). However, it is widely recognized that nitrogen fertilizers are a major contributor to the greenhouse gas, N2O, which destroys the ozone layer (IPCC, 2003). It is estimated that between 44% to 57% of all the world’s greenhouse gas

emissions originates from the global food system (Grain, 2014), where the value chain of fertilizer production accounts for a large part of these emissions. Additionally, application of mineral fertilizers has led to 1-2% reduction in the organic content of soil around the world (Corporate Watch, 2019). International calls have arisen regarding actions to improve the use of fertilizer due to the increased impact of nutrient losses to the environment. This has resulted in two concrete initiatives: the first resolution of nitrogen and the first international code of conduct for the sustainable use and management of fertilizers (FAO, 2019).

NewCo:

The civil explosive market has negative repercussions for local communities, as the production’s neighboring buildings face damage and risk of collapsing, which in turn raise further repercussions for the public infrastructure in towns and villages (Article 36, 2013). Furthermore, instead of

switching to lower- or zero-sulfur fuel, ship scrubbers can “burn out” or “clean” the high-sulfur fuel to comply with the new IMO 2020 regulations. The scrubbers produce large amounts of wash water, which is discharged into the sea without any treatment (Aagren, 2019). These amounts of wash water contain damaging metals and materials which have shown scientific evidence of

harming organisms in the sea (Winnes, 2019; Aagren, 2019). These impacts discussed above may threaten the demand for NewCo’s main products.