Market and product
Yara flags dynamics behind nitrogen price rises
The Norwegian fertilizer giant, fresh from the failure of merger talks with US-based CF Industries, highlighted "curtailments" of supplies from many major rival producers, notably in Egypt and Ukraine, thanks to shortages of energy – a major raw material.
In Egypt, whose nitrogen exports fell 17% in the first half of 2014, the fertilizer sector is receiving only 62% of its gas needs, the country's investment minister, Ashraf Salman, said last week, while Russia in June cut its gas supplies to Ukraine amid a payment dispute, and broader political tensions.
"A substantial proportion of nitrogen capacity in Ukraine remains curtailed, amid the unresolved situation on natural gas supply," Yara said.
Ukraine's urea exports slumped 60% to about 700,000 tonnes in the first half of the year, coming in around the same level as Egypt's.
'Poor Chinese margins'
Meanwhile, looking ahead, "apart from China, there are limited greenfield capacity additions scheduled for completion in the next two years", Yara said, although a series of nitrogen plants are expected to fire up in the US later in the decade, exploiting cheap shale gas.
And even in China, a boom in production is being curtailed by soft prices, which on the domestic market were 7% lower for urea in the July-to-September quarter than a year before.
Despite continued capacity growth, estimated at 9.4m tonnes since 2012 by the International Fertilizer Association, Chinese urea output was 3% lower, year on year, in July and August.
"Poor margins for the highest cost producers resulted in production curtailments," Yara said.
Chinese urea exports, which have been a big factor in depressing world prices, were, at 2.4m tonnes, 400,000 tonnes lower in July and August than a year before, after an early-2014 boom.
Demand dynamics
Meanwhile, demand for nitrogen had proved "strong", particularly in Latin America, where Yara's own sales volumes soared 31% to 3.12m tonnes, boosted also by the contribution of nutrient assets bought from Bunge.
Industry sales of nitrogen rose 12% year on year in the US in the July-to-September period, and 5% in Western Europe, where Yara said it had a "strong order book" entering the last quarter of the year.
India had bucked the trend, seeing a 7% drop to 14m tonnes in industry sales in the April-to-September period, thanks to "unfavourable weather conditions", with a below-par monsoon prompting farmers to delay or reduce plantings.
Nonetheless, urea prices had risen 10% to $330 a tonne over the July-to-September period, taking them 4% above year-ago levels, with values of ammonia averaging $488 a tonne over the quarter, up 13% year on year.
'Strengthens our position'
Yara said it was particularly upbeat over the market for higher-value fertilizers, such as NPK, a mixture of nitrogen, phosphate and potassium nutrients, and calcium nitrate, for which it unveiled $350m plans to expand production at its Porsgrunn plant in Norway.
"This investment… strengthens our position as the global NPK leader," said Torgeir Kvidal, appointed acting chief executive two weeks ago, after Yara, amid the merger talks with CF, ejected Joergen Ole Haslestad, who was close to retirement.
However, the statement, which came as Yara unveiled earnings below expectations, failed to impress investors, who sent Yara shares down 4.3% to NOK296.60 in morning deals in Oslo.
While earnings rose 8.6% to NOK1.71bn, on revenues up 16.9% at NOK24.1bn, the profits rise fell short of market expectations by some 5%.
'Slight miss'
At Societe Generale, analyst Rajesh Singla termed the results a "slight miss", blaming the shortfall on a "higher costs of sales driven by higher-than-expected traded volumes", although lower energy costs "helped the bottom-line".
"Traded volumes were 43% higher than our estimates," Mr Singla said, restating a "hold" rating on Yara shares, with a NOK316 price target.
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