AnalysisYara's strong Q3 results exceed its own expectations

19 October 2010 17:54  [Source: ICIS news]

By Mike Nash

LONDON (ICIS)--Yara’s encouraging set of third-quarter trading statements on Tuesday was hardly surprising, given continued favourable trading conditions fuelled by underlying crop fundamentals.

The results also build on the international fertilizer producer’s strong performance in the second quarter.

It is clear, however, that the figures exceeded even Yara’s expectations. The company says the third quarter is traditionally its weakest, but strong demand for all fertilizer nutrients, in turn driven by agricultural commodity prices, have seen this trend reverse.

Nitrogen phosphorus potassium (NPK) and nitrate supply has been particularly tight in Europe. Notably, the realignment in potash prices, which had been out of kilter with the rest of the market, has allowed Yara to maximise NPK blended fertilizer production.

It is now running at near to full capacity utilisation and volumes and margins are up.

During the quarter, Yara was effectively giving NPKs away, whereas now the cost of the blended fertilizer reflects the prices of its constituent nitrogen, phosphate and potash components.

Following the disastrous effect of high potash prices in 2008 at the time of the financial crash, and their reluctance to come down in line with other fertilizer prices, this is good news indeed for the Norwegian producer. The bottom line is that NPK deliveries have risen 30% year on year in the third quarter.

Corn margins for US farmers for 2011 were also expected to be a major improvement on 2008, with yields rising to $3/bushel (€2.13/bushel) for corn, up from $2.50/bushel in 2010.

The increased use of ethanol in gasoline from 10% to 15% for cars built after 2007 is also a major development.

In this respect, Yara’s response was measured. While this will affect demand for corn looking forward, Yara foresaw no immediate impact on demand.

This announcement will lead to limited investment in fuel tanks and associated infrastructure, but as more cars get bought the proportion of newer cars on the road in the US will increase, leading to more demand for ethanol.

There is already talk of extending the policy to vehicles built in 2006, in turn widening the pool of cars for which the policy is applicable.

It was notable that Yara was keen to play down the highly-anticipated global urea oversupply that will increasingly become evident during 2010-2014.

During the company webcast, Yara executives pointed to significant delays to capacity additions in Algeria and Iran, also implying that further Chinese investment in urea capacity may focus on emission control and greater economies rather than capacity expansion.

Surprisingly, there was no mention of rumours that China could severely limit fertilizer exports in January 2011 in order to bolster domestic urea and phosphate supply. Yara executives concentrated on the fact that the ramp up in Chinese exports during 2010 had not really impacted on international prices.

This is true. And Yara is also right to point out that Chinese availability could be additionally curtailed through plant closures due to high coal costs and reductions in carbon emissions.

Output is being materially impacted by these measures and supply is undoubtedly tight. Yara indicated that output at 40% of Chinese urea plants had been reduced.

But it would be wrong to infer that this situation will continue into the medium term.

A casual look at the International Fertilizer Industry Association (IFA’s) projections released in June 2010 point to a 24% increase in global urea capacity, concentrated in east Asia. Global demand is not forecast to keep pace with this rate of growth, leading to sustained surplus over the course of the period.

Looking forward, Yara’s confidence in the market was emphasised by its commitment to running nitrate and NPK production at full tilt in the fourth quarter.

And looking further out, Yara expected grain prices to be increasingly volatile, but still operating in a range to make fertilizer investment by farmers viable. In urea, Yara expected Chinese exports to be limited and stable.

Key to this continued recovery in the fertilizer sector will be inventory control. Yara executives were quizzed closely following the crash in 2008 that left producers, distributors and buyers high and dry with high-priced fertilizer stock, which took months to work through the system.

“Only a few people did not learn from the financial crisis,” said Jorgen Ole Haslestad, President and CEO, adding that Yara had learned “conscious risk taking”, and that inventory control was now higher up its agenda.

In defence of 2008 he said that normally the market could store one season’s consumption in the pipeline – a common assumption which was only broken in 2008 and had been accepted practice since the turn of the 20th century.

Yara would not be drawn on acquisition activity. However, executives conceded that there was considerable room for expansion with production capacity possibly rising from 25m tonnes to 40m tonnes under its current business model.

The producer has certainly been very acquisitive in the past, and there are reports that Potash Corp of Saskatchewan is in talks with Yara over the sale of parts of the company in order to break it up to block BHP Billiton's takeover attempts.

($1 = €0.71)

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By: Mike Nash
+44 20 8652 3214

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