AnalysisYara 's strong Q4 results offset weak fertilizer demand

07 February 2012 10:41  [Source: ICIS news]

By Karen Thomas

LONDON (ICIS)--Yara International’s 2011 trading results released on Tuesday marked the company’s best full year to date, despite significantly weakened fertilizer markets during the fourth quarter.

Improved margins for urea and nitrates in particular underpinned Yara’s strong fourth-quarter trading statements, which more than doubled to Norwegian kroner (NKr) 3.39bn ($582.5m).

In addition, the fundamentals have remained steady-to-firm with increased confidence that grain and corn prices in the US and Europe will yield healthy returns for farmers.

Yara noted that urea prices remained at a high level during the fourth quarter, at an average $446/tonne FOB (free on board) Black Sea, up 5% on the average price for 2011.

Ammonia prices remained strong until December, at an average of $576/tonne FOB Black Sea – up 43% on the fourth quarter for 2010 – but then dropped at the end of the year as the phosphate market weakened and production cuts were announced.

The absence of business in the northern hemisphere during the fourth quarter and the depressed financial outlook undermined fertilizer export prices, which are still vulnerable as the first quarter gets underway.

Adjusting for the ongoing shortfall of Libyan urea due to the country still struggling with post-conflict resolution after last year’s civil war, Yara’s fertilizer deliveries were down 10% compared to the fourth quarter of 2010.

Noting the delayed demand in Europe and the US, Jorgen Ole Haslestad, president and CEO of Yara, confirmed the pick up in margins had offset the negative impact of reduced sales.

"Northern hemisphere fertilizer customers have been reluctant to take positions ahead of spring application, resulting in slow fourth-quarter sales overall,” he said.

“However, crop prices and farm margins remain healthy, and fertilizer deliveries will need to recover to avoid a decline in global grain stocks.”

The sovereign debt crises in Europe and uncertainty over the future of the euro are underlying factors that inhibited farmers from buying fertilizers until the New Year.

End-users in the US also felt the effects of the spreading financial woes and postponed purchasing until early in the first quarter of 2012.

On the phosphates market, export prices from the US, Morocco and Russia sharply declined, falling $80-100/tonne (€61-76/tonne) during the last two weeks of December.

In a bid to shore up the increasingly vulnerable prices, producers including Mosaic in the US, Russia’s PhosAgro and Office Cherifien des Phosphates (OCP) cut production rates for the first quarter.

The move did prompt a buying flurry of diammonium phosphate (DAP) and urea during the first week of January and prices stabilised.

Nevertheless, Yara’s drop in fourth-quarter deliveries highlights the impact of rising fertilizer prices, weaker agricultural commodity prices and ongoing global financial concerns.

In western Europe, deliveries were down 21% on the same period in 2010 and imports were down 36%.

In the US, fourth-quarter nitrogen deliveries were down by around 12%, largely caused by lower volumes imported.

Urea and DAP buying so far in the first quarter has not fully reduced this 36% deficit and, until the recent cold snap, the market was confident that further imports would be needed for arrival in early February.

But export prices could, again, be at risk if farmers delay the first nitrogen application that was due mid-February due to the plummeting temperatures that have hit the larger European markets, including the UK, Germany and Italy.

In addition to the prospect of another hiatus in demand for imports, traders and buyers face delays to importing and distributing cargoes if the disruptions to ports and land transport links caused by the severe weather continue.

Looking forward, Yara also points to this increased activity and, coupled with healthy farm margins, expects normal spring nitrogen consumption to resume in the northern hemisphere.

Although the company noted that nitrogen industry deliveries for 2011- 2012 could finish lower than the previous season, it is still targeting a stable European market nitrate share compared with the year before.

Yara also holds to the expectation that most agricultural markets will continue to support increased use of fertilizers and market sentiment is buoyed by the prospect that demand will return in strength as the US domestic and India markets come online at the end of the first quarter.

The company’s sales outside Europe were down 9% on the fourth-quarter of 2010 and although demand for premium products was strong, droughts in Argentina and southern Brazil slowed fertilizer offtake and left higher levels of inventory.

Higher sales in other markets did not offset the low demand in Latin American and the volumes of urea deals were down, particularly in North America.

India provided some relief, as urea domestic sales were up 6% for the agricultural seasons beginning in April, prompting increased imports as demand could not be met by domestic production.

Together with Brazil importing a record 3m tonnes of urea in 2011 - up 500,000 tonnes on 2010 – these two markets contributed to the company recording strong annual results.

Domestic demand in the US is due to kick off in March and is expected to be strong enough to ignite the phosphates and nitrogen fertilizer markets and brisk business in Europe and Central America will keep prices stable.

($1 = NKr5.82)
($1 = €0.76)

For more information on phosphates and other fertilizers, please visit ICIS pricing fertilizers

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By: Karen Thomas
+44 208 652 3214

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