AnalysisYara posts rise in Q1 net profits, fertilizer demand returns

27 April 2012 13:29  [Source: ICIS news]

By Karen Thomas

LONDON (ICIS)--The 4.5% year-on-year rise in net profit recorded in Yara International’s 2012 first-quarter trading results is attributed to consistent healthy margins and the return of fertilizer sales to normal volumes, the Norway-based producer said on Friday.

The increase of Yara’s net profit to Norwegian kroner (NKr) 3.02bn ($527m, €401m) in the first quarter lends support to the fertilizer major’s assertions, particularly given the downward pressure exerted by lacklustre fertilizer markets during the first two months of this year.

Yet, despite an uptick in demand seen late in the first quarter that has trended fertilizer prices upwards, Jorgen Ole Haslestad, president and CEO of Yara, sounded a note of caution that will resonate with major suppliers.

“Yara reports strong first-quarter results, as margins remained healthy and European deliveries picked up,” he said, adding: “As expected, northern hemisphere fertilizer demand is strengthening following a slow first half of the buying season. This recovery is needed to avoid a further decline in global grain stocks.”

Citing reduced nitrate fertilizer premiums and increased production costs, Yara recorded a 7.6% year-on-year slip in earnings to NKr3.94bn before interest, tax, depreciation and amortisation (EBITDA) during the first quarter.

Prices plunged at the beginning of the year and markets were at risk of stagnating during a supply-demand stand off.

In particular, fertilizer demand slumped in Europe and was slow to emerge in Latin America and the US - markets that were running hot during the same period last year.

Interest to buy was insipid and sales scant against ongoing concerns over the fiscal stability of the eurozone. The uncertainty over the future existence of the euro kept European importers and farmers on the market sidelines and buying was hand-to-mouth.

Despite expectations of an early spring application in mid February due to mild winter temperatures, which would have pushed demand and moved prices up, a severe cold weather snap further delayed fertilizer importing and farmer buying.

Yara notes first-quarter nitrogen fertilizer deliveries were down 5% in western Europe compared with the same period last year and imports dropped by 8%.

Nitrate prices were lower relative to global urea prices a year ago, prompting importers and end-users to consider switching to cheaper nitrogen sources.

Sensing the sentiment shift to the buy-side, importers held off purchasing until they were confident that the pricing floor had been reached. Phosphate fertilizer producers retreated to first-quarter production cuts and traders baulked at dropping prices to encourage sales.

Prices on a lacklustre phosphates fertilizer market continued to trend downward against global over supply and suppliers noted a disappointing diammonium phosphate (DAP) season in Europe.

In the US, Yara’s first-quarter nitrogen deliveries were down by around 10% from the previous year, largely due to lower imports, and by around 5% season to date. Brazil imported 10% less urea volume than in the first quarter of 2011 with buyers booking 500,000 tonnes.

Together with all the key players, Yara looked to the strong outlook for supply and demand fundamentals, as well as firm grain prices, as the triggers that would ignite trading and lift fertilizer prices.

European buyers came back to the nitrogen market in March and granular urea prices soared on the US domestic market as the spring application came online strongly.

Availability of Middle East granular urea tightened against domestic demand. Protests in Egypt have shutdown Mopco production indefinitely and expected supply out of the Algeria and Qatar did not materialise, leaving the market short.

US urea barge prices surged against lack of product, increasing by $200/short ton (€152/short ton) FOB (free on board) Nola across March, with deals concluded at $725/short ton FOB Nola at the end of the month.

Going forward into the second quarter, relief for Yara and the major fertilizer suppliers is on the cards given the strength of demand emerging from key markets such as India, Pakistan and Latin America.

Brazil quickly stepped back into the phosphates market this month, as buyers scramble to import 250,000-300,000 tonnes of mono-ammonium phosphate (MAP) during May and June. Prices have breached the $600/tonne CFR (cost and freight) level, marking a $65/tonne jump since the end of March.

China remains the wild card. Exports of phosphate fertilizers will start 1 June with urea to follow a month later, as the four-month low export tax window opens and China briefly rejoins global trading.

Around 2.4m tonnes of DAP was exported to India during the 2011 low export tax window and although the availability and prices of fertilizers have not yet been agreed, Chinese supply will impact on the global supply-demand balance.

($1 = NKr5.73 / $1 = €0.76)

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By: Karen Thomas
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