UpdateNorway's Yara sees tough year ahead due to China, energy costs

22 April 2013 14:06  [Source: ICIS news]

(adds further detail on company results throughout)

Yara LONDON (ICIS)--Norwegian fertilizer giant Yara International on Monday warned it sees tougher nitrogen fertilizer market conditions on the horizon because of a combination of increased competition from China and higher energy costs.

In notes accompanying its first-quarter results, the Oslo-based company highlighted a rise in Chinese urea production in early 2013 and warned a "continuation of this trend would increase the probability of significant second-half urea export volumes from China".

According to Yara, China exported 7.2m tonnes of urea between July 2012 and February 2013, more than double the 3m tonnes exported in the previous corresponding period.

"Based on current forward markets for oil products and natural gas, Yara's second-quarter energy costs are expected to be approximately [Norwegian kroner] NKr300m [$51.6m, €39.4m] higher than last year," the producer added. "Third-quarter 2013 energy costs are expected to be NKr50m higher than a year earlier."

Including output from joint ventures in countries such as Qatar and Libya, Yara’s production volumes totalled 6.43m tonnes in the first quarter versus 5.94m tonnes in the year-ago period, with year-on-year rises registered across nearly all products.

Ammonia production climbed 9% to just under 1.83m tonnes from 1.68m tonnes in the same period of last year, while urea output jumped 18% year-on-year to 1.19m tonnes as "additional Qafco and Lifeco output were only partly offset by an unscheduled stop in the Belle Plaine [Canada] plant".

Nitrate production edged up to 1.52m tonnes from 1.5m tonnes and output of nitrogen phosphorus potassium (NPK) products grew to 1.24m tonnes from 1.14m tonnes in the year-ago period. "NPK plants have been running well in the quarter, with monthly production records in several plants delivering an increase of 9% from first quarter 2012," Yara noted.

Turning to its sales performance for the 13-week period, Yara revealed ammonia sales surged 11.5% year-on-year to 869,000 tonnes, while urea sales advanced slightly to just under 1.6m tonnes versus 1.58m tonnes in the first three months of last year.

Sales of nitrates slipped to 1.64m tonnes from 1.69m tonnes in early 2012 but NPK sales rose slightly to 1.63m tonnes from 1.6m tonnes in the year-ago period.

A breakdown of Yara's fertilizer sales volumes by region for the first quarter show of the 5.3m tonnes sold, 2.9m tonnes were sold to Europe, 923,000 tonnes to Latin America, 802,000 tonnes to North America, 484,000 tonnes to Asia and 198,000 tonnes to Africa. Total sales in the year-ago quarter were higher at 5.43m tonnes.

"Global Yara fertilizer deliveries were down 3% on first quarter 2012, as higher urea and NPK blend sales did not fully offset lower urea-ammonium nitrate (UAN) and phosphate trade sales," Yara explained. "Urea sales increased by 4%, mainly reflecting higher sales of Qafco urea in Brazil and North America. Sales of NPK blends increased 16%, driven by higher sales in Brazil where the market improved compared with a weak first quarter 2012.

"Compound NPK deliveries were down 2%, but deliveries of Yara-produced compound NPK increased by 4%. Nitrate sales were in line with last year, as increased European deliveries were offset by lower deliveries to markets outside Europe, especially Brazil where sales to the sugar cane and citrus segments were lower than last year.

"UAN sales decreased by 19% mainly due to reduced product availability from the Belle Plaine plant. Total European sales were in line with last year, with season-to-date deliveries 6% ahead. Sales outside Europe were down 6%, mainly due to lower phosphate trade sales.

"Sales volumes in equity-accounted investees increased with new volumes from the Qafco 5 and 6 expansions and the return of production in Libya. Yara’s sales of Qafco and Lifeco produced urea increased by 60% from first quarter 2012."

Turning to the future, Yara said the global farm margin outlook and incentives for fertilizer application remain "strong", while "start-ups of new nitrogen capacity outside China continue to be delayed, and gas curtailments impacting existing capacity remain an issue for several countries".

"Global nitrogen demand was strong through the first quarter, as higher North American and European buying activity kept prices higher than a year ago despite increased supply from China and elsewhere," Yara said.

"However, the higher northern hemisphere imports so far this season combined with a late spring both in Europe and North America has seen prices soften in March and April. In contrast, North American nitrogen prices increased strongly during first half 2012, amid favourable spring planting conditions and low buying activity earlier in the season.

"Following a slow start to the 2012/13 season, western European nitrogen fertilizer industry deliveries increased in the fourth quarter and were stable in the first quarter, leaving season-to-date deliveries 4% ahead of last year. Yara's European deliveries were impacted by poor weather in March, but have recovered so far in April as planting conditions have improved."

Meanwhile, Yara on Monday confirmed it is still waiting for its potential acquisition of Bunge's fertilizer business in Brazil for $750m to be approved by Brazilian regulators, though it hopes to obtain the green light in the second half of 2013.

The deal for Bunge, which operates 22 blending units in Brazil and delivered 4.8m tonnes of fertilizer products in 2011, was announced last December. It includes a long-term fertilizer supply agreement between the two firms.

"Closing of the deal is subject to approval of Brazilian competition authorities (CADE) and other customary approvals," Yara said on Monday. "The CADE approval process has a statutory maximum duration of 330 days from the date of signing. In case of major remedies imposed on Yara in connection with competition authority clearance, Yara may terminate the agreement with Bunge, subject to paying Bunge a termination fee of $47m."

Earlier on Monday, Yara reported a 25% slide in first quarter net profit to NKr2.26bn on a weaker dollar and one-time gain in the year-ago period. Revenue for the three-month period slipped to 20.6bn, down from 20.9bn in the first 13 weeks of 2012.

"Yara reports a strong first quarter with stable margins and sales volumes," said Yara president and CEO Jorgen Ole Haslestad. "Our production increased due to the Qafco expansions, the Lifeco re-start, and a record production performance in Yara's NPK plants in the first quarter."

($1 = €0.76, $1 = NKr5.81, €1 = NKr7.60)

By: Richard Ewing
+44 208 652 3214

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