FocusYara sees lower H2 gas costs in Europe, mulls Africa expansion

19 July 2013 16:25  [Source: ICIS news]

By Richard Ewing

LONDON (ICIS)--Yara expects European energy costs to fall in the second half of 2013 and is interested in constructing a fertilizer plant in Africa if it can secure a long-term gas agreement, senior executives of the leading fertilizer producer said on Friday.

The Oslo-headquartered company expects current third-quarter European energy costs to be "in line with last year" and fourth-quarter energy costs in the region to be Norwegian kroner (NKr) 100m ($16.7m, €12.7m) lower than the final quarter of 2012, though it warned these "estimates may change considerably depending on future energy prices".

Speaking during a conference call following the release of the firm's second-quarter earnings results, Yara president and CEO Jorgen Ole Haslestad said the company was keen to explore new manufacturing opportunities in gas-rich countries such as Angola or Mozambique, subject to long-term gas supply agreements being reached with suppliers.

"We could potentially build a new fertilizer plant in Angola or Mozambique if we could secure a long-term gas agreement," he said. "We are targeting such regions for upstream and downstream growth, along with countries in Latin America and Europe."

Yara already has a presence in Africa through its 50% stake in the Lifeco nitrogen fertilizer plant in Libya. However, highlighting the challenges of investing in Africa, the firm noted that the "supply of power and utilities to the site [at Marsa El Brega] is not yet stable, and capacity utilisation is likely to run at approximately 75% capacity for the time being".

The company, which also owns a 25% stake in major Qatari ammonia and gas producer Qafco, revealed that Qafco recently renewed its natural gas supply contracts for plants I, II, III and IV.

Yara CFO Torgeir Kvidal said the four contracts – one for each plant – were renewed in the first quarter of this year but that the gas supply contracts for the newer Qafco V and VI plants are "longer-term" agreements and so not yet up for renewal, without providing further details.

Following a decent second-quarter performance, Yara remains upbeat about the rest of 2013 and beyond as farmers look to cash in on rising food prices through the use of fertilizers to boost crops such as corn and soyabeans.

"Incentives for fertilizer application remain strong," Yara said in its quarterly outlook. "Global farm margins are stronger than a year ago, with the June FAO food price index 5% higher than a year ago, while fertilizer prices are lower overall.

"The US Department of Agriculture estimates that global grain stocks-to-use will increase by 2% to 71 days during the 2013/14 season, as a result of improved weather conditions and strong fertilizer application. If realised, this projection would represent a positive development  towards the long-term challenge of increasing agricultural productivity."

Yara continued: "Global nitrogen demand was strong through the second quarter, but was met by a strong supply increase from China, with high exports earlier in the season and a build-up of port stocks during the quarter, ahead of the new season export window.

"As a result, nitrogen prices globally are lower than a year ago, when supply was lower and limited pre-buying took place earlier in the season."

Turning to Europe, Yara said nitrogen fertilizer industry deliveries for the 2012/13 season in western Europe were 6% higher than a year earlier, primarily reflecting higher opening stocks in the 2011/12 season.

"Second-quarter nitrogen fertilizer industry deliveries in Europe were up 14% reflecting strong demand for immediate consumption, following poor weather in March," the firm noted.

"The European nitrogen fertilizer industry enters the 2013/14 season in Europe with lower stocks, in Yara’s case 19% lower than a year ago. European farm margins remain strong, with somewhat lower cereal prices but significantly higher dairy prices than a year ago.

"Yara’s value-added nitrate and nitrogen phosphorus potassium (NPK) products continue to deliver strong and stable volumes, and margins which are relatively less exposed to swings in commodity nitrogen, phosphate and potash markets.

"Continued strong food prices combined with lower commodity fertilizer prices increase the relative value of more efficient fertilizer types like nitrate and NPK. Increased focus on food chain efficiency and quality are expected to reinforce this trend going forward."

Earlier on Friday, Yara said its second-quarter net income fell by 33.1% year on year to NKr1.87bn, partly on foreign exchange losses, although revenue climbed 7.54% year on year to NKr23.1bn. Operating income for the quarter fell by 23.1% to NKr2.55bn, it stated.

For the first six months of this year, Yara’s net income was down by 28.9% year on year at NKr4.12bn, while revenue was up by 3.28% to NKr43.7bn.

"Yara reports a strong second quarter with record deliveries," Haslestad added. "While we have seen a considerable price decline for urea – almost 30% – our value-added product prices are broadly in line with a year ago, as continued strong food prices motivate farmers to optimize productivity with higher-efficiency fertilizer."

The producer said global urea demand was strong during the second quarter, "although many markets were well ahead on supply compared with second quarter last year, due to the large increase in imports from China earlier in the season".

"For July through May, China has this season exported 7.9m tonnes, up from 3.0m tonnes in the same period last season. Supply additions excluding China have not been significant, with capacity additions in Qatar and Vietnam offset by supply problems in Iran and Egypt.

"The average price at $342/tonne FOB (free on board) Black Sea, 27% lower than second quarter last year, clearly demonstrates that the market tightness seen during second quarter last year was not repeated this year."

Yara added that lower phosphate fertilizer demand from the vast Indian market continued to impact market dynamics but demand remained strong in most other regions.

This weak demand for phosphates such as di-ammonium phosphate (DAP) and mono-ammonium phosphate (MAP) had contributed to a fall in ammonia prices although the slides was not as great as for urea prices.

($1 = €0.76, $1 = NKr5.98, €1 = NKr7.96)

By: Richard Ewing
+44 208 652 3214

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