Lower prices drive down Yara Q1 profit despite higher volumes

Tom Brown

30-Apr-2014

(updates throughout, adds sector detail, analyst comment and 2014 outlook)

Yara LONDON (ICIS)–Yara International’s net profit for the first quarter of 2014 fell 21.4% year on year despite strong demand and increased volumes, due in part to falling prices across its product lines, the Norway-based fertilizer producer said on Wednesday.

The company’s net profit for the quarter fell to Norwegian kroner (NKr) 1.77bn (€213.25m) despite a 4.9% year-on-year increase in sales to NKr21.7bn and a 13.2% increase in volumes to 8.39m tonnes.

First-quarter earnings before interest, tax, depreciation and amortisation (EBITDA) declined 14.2% year on year to NKr3.59bn, while operating profit fell 19.5% to NKr2.27bn, Yara added.

The impact of price falls during the quarter was mitigated by lower raw materials costs compared to the same period in 2013. Yara also noted lower average oil and gas costs and European gas and oil costs, to $8.10/MMBtu (million British thermal units) and $11.30/MMBtu respectively.

Strong demand in Europe and Latin America helped to offset increased supplies of some materials from China, according to Yara CEO Jorgen Haslestad.

While global commodity nitrogen markets have been impacted by increased export supply from China, healthy demand in both Europe and Latin America has supported value-added premiums,” he said.

The company also noted a trend of rising food prices compared to sloping price levels in early 2013, particularly for grain, which it attributed to concerns over the size of the 2014/15 crop following the harsh winter and late spring in North America.

Stronger northern hemisphere demand for urea during the quarter helped to pull prices up from the levels seen in the second half of 2013, but this fillip was capped by lower pricing and export tax levels for the material in China, Yara said. Average urea selling prices dropped 16% year on year to $338/tonne FOB (free on board) Black Sea.

Reduced US demand for ammonia has led to excess supply and production curtailments, although the conflict in Ukraine has helped to balance out the market to an extent, but prices for the material were still down
22% year on year to $438/tonne FOB Black Sea during the quarter.

Phosphate fertilizer demand improved during the quarter compared to late 2013, with prices rising 30% quarter on quarter, but remaining 3% below first-quarter 2013 levels at $475/tonne FOB US Gulf.
 
Calcium ammonium nitrate (CAN) prices also fell 2% year on year to $345/tonne CIF (cost, insurance, freight) Germany, and phosphate rock prices fell 29% compared to the first quarter of 2013 to $114/tonne FOB Morocco. Total production fell 0.9% during the period to 6.38m tonnes, it said.

US-based analyst Bernstein Research said that the company’s NKr7.03 earnings per share excluding special items for the quarter was almost double its forecast for the producer, and that Yara’s volume and product mix impact was much better than it had expected.

However, long-term structural issues for the company remain, it added.

“We have become much more concerned about several near-term issues impacting earnings. Yara’s key product prices have fallen further and faster than we expected in recent months,” Bernstein said in an analyst note.

“We are also more concerned about long term volumes and margins. We see significant overcapacity when we couple our new analysis of demand growth with the wave of new supply and its low operating and capital costs,” it added.

Yara noted that lower margins and prices in late 2013 had seen some of its commodity nitrogen plants come close to curtailment, although pressure on ammonia and urea production was eased by lower European gas prices.

“Yara will continue to evaluate the need for temporary or permanent capacity curtailments on an on-going basis, linked to both market price developments and investment decisions,” Yara said, noting that cost efficiency improvements and Latin American growth are key focuses for 2014.

Additional reporting by Pearl Bantillo.

 (€1 = NKr8.30)

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