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Urea price rally faces test from capacity boom, says Yara

The recovery in urea prices faces a reversal later this year, as fresh production capacity comes onstream, fertilizer giant Yara International said, as it unveiled a surprise quarterly loss, sending its shares tumbling.

The Norwegian-based group, the world's top nitrogen producer, backed observations from the likes of PotashCorp that high costs are stemming a flood of Chinese urea onto the world market, exports viewed as a big driver of a retreat in prices from 2012-16.

"Higher coal prices and logistical costs have increased production costs," Yara said, with values of coal, the key energy source for Chinese nitrogen plants, up some 75% year on year as measured by Ice south China coal futures.

"October and November urea production in China was reported 23% lower than a year earlier," Yara said.

Even though urea prices have been on the rise, reaching $250 a tonne on the Chinese export market, "production curtailments have also increased".

Urea price rally to reverse?

The group flagged that "Chinese urea production and export costs continue to be the main reference point for global nitrogen pricing".

Rise and fall of net additions in world urea production capacity

2020: 3.8m tonnes

2019: 5.7m tonnes

2018: 5.3m tonnes

2017: 8.0m tonnes

2016: 3.6m tonnes

2015: 2.3m tonnes

Source: Yara

Nonetheless, the boost to world urea prices China's dynamics will be muted by extra production capacity coming onstream in other countries, with additions, net of closures, expected to come in at 8.0m tonnes this year.

That increase - fuelled by the shale gas revolution which has sent output costs tumbling in countries such as the US - is more than twice the 3.6m tonnes added in 2016, besides being above the rise in demand which averages about 3m tonnes a year.

The impact will be stem the revival in world prices, which according to Credit Suisse are, at $250 a tonne, up 13% so far in 2017 alone, as  measured by Baltic Sea export values.

"Ongoing urea capacity increases outside China are partially displacing Chinese urea exports," Yara said.

"Incremental US capacity in particular may weigh on global urea prices later in 2017."

'Margins were significantly lower'

The comments came as the group unveiled a loss of NOK333 for the October-to-December quarter, its first fall into the black in eight years, and compared with earnings of NOK434m for the last three months of 2015.

Make-up of 2017 urea production capacity increase, by country 

1: US, 3.1m tonnes

2: Iran, 1.5m tonnes

3: Algeria, 1.2m tonnes

4=: Nigeria, 0.7m tonnes

4=: India, 0.7m tonnes

Kuwait will see a 0.6m-tonne reduction

Total (includes others): 8.0m tonnes

Source: Yara

Investors had expected the group to report earnings of NOK271m.

While the loss reflected largely currency moves, Yara chief executive Svein Tore Holsether also flagged the impact of "lower fertilizer prices, as the nitrogen price floor was tested during the quarter".

"Margins were significantly lower compared with a year earlier," both for the value of ammonia compared with that of the gas used to make it, and for the premium of some of the more refined nitrogen products, notably of nitrates.

Market reaction

While the results in some lines beat market forecasts - with earnings before interest, tax, depreciation and amortisation (ebitda) of NOK2.47bn, for instance, well ahead of the NOK2.26bn expected - the some investors expressed disappointment at Yara's payout.

The group proposed a 2016 dividend of NOK10 per share, behind the NOK12.70 per share that analysts had forecast.

Pareto Securities, terming the results "mixed", said that "we anticipate that the lower cash dividend may weigh on the share today".

Yara shares stood 7.0% lower at NOK320.10 in late morning deals in Oslo.

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