Yara International revealed it was considering a tie-up with BASF to build a "world scale" ammonia plant in the US, as it revealed the pressure on the global nitrogen fertilizer market from soaring Chinese exports.
Norway-based Yara, the world's biggest nitrate fertiliser manufacturer, said that it was still discussing with BASF the details of the plant, which will be based in the US Gulf, although "location, capacity and other project parameters" are still under discussion.
The deal would give BASF greater control over its US supply chain for ammonia, while boosting Yara's presence in a North American market in which it is a relatively small player.
In fertilizer, North America accounted for 573,000 tonnes of sales in the July-to-September quarter, only 9.7% of the group total, with the traditional core European market taking 2.14m tonnes.
Latin America, where Yara has boosted its presence through the purchase of Bunge's Brazilian fertilizer business, became the group's most important market, with volumes of 2.38m tonnes.
Supply vs demand
The proposal comes amid a dash by nitrogen companies to expand in the US, where the growth of shale gas has provided the energy-intensive industry with a low-cost source of a key raw material, natural gas, although some plants, including those in China, use coal as an alternative.
CF Industries and Egypt's Orascom Construction Industries have also unveiled plans to build nitrogen capacity in the US, although concerns over the extent of the dash for gas has prompted Agrium to row back on its own expansion in the sector.
However, Yara estimated that world growth in nitrogen capacity outside China was scheduled to grow by 1.8% a year in 2013-17, once closure of obsolete plants was taken into account – a rate behind annual demand growth of 2.1%.
Beyond capacity additions in Algeria, where one plant opened last month and a further two are under construction "with unclear start-up timing…. there are limited greenfield capacity additions outside China scheduled for completion in the next two-to-three years", Yara said.
The announcement comes against a backdrop of rising competition in urea from China, which in the first eight months of 2013 exported 4.1m tonnes of the important nitrogen product – more than three times the 1.2m tonnes shipped in the same period last year.
The surge in exports - a reflection of increased capacity, lower coal prices and a lower export tax in China – has turned the global market "supply driven" and played a big role in undermining prices, Yara said.
However, the subsequent drop in urea values, to some $280 a tonne in the key Ukraine port of Yuznhy from some $360 a tonne a year ago, "implies an export price level from China unattractive for the highest cost producers there", the group said.
Lower Chinese urea production "in recent months", in the face of more stable coal prices, "indicates marginal plant profitability".
The comments came as Yara unveiled a 40% slump to NOK1.57bn in earnings for the July-to-September period, reflecting the drop in product prices, with Yara acknowledging that the ammonia market had turned "supply driven" too.
While revenues fell by only 1.0% to NOK20.6bn, they were kept steady by the inclusion of the Brazilian assets bought from Bunge.
By volume, sales rose 11.4% to 7.59m tonnes, but the average price of urea fell by 19.6% to $383 a tonne year on year during the quarter, and of ammonia by 41% to $430 per tonne.
Earnings before interest, taxation, depreciation and amortisation (ebitda) fell 23% to NOK3.22bn ($543m), in line with market expectations.
Yara shares rose by 2.2% to NOK242 in lunchtime deals in Oslo.