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Currency hit, China caution take shine from Yara results

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Shares in Yara International dropped after the fertilizer giant unveiled a dent to its profits from a $233m foreign exchange loss, and underlined the dent to nitrogen price prospects from a "surge" in Chinese exports.

The strength of the dollar - which was 27% higher against the krone year on year - and a 33% drop in Yara's gas and oil costs thanks to the tumble in energy markets, proved a boon to the Norwegian-based group's operating results.

Yara unveiled underlying earnings before interest, taxation, depreciation and amortisation (ebitda) up 50% at NOK5.74bn ($732m) for the January-to-March quarter, ahead of market forecasts of a NOK5.42bn result.

Revenues rose 28% to NOK27.77bn ($3.54bn).

Torgeir Kvidal, Yara's acting chief executive, flagged "higher deliveries and improved margins, reflecting continued lower natural gas cost and a stronger US dollar".

One-off hits

However, Yara's reported earnings dropped 59% to NOK729m, reflecting in part a witedown at its Libyan Lifeco joint venture unveiled earlier this week, but also a NOK1.83bn ($233m) "foreign exchange loss".

"Foreign exchange effects include a significant currency impact due to the appreciation of US dollar compared with Norwegian krone," Yara said.

The group's earnings fell well short of the NOK2.71bn that investors had expected, excluding one-off charges.

'Tightness did not materialise'

Furthermore, the group highlighted the continued threat to nitrogen prices from Chinese producers, whose urea shipments soared to 3m tonnes in the first two months of 2015, up from 1.3m tonnes in the same period of last year, a surge spurred by lower export taxes.

"Global nitrogen demand remains strong, but the market has not been fully able to absorb the significant increases in Chinese urea exports," Yara said.

While political unease and gas supply problems curtailed production at Egyptian and Ukrainian urea plants, these "were not sufficient to balance the market".

"As a result of the surge in Chinese exports, main import markets have been well supplied, and the market tightness often seen in the first quarter did not materialise this year."

'Erased margins'

Indeed, the average price that Yara achieved for urea during the quarter fell by 13% to $295 a tonne.

Nor has sticking with ammonia, rather than upgrading to urea, offered guaranteed protection.

"After a period of significant upgrading margin… lower urea prices erased those margins towards the end of the quarter, meaning that ammonia pricing is close to the ceiling set by the urea market," said the group, which sold 602,000 tonnes of ammonia in the latest quarter, up 35% year on year.

Yara cautioned that China "will be key to global nitrogen pricing going forward".

In particular, the price of anthracite coal, the main raw material for many Chinese urea producers, and the exchange rate of the yuan to the dollar "will be key for global pricing of commodity nitrogen".

European, US prospects

Yara was upbeat on prospects for a recovery in European sales volumes, seeing a drop of 3% in its own deliveries to the region in the January-to-March period as being down to a late spring.

"Crops are currently benefitting from favourable growing conditions and [nitrogen] application is expected to take place later compared to last year when the spring came early," the group said.

"Yara deliveries in Europe have been running well in April."

However, it was less upbeat over prospects for the US, even after a stronger start to 2015 for industry deliveries, up 3% year on year in the January-to-March period.

"Given the forecasted reduction in corn and wheat acreage, the US market appears well supplied going into second quarter."

US farmers are switching considerable acreage towards soybeans, which fix their own nitrogen from the atmosphere.

Yara shares tumbled 4.8% to NOK393.7 in early deals in Oslo, before recovering some ground to end at NOK404, down 2.3% on the day.


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