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Nitrogen industry faces 'long-term oversupply situation', Yara warns

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Yara International shares soared nearly 7%, despite the nitrogen group warning of a long-term industry "oversupply", as it revealed that weak fertilizer prices had hit its profits by less than investors had expected.

The Norwegian-based group flagged that falls in nitrogen values, stoked by output increases in countries such as Algeria, Egypt and the US, have got so low that even some Chinese producers – long the market's bugbear thanks to competitively-priced exports – are struggling.

"Recent increases in coal prices have added to the cost pressures on Chinese urea producers, resulting in lower production rates," Yara said, if adding that "for the most important grade, anthracite coal, prices have only increased modestly".

Export prices of about $200 a tonne "appear to represent a break‐even level for high‐cost Chinese producers", Yara said, reporting that prices, as measured in the key Black Sea market, had averaged $183 a tonne in the July-to-September quarter, a drop of 32% year on year.

'Oversupply situation'

Chinese urea exports, at 6.8m tonnes for the first eight months of 2016, were down some 20% year on year.

"Ongoing urea capacity increases in the US and North Africa are partially displacing Chinese urea exports, leading to structurally lower prices in most locations compared with Chinese prices," Yara said.

And there was more to come from the wave of investment in fresh capacity, in part stoked by the fracking wave in North America which has released large supplies of low-priced gas. Nitrogen plants require a ready source of energy, typically gas in the west, or coal in China.

"New ammonia plants have come onstream in Russia, Saudi Arabia and US, and with further capacity additions expected shortly in US," Yara said, flagging also programmes to grow its own output.

"The oversupply situation in our industry is expected to last for some time," said Svein Tore Holsether, the Yara chief executive.

Profits fall

The industry dynamics - which imply weak prices, given the comfortable supply prospects – underline "the need for" the cost cuts and rationalisation programme which Yara has trailed, and will announce full details on early next year.

Mr Holsether restated that the scheme would "deliver at least" $500m in profits improvements, at the ebitda (earnings before interest, tax, depreciation and amortisation) level.

The comments came as the group unveiled underlying ebitda of NOK2.97bn for the July-to-September quarter, a drop of 36% year on year, but above the figure of NOK2.85bn that investors had expected.

Revenues fell 22% to NOK23.92bn, but were again above the NOK23.68bn expected by analysts.

Yara shares stood 5.2% higher at NOK288.30 in morning deals in Oslo, having earlier touched NOK292.20.

By Mike Verdin

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