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".
The group flagged that "Chinese urea production and export costs continue to be the main reference point for global nitrogen pricing".
2020: 3.8m tonnes
2019: 5.7m tonnes
2018: 5.3m tonnes
2017: 8.0m tonnes
2016: 3.6m tonnes
2015: 2.3m tonnes
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."
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
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.
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.
By Mike Verdin