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Yara offers hope for end to nitrogen downturn - sending shares up 9%

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Yara International shares soared 9% after the world's biggest nitrogen fertilizer producer boosted hopes for an end to the downturn in nitrogen prices, offsetting disappointment at a bigger-than-expected drop in profits.

The Norwegian-based group unveiled underlying earnings before interest, tax, depreciation and amortisation (ebitda) which, down 22% at NOK3.96bn, fell short of market expectations of a NOK4.04bn result.

"Weaker fertilizer prices were only partly offset" by gains from lower energy costs and currency movements, Yara said.

However, the Yara shares gained, soaring 9.2% at one point to NOK299.40, adding NOK7bn ($825m) to the group's stockmarket value, as the group offered some hope of an end to the nitrogen price downturn which has plagued the sector.

Yara's annual earnings have over the past four years remained well below the record NOK12.1bn reached in 2011.

China squeeze

Urea prices which in the April-to-June quarter averaged $198 a tonne in the key Black Sea market, down 29% year on year, have helped stem the tide of Chinese exports of the nitrogen-based nutrient.

China's urea exports fell 1.8m tonnes at 4.3m tonnes for the July-to-May period, the first 11 months of the 2015-16 fertilizer year.

"The lower urea price level reduced the export attractiveness for the Chinese producers," whose output growth is now slowing.

Urea export prices of about $200 a tonne appear "to represent a breakeven level for high-cost Chinese producers", Yara said.

'Stronger European order book'

Meanwhile, there were signs of weaker prices stimulating demand too, with industry nitrogen deliveries in western Europe, up 6% year on year in the April-to-June period, after a slow start to the fertilizer year.

And with lower prices boosting "pre-buying incentives" for farmers for next season, "Yara enters the third quarter with a stronger European order book than a year ago".

The group flagged "continued fertilizer demand growth" too in Brazil, where the boost to farm spending from strong exports and improved credit availability had "positively impacted demand in 2016".

As an extra fillip, Yara said it had identified benefits equivalent to a NOK500m boost to ebitda from an investigation announced in March into potential cost cuts.

Broker reaction

Yara's outlook comments were viewed by Pareto as "more positive than anticipated", with the broker adding that the rise in European pre-ordering had cut the threat of further nitrogen price cuts.

The broker kept a "buy" rating on Yara shares, as did Kepler Cheuvreux," which said that "in a difficult environment for agro input markets, Yara held on fairly well".

Yara shares stood 6.3% higher at NOK291.30 in midday deals.

By Mike Verdin

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