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Yara shares fall, as it warns over Chinese boost to urea prices

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Shares in Yara International dropped nearly 6% after the nitrogen fertilizer giant unveiled below-forecast results and cautioned over hopes for the boost to urea prices from a slump in Chinese output.

Shares in the Norwegian-based company touched NOK316.20 in early deals in Oslo, wiping some NOK5.3bn ($620m) from the group's stockmarket value, before recovering some ground to stand at NOK317.30, down 5.5% on the day.

The drop followed Yara's announcement of underlying earnings before interest, tax, depreciation and amortisation (ebitda) of NOK3.34bn for the January-to-March period, down 34% year on year, and below the figure of NOK3.88bn that investors had expected.

Revenues dropped 9.7% to NOK22.64bn.

Lagging benefits

The group said that the decline in its performance reflected setbacks to ammonia output, thanks to "unplanned stops" at the Pilbara plant in Australia and Le Havre factory in France, besides "strong" forward contracting in urea, which had prevented it exploiting some recovery in prices.

Although estimating urea market prices, as measured in the Egyptian export market, at an average of $265 a tonne during the quarter, a rise of 13.7% year on year, while pegging ammonia values up 11.5% at $301 a tonne in the Black Sea, Yara said that the values it achieved fell for some products.

"Yara's average realised urea and nitrate prices decreased 5% and 15% respectively while realised NPK [compound nitrogen, phosphate and potassium fertilizer] prices decreased by around 10%, the company said.

"The realised prices for nitrates and urea reflect strong order books at the end of fourth quarter, resulting in first-quarter time lags compared with spot prices up to two months for nitrates in Europe, and up to three months for urea deliveries in North America."

China vs rest of the world

And while underlining the spur to world urea prices from a drop in output in China, which had fed through into a 60% slump to some 800,000 tonnes in the country's exports in the first two months of 2017, Yara underlined growing production potential elsewhere.

"Chinese urea production and export costs continue to be the main reference point for global nitrogen pricing, and these have increased over the past year," Yara said.

"However, the strong ongoing urea capacity increases outside China are weighing on global urea prices, a situation which could persist throughout 2017."

"Capacity additions outside China exceed consumption growth," the group said, forecasting additions of 8.1m tonnes this year and 3.6m tonnes in 2018, while flagging long-term demand growth at some 2.8m tonnes a year.

'High level of curtailments'

China's urea output - down 22% year on year over January and February - has been undermined by a squeeze on producers both from higher prices of anthracite coal, a key raw material for the country's nitrogen manufacturers, and a dent to domestic demand from crop price weakness.

"Production curtailments are maintained at a high level," Yara said.

"In addition to higher production costs, urea demand is negatively affected by lower crop prices in China, with lower corn price and acreage a major contributor."

Chinese prices of corn, a nutrient hungry crop, have been hurt by a subsidy shake-up which has ended a scheme of guaranteed values for farmers.

Domestic urea prices, meanwhile, averaged 21% more in the January-to-March period than a year before, in yuan terms, Yara said.

By Mike Verdin

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