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Yara shares hit 13-month low, amid caution over Chinese urea

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Yara International shares hit a 13-month low despite the world's top nitrogen producer unveiling a bigger than expected dividend, as it cautioned over the continuing threat to urea markets from China.

The Norwegian-based group unveiled underlying earnings before interest, tax depreciation and amortisation (ebitda) for the October-to-December period of NOK3.51bn, a drop of 23% year on year, but in line with market expectations.

While after-tax earnings, at NOK434m, tumbled by 77% year on year, the extent of the decline was largely down to asset writedowns announced two weeks ago in a profit warning.

Yara unveiled a dividend rise of NOK2 to NOK15 a share for 2015 despite the weaker earnings, with the group saying that the rise – which took the payout to the equivalent of 51% of annual earnings, ahead of the company target of 40-45% - reflected its "strong financial position".

Nonetheless, Yara shares tumbled by 4.4% in early deals in Oslo to NOK307.60, their weakest since December 2014.

And while the stock recovered in later deals to NOK313.00, a drop of 2.7% on the day, that was more than the average for Oslo shares on a weak day for equities after Janet Yellen, chair of the Federal Reserves, warned that factors such as China and credit costs had become "less supportive" for US economic growth.

'Price fluctuations can be expected'

Yara itself highlighted the prospect of continued volatility in values of urea, a key nitrogen fertilizer, thanks to dynamics in China, the biggest exporter of the nutrient but also a high-cost producer.

While lower energy prices, and a weaker renminbi, have offered some support to Chinese producers' prospects, weaker urea values – down 21% year on year in the October-to-December quarter in the key Black Sea market– have kept margins under pressure.

"Recently recorded [Chinese export] prices below $200 per tonne are likely below a breakeven level for high-cost Chinese producers," Yara said.

However, it was "uncertain" how long losses needed to last "to trigger the necessary curtailments" to allow a tightening in world urea supplies.

"Price fluctuations can be expected also going forward, due to both seasonality and the significant spread in Chinese plants' cost bases," the group said.

Middle Eastern exports

In fact, Chinese urea exports - which "continue to be the main reference point for global nitrogen pricing going forward" - fell in the October-to-December period by 24% to 4.2m tonnes, limiting the rise in shipments for the full year to 200,000 tonnes, taking them to 13.8m tonnes

Agrium, the Canadian fertilizer group, earlier this week cited this slowdown in a more upbeat forecast for urea values, forecasting that Chinese shipments will retreat to some 12.5m-13.5m tonnes this year, offering "support" to prices.

However, Yara also cautioned that urea "export capacity has increased in Iran and Egypt, and from new plants in Algeria, Saudi Arabia and the US".

In ammonia - another major nitrogen fertilizer type, for which prices fell by 38% to average $355 a tonne in the October-to-December quarter - the group said that most producers "are still making positive margins", thanks to weaker prices of energy, a major raw material.

Urea price bounce

The comments actually come at a time of some recovery in urea prices, which Credit Suisse said bounced by 4% last week, amid talk of slow supplies from the key Black Sea port of Yuznyy" as sellers and buyers cannot agree on prices."

"However, producers now have negotiating advantage," Credit Suisse added.

Broker Raymond James, estimating the bounce in prices last week at 0.5%, said that "sentiment appears to be firming due to pent up seasonal demand".

A move by Banco do Brasil, Brazil's top bank, "to increase credit availability to farmers is also expected to help support fundamentals".

Nitrogen vs potash

Yara also flagged some more positive dynamics for the sector, including the prospect of a catch-up in purchases by farmers in Europe, where industry deliveries of nitrogen are down 5% year on year.

"Yara expects a catch-up in deliveries during the first half of 2016," the group said.

It also flagged greater resilience to low prices of demand for nitrogen, compared with phosphates and potash, "where many farmers can temporarily reduce application without many negative yield effects".

The group unveiled a 1.9% drop to NOK27.7bn n revenues for the October-to-December period, reflecting smaller volumes besides weaker prices.

By Mike Verdin

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