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Chinese cutbacks supporting urea prices, and volatility - Yara

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Yara International flagged a boost to urea values, and price volatility, from Chinese production setbacks, even as the fertilizer giant unveiled below-forecast results and cut its dividend, sending its shares lower.

 

The Norwegian-based group - reporting urea prices, as measured in the Egyptian export market, at $272 a tonne in the October-to-December period, up 16.7% year on year – highlighted the market impact of a halving to 1.9m tonnes in Chinese exports in the July-to-December half.

 

Terming Chinese urea prices “a key reference point for global nitrogen pricing”, Yara flagged that higher output costs in in the country, thanks to elevated costs of anthracite coal, had “resulted in significant curtailments and reduced exports”.

 

Manufacturers in most other countries use gas as their main raw material for what is, in nitrogen fertilizer production, an energy intensive process.

 

The Chinese setbacks were “offsetting oversupply elsewhere” prompted by a rash of plant investment in the likes of Iran and the US, spurred by weakened natural gas costs.

 

However, after reaching 6.6m tonnes in annual output last year, the “surge of new capacity is past its peak”, with a further 4.0m tonnes to be added in 2018, roughly in line with typical annual demand growth, and a further 2.6m tonnes next year.

 

‘Higher volatility’

 

China’s downturn in urea export supplies is “also driving higher price volatility” in the world market, “as global market demand for Chinese product fluctuates through the year”, Yara said,

 

“Urea from other locations is currently priced at a discount to Chinese product, but only a modest improvement in global demand could push global prices closer to Chinese levels.

 

“Such a scenario is not unlikely, given the approaching spring application period on the northern hemisphere.”

 

‘Import catch-up need’

 

Indeed, the group noted in particular an “import catch-up need in India”, given a urea stocks drawdown suggested by a 4.0% rise to 23.3m tonnes in sales in the April-to-December period, during which the country’s own output fell by 2.7% to 17.8m tonnes.

 

India’s urea imports over this period totalled 5m tonnes, “similar to same period the previous year, resulting in lower inventories at end December than a year earlier”, Yara said, in comments which echoed those earlier this week from Canada-based fertilizer maker Nutrien.

 

Jason Newton, the Nutrien head of market research, said that the group was a “little bit surprised that we haven’t seen India come back in [for imports], because it’s widely expected that they would be in in the last couple of weeks and it hasn’t happened.

 

“We do know that the inventories of urea in India are down significantly year-over-year, somewhere between 500,000 and 600,000 tonnes currently, which really supports the outlook for imports in the first half of the year.

 

Short of expectations

 

Yara’s comments came as the group unveiled earnings of NOK 846m for the October-to-December quarter, an improved on a NOK 333m loss a year before, on revenues up 7.2% at NOK 23.93bn.

 

However, adjusted earnings before interest, taxation, depreciation and amortisation (ebitda), while up 15.0% at NOK 2.85bn, came in sort of the NOK 3.24bn figure that investors had expected.

 

The group also unveiled a dividend of NOK 6.50 per share, down from NOK 10.00 paid for 2016, reflecting a full-year earnings figure which, at NOK 3.95bn, was down 38% year on year.

 

Yara shares tumbled 5.0% to a four-month low of NOK340.00 in early deals in Oslo, before recovering some ground to stand at NOK 347.90 in midday deals, down 2.8% on the day.

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