All Posts from October 22, 2021

Yara Posts 3Q Net Loss, EBITDA Beats Estimates, Further Capacity Cuts Possible

Yara International ASA, Oslo, reported a third-quarter net loss of $143 million versus a year-ago net income of $340 million. The net loss includes a $355 million impairment of the Salitre phosphate assets in Brazil – which are in the process of being sold to EuroChem Group AG (GM Aug. 6, p. 1) – as well as a currency translation loss of $148 million.

Adjusted for currency effects and special items, the basic earnings per share was $1.33, compared with $0.88 per share the previous year.

Third-quarter revenues increased 46 percent, reaching $4.49 billion, up from the year-ago $3.08 billion, mainly reflecting higher product prices in the period.

Adjusted EBITDA was 37 percent higher year-over-year to $765 million, up from $558 million, beating the average analyst estimate of $743.7 million (range $624.0 million to $845.0 million, Bloomberg Consensus). The company cited higher product prices, which more than offset increased energy costs and despite the recent ammonia production curtailments, as behind the boost in adjusted EBITDA.

Yara in recent weeks has curtailed production at several of its European ammonia facilities as a result of soaring gas prices. As per its Sept. 17 announcement, the company confirmed current curtailments amount to around 40 percent of its European ammonia capacity, including both scheduled maintenance and market-driven curtailments (GM Sept. 17, p. 1).

The company’s third-quarter ammonia production was down by almost 7 percent, to 1.82 million mt from the year-ago 1.95 million mt.

Yara Ammonia Curtailed Production Capacity (million mt)

Source: Yara

However, at its earnings release on Oct. 20, Yara said the impact of its European ammonia curtailments on its finished fertilizer production has been limited so far. According to Yara International President and CEO Svein Tore Holsether speaking at a company earnings call on Oct. 20, the company so far has been able to maintain finished fertilizer production capacity in Europe “at almost full capacity.”

Yara’s global fertilizer deliveries in the third quarter were 2 percent lower than a year ago, at 7.57 million mt versus 7.76 million mt. Third-quarter European fertilizer deliveries were down 9 percent, to 2.11 million mt, versus 2.3 million mt a year earlier.

Yara reminded that its operational flexibility allows its unprofitable ammonia production to be curtailed and replaced with sourcing from its own captive plants outside of Europe, and from the company’s global trade network, including third-party suppliers. Yara is the world’s biggest trader of ammonia, and has ammonia ships.

Holsether also reminded analysts that the company even in normal times is net short of ammonia in Europe, meaning at any given time it sources ammonia from external sources.

“Structurally, the company is normally long in the range of 0.5 million mt to 1.0 million mt of ammonia globally; with the European short-listing, that is probably a bit larger than that. So let’s say around 1 million mt thereabouts, maybe a bit more,” he said.

The CEO said at the present time Yara is able to source all of the ammonia it needs.

But he said the company is closely monitoring the situation going forward. “We are committed to producing and supplying our customers with finished products, provided sufficient margins are available,” Holsether told analysts.

“We have been able to do that so far, but it is certainly possible that we will need to make further adjustments going forward,” he said.

But Holsether added that “the higher energy costs have come with higher nitrogen prices.

“So the situation can be both ways,” he said. “Even though the ammonia margins in most cases these days are negative, the fully integrated margin so far has been good enough for us to continue with the finished product.”

Based on current forward markets for natural gas as of Oct. 17, without the current production curtailments, Yara put its gas costs for the fourth quarter of this year and the first quarter of 2022 at $850 million and $950 million, respectively, higher than a year earlier. However, the company said its European ammonia curtailments are reducing purchased gas volumes, and the cost impact will therefore depend on the duration of the curtailments.

Yara normally purchases around 40 million mmBtu per quarter in Europe. Responding to an analyst’s question, Holsether said the company’s gas purchases in Europe are roughly down around 40 percent due to the current ammonia capacity curtailments.

But like many other fertilizer producers in Europe, Yara believes gas prices will come down in the spring.

Responding to an analyst’s question, Holsether agreed that the higher nitrogen fertilizer prices on the back of soaring gas costs has led to some demand disruption. But for more mature regions like Europe and the U.S., he believes this is probably going to be more marginal than in some other parts of the world.

The biggest impact of the current European natural gas prices will be in parts of the world where fertilizer cost development “now could mean the difference between applying fertilizer or not,” the CEO said.

Holsether said the impact of not utilizing nitrogen fertilizer is “immediate and huge. Annual nitrogen application is critical for crops. If you take grain, and you don’t apply nitrogen fertilizer for the season, then the first harvest drops by nearly 50 percent,” he said.

He noted nitrogen fertilizer provides food for around a half of the world’s population.

“European nitrogen production is essential to global food security, and we are concerned about the impact the current high European natural gas prices will have, especially on the world’s poorest regions,” the CEO said.

According to Yara, European production of finished nitrogen products accounts for about 15 percent of global nitrogen production (in nutrient tons).

“However, Yara will do its utmost to supply farmers and support global food production. The current situation clearly demonstrates the need for more resilient food supply chains, and I call on the authorities, international organizations, and food value chain players to work together to secure global food supply,” said Holsether.

Yara reported an 8 percent decline in net income for the nine months to Sept. 30, to $410 million, down from the year-ago $444 million. Revenues grew 32 percent, to $11.58 billion, up from $8.80 billion. Adjusted for currency effects and special items, the basic earnings per share was $3.54, compared with $2.32 per share the previous year.

Nine-month EBITDA adjusted for special items came in 29 percent up on the same prior-year period, reaching $2.13 billion, up from $1.65 billion.

Looking ahead, Yara said the global nitrogen outlook remains strong, driven by strong demand fundamentals, low global inventories, and limited pre-buying so far this season.

The company noted industry consultant projections show increased nitrogen capacity growth in 2022, but it said similar to 2021, actual production growth is expected to be lower, below historical trend consumption growth.

Yara sees sustained nitrogen curtailments in Europe over the winter as likely leading to an even tighter market situation in 2022.

The company on Aug. 1 signed a Share Purchase agreement (SPA) with EuroChem Group AG, Zug, Switzerland, to sell its Serra do Salitre phosphate project in Brazil for a cash consideration of $410 million, subject to final purchase price adjustments (GM Aug. 6, p. 1). Brazil’s Administrative Council for Economic Defense (CADE), the country’s antitrust regulator, gave the deal the green light last month (GM Sep. 10, p. 1), and Yara expects the transaction to be completed within six months from the date of the SPA signing, subject to other local regulatory approvals and customary closing conditions.

Yara said the recoverable value of the Salitre assets was determined to be lower than their carrying amount, and an impairment of US$385 million was recognized immediately before reclassification to held-for-sale. At the end of the third quarter, US$31 million of the impairment was reversed, mainly due to U.S. dollar/Brazilian real currency development. The impairment for the third quarter was therefore US$355 million.

Yara has reduced its full-year 2021 capex guidance by about $200,000 from the previous $1.3 billion for the 12 months, to $1.1 billion. However, it said this is essentially phasing into 2022. Including the phasing, FY2022 capex guidance is $1.4 billion. The capex guidance includes scheduled plant turnarounds as well as some planned growth projects.

The company said it will consider further cash distributions in the coming quarters, in line with its capital allocation policy.

Yara Production and Deliveries

¹ Including Yara share of production in equity-accounted investees, excluding Yara-produced blends

Yara Deliveries

¹ The Africa and Asia business also includes Oceania

² Pure product equivalents

³ Including AN Solution

⁴ Including sulfuric acid, ammonia, and other minor products