Yara cautioned European farmers against delaying fertilizer purchases, despite elevated prices, flagging a risk of supply “shortages” and even higher bills, especially if supplies of natural gas dry up.
The Norwegian-based fertilizer giant estimated at 19% the dip in industry sales of nitrogen nutrients in Europe in the 2021-22 season, as ended last month, and said that buying for 2022-23 “has been limited so far”.
The price of urea, as measured in the Egyptian export market, averaged $919 per tonne in the April-to-June quarter, up 144% year on year, with Yara achieving $695 per tonne in Europe for nitrates, up by 137% year on year – despite weakened farmer demand.
European deliveries fell 22% by volume in the quarter, “mainly reflecting lower demand due to high prices”.
‘Risk of price spikes’
Nonetheless, farmers, whose “profitability remains high” thanks to elevated agricultural commodity prices, face a threat of paying more for fertilizers, or going without, if they hold-off purchases.
“Nitrate inventories in Europe are at a historically low level” despite the weaker industry deliveries, as producers mothball capacity to save on soaring prices of natural gas, a key raw material for the region’s nitrogen manufacturers.
Yara reported “significant curtailments” among Europe’s nitrogen manufacturers, including the equivalent of 1.7m tonnes of its own capacity, in finished fertilizer terms.
It added that “there is a risk of nitrogen shortages and price spikes if [farmer] buying is delayed”.
This risk was “especially” large “if natural gas availability continues to deteriorate”.
‘Cannot produce at negative margins’
Europe faces the risk of a squeeze on the Russian gas it relies on for most of its supplies, should Moscow retaliate for the sanctions placed on the country for its invasion of Ukraine.
Russia piped 4.7bn cubic metres of gas to Europe last month, one-third of levels in June 2021, according to S&P Global, after a squeeze blamed on technical snags.
European gas prices for delivery this winter, at E182 per megawatt hour, are nearly as high as in the early-March surge which followed the start of the Ukraine war.
Yara said that its gas costs for the current quarter would $1.10bn higher than a year before, with those for the October-to-December period up $800m year on year.
With gas price rises less severe in some other major nitrogen producing regions, including North America, Yara said that it would “where possible use its global sourcing and production system to supply customers”, but added that it “cannot produce at negative margins”.
High nitrogen prices – which Yara said are also being underpinned by a squeeze on shipments from China, a key urea supplier, as well as exports from the former Soviet Union in the face of the Ukraine war and Western sanctions on Russia – are encouraging investment in extra capacity.
“Industry consultant projections show increased nitrogen capacity additions in 2022 and 2023,” pegged by Cru at 5.7m tonnes and 5.0m tonnes respectively.
That is up from Cru forecasts three months ago of 5.1m tonnes in extra capacity opening this year, and 4.3m tonnes in 2023, and above the 3.2m tonnes in volumes needed to meet underlying annual global consumption growth.
However, forecasts show “limited supply growth thereafter”, of a total of 3.9m tonnes between 2024 and 2026, said Yara, adding that the “demand outlook remains strong driven by solid demand fundamentals”.
The comments came as Yara reported earnings up 24% year on year at $667m for the April-to-June quarter.
Revenues jumped by 63% to $6.45bn, as higher prices more than offset weakened sales volumes in the Americas and Africa& Asia regions, as well as in Europe.
Yara’s overall fertilizer deliveries for the quarter, at 5.79m tonnes, were 21% below those of the same period of 2021.
Although Yara faced higher gas bill for the quarter, up by $1.02bn year on year, it achieved a 90% jump to $1.48bn in underlying ebitda, ahead of market expectations of a $1.39bn figure.
Yara shares, after rising to NOK412.10 in early deals in Oslo, fell back to NOK402.10 in late morning trade, down 1.0% on the day.