Yara released its earnings report for the second quarter yesterday, featuring a long tale of woe for nitrogen margins based around the argument that nitrogen commodity prices are depressed due to oversupply.
Still, this won’t stop Yara from opening its new world-scale ammonia plant later this year, which remains on schedule at Freeport in Texas.
I noted the way Yara’s management position themselves as having predicted and prepared for this situation:
“Our industry is facing strong over-supply of urea and other commodity nitrogen products, and we have expected this development for some time. We are therefore focused on improving our operations, and making growth investments primarily within premium fertilizer and industrial applications where margins are more stable.”
Tore Holsether, President and CEO of Yara, 2Q 2017 Earnings Announcement, 07/18/2017
To give credit where it’s due, they were hardly alone but they did predict this, back in 2013, when they cancelled the brownfield that had been approved for Belle Plaine, SK. The cancellation was partly due to the construction cost escalations seen throughout the industry but “there is also a significant risk of future nitrogen over-supply in North America as new project initiatives are announced, despite deteriorating project profitability.”
According to its earnings presentation, however, the Freeport plant is the one major piece of capital expenditure that Yara classes as a high risk (high “exposure to commodity nitrogen prices”) in this market.
Yara has managed this risk, or designed for it, by making its Texas investment an extremely low-cost expansion, primarily by relying upon a hydrogen feedstock, delivered by Praxair’s new pipeline, and thus avoiding the need to construct the entire front-end of the plant. This cut the capex by approximately 25%.
Yara is expanding capacity in several plants at a significantly lower capital expenditure per capacity tonne compared with benchmark greenfield expansions. Most of these projects will be completed during 2017 and 2018.
Yara: 2Q2017 Earnings Report, 07/18/2017
As I wrote yesterday, the Yara / BASF brownfield will be one of the lowest-cost capacity expansions, only costing roughly $910 per metric ton of annual ammonia capacity (this is less than every other new plant proposed or built across North America in the last few years, except the Phibro plant planned for Indiana, which could cost less than $900 per ton capacity).
For those curious about the global supply / demand balance and its impact on pricing, the earnings report itself provides some interesting depth:
From China, export costs are higher than a year ago, primarily due to increased coal prices. This cost inflation resulted in substantial production curtailments in China, and supported the urea market. Relatively slow demand and increased production outside China, with new plants starting production have reduced the need for Chinese urea exports … The worsening supply/demand balance has effectively offset the increase in Chinese production costs, leaving urea pricing stable compared to second quarter last year …
Strong urea capacity increases outside China are weighing on global urea prices, as non-Chinese fob prices are reduced in order to displace Chinese exports. Yara expects this situation to persist also into 2018, given the significant number of new plants entering the market over the next year.
Yara: 2Q2017 Earnings Report, 07/18/2017
For more on Yara’s joint venture with BASF, see my Research Note for Freeport, TX.