By Kjetil Malkenes Hovland
OSLO--Yara International ASA (YAR.OS) Chief Executive Officer
Jorgen Ole Haslestad said Friday he didn't expect urea prices to
drop much further, as the Norwegian fertilizer producer missed
second-quarter expectations amid record sales volumes countered by
low prices.
"This is because urea prices have fallen more than 30%," Mr.
Haslestad said in an interview. "There is an oversupply in the
market, we see that both for steel, aluminum and paper. There are
too many commodities available. China has a fertilizer overcapacity
of at least 30%."
Yara's second-quarter net profit was 1.87 billion Norwegian
kroner ($313.2 million), compared to NOK2.8 billion a year ago and
expectations of NOK2.11 billion. Earnings per share was the lowest
since 2010 at NOK6.68.
Despite a strong increase in Chinese urea production and exports
this fertilizer season, Mr. Haslestad didn't expect urea prices to
fall much lower from the current level, as production costs in
China and Ukraine didn't allow it.
"We think we have reached a cost level where it's hard to
imagine [prices] moving down very much further," he said,
acknowledging that urea prices were close to a floor. "We believe
so."
Yara's raw material, energy and freight costs soared 17% on the
year to NOK17.9 billion in the second quarter, on the back of
higher volumes.
"This is mainly due to higher volumes. The production increased,
and then you add increased raw material costs, both for gas,
phosphate and potassium. Energy prices also increased, by about
NOK230 million," Chief Financial Officer Torgeir Kvidal said in an
interview.
The company said it expected lower gas prices in the coming
quarters, with third-quarter European energy costs in line with
last year, and NOK100 million lower on the year in the fourth
quarter.
The company is unlikely to continue delivering record volumes
into the next quarter, as its global inventories are 9% lower than
a year ago, Mr. Kvidal said.
"The record [2Q] deliveries were due to stock build-down. We
can't keep on doing that, we are close to an optimal operational
level," Mr. Kvidal said.
Yara posted a net currency loss of NOK409 million in 2Q, partly
due to a stronger U.S. dollar versus the Norwegian krone at the end
of the second quarter. Yara benefits from a stronger dollar because
its products are priced in dollars, but its dollar-denominated
loans become more expensive.
"That's a currency loss I'll gladly take," said Mr. Kvidal. "We
don't want to avoid [the dollar exposure]. What we want is to hedge
against a [potentially] weakening dollar. A depreciating dollar
hurts our business, but makes our financing easier because we have
dollar loans."
Write to Kjetil Malkenes Hovland at
kjetilmalkenes.hovland@dowjones.com