Investor Relations

Outlook 2010

Global agricultural markets are strong. Agricultural commodity prices increased through the second half of 2010 and into 2011 as demand prospects remained strong, while increased concerns were raised about agricultural supply following weather-related setbacks.

The FAO food price index has surpassed the earlier peak of spring 2008. With the price increases linked to a broad range of agricultural products, there are even stronger and more robust incentives to increase land productivity. 

The improved agricultural prices have led to a strong increase in fertilizer demand. Nitrogen fertilizer deliveries in Western Europe for the first half of the 2010/2011 season are 13 percent ahead of last season, but still four percent behind the 2007/2008 season, when farmers also had strong incentives to increase fertilizer application. To match the 2007/2008 season, deliveries in the second half of this season would need to be 20 percent higher than last year.

The supply situation of nitrogen fertilizer on the global market is tight. At current prices, global nitrogen fertilizer producers outside China have incentives to run at full capacity. China has announced a 110 percent urea export tax effective from Dec. 1, 2010, until the end of June 2011. Lower production and higher exports have led to a 25 percent reduction in urea deliveries to the Chinese domestic market during the second half of 2010.

It is hard to see this drop being sustainable, supporting strict export policy enforcement for the remainder of the season. Adding to the potential shortfall, no new export capacity is expected to start up early enough to supply demand for the current season.

Nitrate fertilizer prices have increased substantially in early 2011 and deliveries are running well, improving earnings prospects. In addition to a tight global nitrogen market, the nitrate premium over urea continues to be supported by low inventories and production constraints.

Looking ahead

Based on current nitrogen pricing levels, Yara aims to run its fertilizer production facilities at full capacity. Yara will add production capacity in 2011, with the urea expansion in Sluiskil, the Netherlands, expected on-stream in June and the Qafco-5 ammonia and urea start-ups at our Qatarian JV expected in the fourth quarter.

Tight markets for agricultural commodities with low price elasticity have potential for substantial price volatility. More weather-related setbacks could further increase short-term demand, while a significant drop in agricultural prices, e.g. in the event of improved harvest prospects, could produce a temporary slowdown in fertilizer deliveries. However, a substantial harvest increase in the 2011/12 season is needed merely to avoid a further decline in inventories, due to the recovery needed to compensate for the 2010/11 harvest shortfall.

A major part of Yara’s dry raw material purchases are re-negotiated yearly. While these costs over time normally are recovered in Yara’s finished fertilizer sale prices, a smaller negative impact is expected in Yara’s results in 2011 compared with 2010, particularly due to increasing phosphate rock prices through 2010.

Regional impact

Unrest in the Middle East and North Africa has increased crude oil prices and thus raised the cost of one-third of Yara’s European oil and gas purchased at prices directly linked to crude oil rates. Our Libyan JV has temporary stopped production as a result of the unrest.

Based on current forward markets for oil products and natural gas, Yara expects its energy costs to increase significantly from 2010 to 2011.

The necessary level of investment needed to maintain current capacity and implement basic productivity investments is estimated to be NOK 1,800–2,000 million per year.

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