Investor Relations

Outlook 2011

Global agricultural markets are strong. Although the FAO Food Price Index ended the year 7% lower than the average for 2011, the latter was still 6% higher than the average index for any other calendar year. The price index increases reflect tight markets for a broad range of agricultural products, and create strong incentives to increase agricultural productivity. Assuming continued growth in global food consumption, the world needs another record grain crop in 2012 in order to prevent a further inventory decline.
Yara fertilizer bags

Improved agricultural prices in 2011 led to strong fertilizer demand during application season for all regions. However, the second half of the year saw lower Northern hemisphere pre-buying activity for spring 2012 application, likely impacted by macroeconomic turbulence, modestly declining crop prices, and a higher fertilizer price level. Nitrogen fertilizer industry deliveries in Western Europe for the first half of the 2011/2012 season were 18% behind a year earlier, following strong deliveries at the end of the 2010/2011 season and low pre-buying activity in the current season.

European deliveries have picked up since December, and Yara expects normal European nitrogen consumption in 2012. The supply of nitrogen fertilizer is limited, and the global nitrogen fertilizer industry outside China is already running at full capacity as all producers have positive margins. Furthermore, new export capacity start-ups during 2011–2015 and are expected to be in line with historical trend consumption growth.

China has implemented a 110% urea export tax, effective from 1 November 2011 through June 2012. Urea export volumes from China were halved in 2011 compared with a year earlier, following the introduction during the year of a stricter export tax system also for the low-season period 1 July – 31 October. A similar progressive export tax mechanism has been announced for the same period in 2012, which at February domestic urea price levels would indicate a swing export price around USD 400 per ton fob China from 1 July 2012.

Nitrate fertilizer prices increased in 2011 compared with a year earlier, reflecting both stronger nitrogen prices and a continued healthy crop price level. Nitrates continue to command a price premium over urea due to their agronomic benefits, and the size of the premium is largely linked to the strength of farm margins and thereby crop price levels, particularly wheat prices for Yara.

Looking ahead

Based on the current strength of nitrogen prices, Yara aims to run its fertilizer production facilities at full capacity. On this basis the company will increase production in 2012, with the urea expansion in Sluiskil fully on-stream following start-up in third quarter 2011 and the Qafco 5 and Qafco 6 ammonia and urea expansions ramping up during first and fourth quarter 2012 respectively. The Lifeco joint venture plant remains closed while preparations are made for a safe return to normal operation. Yara is targeting a third-quarter start-up, with full production by end 2012, contingent on natural gas supplies being available by the summer.

There is significant potential for high price volatility in the markets for agricultural commodities where supply is limited and customers have a low sensitivity to price changes. Weather-related setbacks in agricultural production could further increase fertilizer demand, while a significant drop in agricultural prices, e.g. in the event of improved harvest prospects, could lead to a temporary slow-down in fertilizer deliveries. However, a substantial harvest increase in the 2012/13 season will be required merely to avoid a decline in inventories.

A majority of Yara’s dry raw material purchases are re-negotiated annually. While these costs are typically recouped in Yara’s finished fertilizer sale prices over time, the company expects to record a smaller negative impact in its 2012 results compared to 2011, partly as a result of rising phosphate rock prices during the year. Yara’s energy costs are projected to increase in first half of 2012, compared with a year earlier based on current (8 March) forward markets for oil products and natural gas.

The necessary level of investment needed to maintain current capacity and productivity is estimated to be NOK 2 billion per year. In addition, Yara plans approximately NOK 1 billion of continuity and reliability investments per annum in the next 2–3 years.

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