February 1, 2012

 

Credit Suisse cuts Yara International's shares rating

 

 

Credit Suisse slashed its rating on Yara International shares as it slashed forecasts for fertiliser prices by, in some cases, more than US$100/tonne, following a "weak Q4 and slow January" demand.

 

The bank delayed until 2013 its forecast for potash values returning above US$500 a tonne, noting "momentum in prices stalled at the end of 2011 due to caution farmer and dealer buying behaviour", and forecasting only a muted recovery in demand this year.

 

Indeed, world shipments are set to market time at 55 million tonnes in 2012, at the bottom of the 55-58-million-tonne range outlined by PotashCorp, the sector leader, last week.

 

"With distributors focusing on destocking in early first quarter 2012 and India facing budgetary and logistical issues, we expect 2012 potash shipments to remain only flat with 2011 levels," Credit Suisse said.

 

However, potash prices were at least gaining support from "strong supply side discipline", evident in production cutbacks of 1.7-2.5 million tonnes by PotashCorp and Russia-based Uralkali.

 

Prices of nitrogen and phosphate, the other major nutrients, had fallen by 20-40% thanks to the failure of these sectors - which unlike potash are not concentrated around marketing cartels – to curb supplies.

 

Phosphate prices "plummeted" in the last quarter of 2012, dropping in US Gulf ports by nearly 30% to US$470 a tonne, as lower crop prices and macroeconomic uncertainty prompted farmers to hold back on fertiliser applications.

 

And the outlook for a recovery in prices was "limited", despite prospects for a revival in demand during the northern hemisphere spring sowing period, thanks to additional supplies coming on stream at a time when producers are already sitting on ample inventories.

 

Besides the continuing ramp up of Saudi Arabia's Ma'aden project, "there is substantial new diammonium phosphate capacity" planned by Morocco's OCP and Brazilian manufacturers.

 

"Over the next few years, we anticipate a largely supply-driven market," Credit Suisse said.

 

And the nitrogen market faced a similar story, as a short-term rebound in prices of urea looked set to run into new supplies expected to "flood" the market.

 

With plants in countries from Algeria to Venezuela set to come onstream this year, "it is becoming clear that the market will be massively oversupplied by 2013-14", by some 10 million tonnes next year, the bank said.

 

The nitrogen market will gain capacity at export-oriented projects equivalent to nearly one-quarter of 2011 shipments.

 

Chinese production costs looked set to provide a floor to values, as the country's exports "will be needed by the market, and their higher cost base could support urea prices in the US$400-a-tonne range".

 

The weaker price prospects boded ill for profitability at Norway-based Yara International, the world's biggest nitrogen group, which also "being severely impaired by stubbornly high European natural gas prices".

 

"Falling nitrogen prices should directly hurt Yara's margins at its own production facilities, and weigh on margins in Yara's global downstream operations," Credit Suisse said, cutting its estimates for the group's earnings per share by 38% for this year and 40% for 2013.

 

The target price for Yara shares was slashed to NOK244 from NOK365, and the recommendation cut to "neutral" from "outperform".

 

The shares stood 3% lower at NOK236.60 (US$40.72) in lunchtime deals in Oslo.