Yara International ASA continues to show strong financial performance and market position gains. As the company today meets with its major investors and analysts for Yara’s Capital Markets Day, CEO Thorleif Enger presents an optimistic view on the market fundamentals and opportunities for profitable growth for the company.
“Current demand fundamentals make the fertilizer industry an attractive business for strong players. Historically low grain stocks-to-use ratio and high grain prices point to an increase in planting and fertilizer applications in the next season. Strong growth in biofuel demand and a limited increase in new fertilizer capacity before 2010 further underpins the overall healthy supply-demand balance in the nitrogen fertilizer market,” says President and CEO Thorleif Enger, who adds that Industrial applications are supported by general economic growth and more stringent environmental regulations.
In 2006, Yara has continued to deliver strong results, with return on capital well above its 10 percent CROGI target. Upstream margins have declined due to increasing European energy costs – which peaked in second quarter – but the Downstream segment has increased its market share in Europe, and the Industrial segment has continued to grow, conspicuously in environmental applications.
Yara presents new scenarios for future earnings at the Capital Markets Day. The scenarios are not a prediction of future results, but “what if” scenarios based on forward prices for energy and selected urea margins. The forward energy prices used are market prices as of November 1 2006, when natural gas prices for Yara’s European plants were in line with US natural gas prices. A supply-driven market with a European swing scenario at this energy price level translates into an estimated average Earnings Per Share (EPS) of NOK 7-8. A one USD per MMBTU increase in the US natural gas price yields an estimated Yara EPS of NOK 10-11 under a supply-driven scenario.
Strong fertilizer demand fundamentals increase the probability of a demand-driven market in the coming years. Demand-driven scenarios with USD 20 and USD 40 in urea margins yield an estimated EPS of NOK 10-11 and NOK 13-14 respectively. An alternative scenario based on 10-year historical average prices and currency rates, and with Yara’s existing business structure and fixed costs, would give an approximate EPS of NOK 11 per year.
Yara’s growth ambition is to obtain a 10 percent market share within a business cycle, up from approximately 6 percent today. This will require both organic growth as well as step growth initiatives. Three categories of step growth are envisaged; first, an increased production capacity in low-cost gas areas. Second, an expansion of market positions in high-growth markets like Asia, Latin America, specialty fertilizer and industrial applications. Third, the pursuit of merger and acquisition opportunities in mature markets where the acquisition valuation mainly depends on distribution and market positions, and less on production assets. For all growth categories, scale, synergy and timing are key considerations together with prudent investment criteria.
“Our recent growth initiatives in Fertibras, China BlueChemical and the Qafco-5 expansion, show that the combination of Upstream’s technical expertise and global sourcing, Downstream’s unique distribution and marketing system and Yara’s product knowledge, make our company an attractive growth partner,” says Thorleif Enger. “Through these initiatives we are expanding our presence in two of the world’s biggest and fastest-growing nitrogen fertilizer markets, where there is also future consolidation opportunities,” says Enger.