Interview w/Yar.ol CEO re China Fert Tax Hike:
INTERVIEW: Yara Intl Welcomes China Fertilizer Tax HikeLast update: 4/18/2008 12:15:18 PMBy Elizabeth Cowley Of DOW JONES NEWSWIRES OSLO (Dow Jones)--As Norwegian fertilizer giant Yara International ASA (YARIY) reported a near-trebling of its first quarter net profit, company executives welcomed a move by China to actively manage its domestic fertilizer supply-demand balance by increasing urea export taxes. Chief Financial Officer Sven Ombudstvedt said a 100 percentage points increase to 135% on Chinese fertilizer export tax introduced this week has lifted the previous $400 a ton price ceiling on urea. The move will sharply trim Chinese exports, cutting supply and supporting global prices. Yara's first quarter net profit rose to 2.81 billion Norwegian kroner ($565.9 million) from NOK1.09 billion a year earlier, due to tight global markets and an increase in its margins for some fertilizer types. In the past week, since rumors of a China tax raise filtered into fertilizer markets, urea prices have lifted almost $100 a ton to around $500 a ton. "What's important is that the Chinese are actively managing (fertilizer supply and demand). They have given a very strong signal that they want to manage it," Ombudstvedt said. "Last year there was quite a lot of demand disruption in China due to extreme weather which dampened the global demand-growth trajectory. We now believe the Chinese see a recurrence of high demand growth rates," he said. Yara's Chief Executive Thorleif Enger said earlier Friday that the tax hike was an indication of the country's concern over its own production and said it showed China was responding quickly to a deterioration in the domestic situation. When asked if Yara views developments in the Chinese market negatively or positively, in terms of the increased uncertainty over supply and demand there, Ombudstvedt said: "China constitutes a third of the fertilizer market. That has to be a positive thing. We like large-scale agricultural markets." While demand in China grows, supporting global fertilizer prices, Yara said India shows potential for even higher demand growth. "There will be no further domestic expansion as all energy sources are going towards electricity production. So all demand increases there have to be met by imports," Ombudstvedt said. He added that the country is "becoming more important in terms of short-term market price-setting, as it gradually overtakes the U.S.'s global market share. Demand-side price support, bolstering Yara's coffers, is also expected to come from the biofuels industry and industrial applications including greenhouse gas emissions reductions, Ombudstvedt said. "Biofuels require more nitrogen and someone has to deliver it. It's positive for market balance," he said. New applications will push long-term global fertilizer demand growth up to 4% per annum, roughly 1% above historical growth rates of 2.5%-3% Ombudstvedt reckoned, justifying his company's rosy outlook for at least the next few years. Yara plans to expand through organic growth - on brownfield sites in low-cost gas producing areas - or through mergers and acquisitions, Ombudstvedt said, although current high asset prices are a challenge, he admitted. "We've probably done what we can do in Europe, but Brazil, North America and low cost gas areas like North Africa and Australia are of particular interest," he said. Yara recently completed its biggest acquisition yet, of Finnish company Kemira GrowHow, and the CFO said the integration process has "gone very well," proving integral to first quarter success in Europe, improving Yara's position in the primary phosphate market. "The synergies in the deal allowed Yara to expand at the right time. But there are threats on the horizon for Yara, in the form of the weak dollar which is reducing Yara's competitiveness in some markets. "We certainly want to see a stronger dollar," Ombudstvedt said. In addition, climbing energy costs "will have to be absorbed by the company," he said. Despite this, a research note from Citi Friday said the key takeaway from Yara's first-quarter results was the "ease with which Yara is passing through very high energy costs," suggesting the company is managing that threat above expectations. Citi rates Yara hold with a target price of NOK380. Yara's stock closed up NOK45.50 or 13.1% at NOK394.
