Oslo, 31 March 2011

Norway's Yara International ASA , the world's top supplier of crop nutrients, said the global fertiliser market is set to remain demand-driven for some time to come, reflecting record high food prices. Chief Executive Joergen Haslestad told Reuters that even as prices of urea-based fertiliser fell in the seasonally weak first quarter, other nitrate fertilisers and NPK (nitrogen, phosphorus and potassium) have remained surprisingly strong.

But he offered little guidance in terms of margins, repeating that rising European natural gas prices were a worry. "Farmers are looking around and ploughing up their gardens and backyards because of the grain prices," Haslestad said.

"We still don't think there will be a dramatic shift from the demand-driven scenario. As long at it makes sense for farmers to fertilise and they have a healthy margin, what can go wrong?"

Food prices have risen sharply in the past year, as have futures on corn, wheat and soybean. U.S. corn stocks are forecast to drop to a 15-year low by the time the new crop is harvested.

However, the fertiliser market absorbed a wave of Chinese urea exports in late 2010 and inventories are fairly high as a result, which Haslestad sees as the main explanation for lower urea prices than Yara had expected when the quarter started. Graphic on corn, food prices:

LEVEL PRICE

"Prilled" urea in the Black Sea Yuzhnny port, the benchmark for urea in Europe, is down more than 20 percent to $310 per tonne since peaking in mid-January. And Yara shares have sunk by 20 percent from their January highs. Urea accounted for 23 percent of Yara's sales volumes last year -- about half that of nitrates and NPK -- products whose prices have in the past followed those of urea.

"Normally the rest of the nutrients would follow, but we haven't seen that the nitrates fertiliser and NPK have not fallen at all," Haslestad said. "We are able to keep up the price level."

In Europe, where Yara has most of its production, gas costs threaten its margins, especially as about 35 percent of Yara's European gas contracts are linked to the buoyant oil price."When it comes to a negative effect on our business, that is probably the biggest one," Haslestad said of gas prices.

Yara, which produced more than 20 million tonnes of crop nutrients last year, is looking to expand its presence but attractive deals including cheap supplies of gas needed to produce ammonia-based fertilisers are hard to come by.

Until recently Yara thought its Libyan ammonia plant in Braga had the best chance of expansion due to the potential for more cheap gas supplies. Yara repeated it was interested in buying fertiliser assets owned by Germany's BASF AG, which earlier this month said it is preparing to divest major parts of its nitrogen fertiliser business.

"It will match our nitrate business in Europe very well, and NPK. So it is a good match," Haslestad said, adding Yara had not yet received any formal invitation to bid on the assets.

Yara is also hoping to win an auction for the remaining 65 percent stake in Australian partner Burrup Holdings. "We would very much like to buy the rest of the plant if we get it at an acceptable price -- that depends very much on the gas agreement, which there are some uncertainties about," Haslestad said.

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By Victoria Klesty, Reuters - for Commodities Now