Recently, Yara changed its operational structure into three new segments named Sales &
Marketing, New business and Production, effective from 1st of January 2019 (Yara, 2018).
However, the valuation in this thesis is based on the old reported segment structure, to be able to build upon historical segmented figures. Therefore, the figures in 2019 will be allocated on the basis of the percentage share in 2018, which will be further discussed in Section 4.6.
4.3 Production process
considered harmful for the environment, leading to only 11% of the global ammonia production being traded, while the rest is upgraded to other nitrogen products, such as fertilizers (Yara, 2018a). 20% of the revenue in Yara’s Production segment is external and consists mainly of
ammonia trade. The remaining share is products such as ammonia, fertilizer- and industrial, sold to the Crop Nutrition and Industrial segments (Yara, 2018).
The main product portfolio in Crop Nutrition contains nitrogen-based fertilizers such as NPK, urea and other nitrates, where the latter contain at least 50% of nitrogen. Crop Nutrition exports these products to farmers for agricultural use, in addition to the mining produced phosphate- and potash (referred to as P&K)- based fertilizers, which Yara mainly purchases from third parties (Yara, 2018). Further, as previously explained, Industrial upgrades the materials purchased from Production into finished products such as technical nitrates, phosphate and nitric acid. These industrial nitrogen products are sold for industrial applications within base chemicals, civil explosive for mining applications, animal nutrition, environmental solutions for NOx and SOx reduction and industrial nitrates for e.g. wastewater (Yara, 2018). The figure below illustrates Yara’s total revenue distributed by each product in 2019.
4.3.2 Industry
The operation of the industry is affected by the global market prices of commodities used in
productions and market prices on products sold (Yara, 2018). Explained in the section above, there are multiple resources needed in the production, making fertilizers closely dependent on other industries. Yara’s key value drivers affecting the company are linked to nitrogen fertilizer prices, natural gas prices and the availability of raw materials (Yara, 2018). Hence, this makes the pricing structure for the industry complex, as the different prices affect both cost- and revenue stream across each other. Therefore, the price development of the most important cost- and revenue drivers is presented below.
Raw materials Natural gas
Natural gas highly impacts the cost structure of the industry, as it stands for around 90% of the cost in the production of ammonia. The prices are determined by either long-term- or spot-based contracts, depending on the region and its competitive market (TFI, n.d; Yara, 2018). The most commonly applied pricing points, used as benchmarks for the global natural gas markets are the U.S. Henry Hub and the European Hub (Nutrien, 2019). As illustrated in figure 14, both the spot prices are volatile and contribute to fluctuations in the industries’ earnings. Although the natural gas prices in Europe have historically been higher than the U.S., this spread is decreasing and reduces the cost structure of European producers. In fact, the European prices fell by 41% in 2019, triggered by weaker demand due to mild weather as well as wider availability of liquified natural gas (World Bank, 2019).
Phosphate and Potash
Other raw materials used in the fertilizer production are P&K, supplied by a small number of large industry players, which are solely available in certain regions of the world. In fact, there is a shortage in the materials as most countries’ reserves are limited around the world, threatening the fertilizer industry (Carrington, 2019). Figure 15 illustrates a decreasing trend of the spot prices over the years, which is positive for the cost structure of the fertilizer industry. Further, the raw materials of P&K, phosphate rock and potassium chloride, are used to subsequently produce products such as DAP and MAP that affect the revenue stream of the industry. As seen in figure 16, both
products roughly follow the same trend and the prices recently experience a decrease (Indexmundi, 2020).
0 5 10 15
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
$/MMBtu
Natural Gas Prices
European Hub Henry Hub
Fertilizer prices
The majority of the revenue stream in the industry is affected by fertilizer prices where a large portion is derived from the sale of ammonia, urea and other fertilizers. These fertilizer prices tend to be supply-driven and cyclical, like other commodities such as grain, mainly caused by the irregular in supply additions resulting in periods of over- and under capacity (Yara, 2018a; Yara, 2018).
Urea
Urea is the largest contributor to global consumption of fertilizers and is widely traded on international fertilizer markets. This makes urea the global price setter for the nitrogen products (Yara, 2018a). The spot prices for urea trade are determined by several different hubs, where the main hubs relevant for Yara are the Black Sea Prill, the China Prill or the Granular (Fob Egypt).
Urea prices are supply-driven meaning that the prices depend on the amount produced at any given time. However, unlike Crop Nutrition, the Industrial segment purchases urea internally from the Production segment, and hence affects the cost structure (Yara, 2018). As shown in the figure 17, the urea prices are also highly volatile, laying on a currently lower level compared with the high level in 2012.
50 150 250 350 450
2020 2018 2017 2016 2015 2013 2012 2011
$/Metric Ton
P&K prices
Phosphate rock Marocco Potassium chloride price
100 300 500
2020 2019 2018 2017 2016 2015 2014
$/ton
DAP & MAP prices
DAP US Golf NOLA DAP Marocco MAP Brazil CFR
Ammonia
Since ammonia is the key intermediate for all nitrogen fertilizers, prices on ammonia have a large impact on the fertilizer prices, and hence the revenue stream. As previously explained, ammonia is often sold both internal and external, where changes in the prices provide both a negative and positive impact on the industries’ earnings (Yara, 2018a). Similar to urea, the prices of ammonia are determined by several different hubs, such as the Black Sea or US Gulf, as illustrated below.
Although ammonia prices are volatile, the trend is relatively low relative to historical prices, as illustrated below.
Price correlation and margins
The price structure of the industry is highly complex, as many of the prices are correlating and affecting each other. The most significant market risk for Yara is related to the margin between
150 250 350 450 550
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
$/ton
Urea prices
Granular (Fob Egypt) Black Sea Prill China Prill
100 200 300 400 500 600 700
2020 2019 2018 2017 2016 2015 2014 2013 2012 2011
$/ton
Ammonia prices
Black Sea US Gulf NOLA
prices on nitrogen fertilizer and natural gas, which have experienced a positive long-term
correlation affected by the respective demand/supply balances for food and energy (Yara, 2018).
Other cost drivers affecting the margins are commodity prices as well as the price of oil in terms of both the transportation- and the production process. As shown in Appendix 9 and 10, the oil price and commodities prices, such as corn, rice and wheat, are highly volatile and create fluctuations in the industry’s earnings.
Commodity prices are highly correlated to fertilizer prices, such as urea and ammonia (Yara, 2018). In fact, variations in grain prices explain about 50% of the variations in urea and the monthly correlation between ammonia and national corn prices are 0,79, which influences fertilizer prices to a great extent (Yara, 2018a). On the other hand, correlation between ammonia and natural gas is low, which might be explained by the high volatility in both raw materials (Ibendahl, 2019).
Furthermore, the fertilizer prices are not only correlated to raw materials, but also to each other.
Products, such as urea and nitrate prices have a strong correlation, as they are nearly substitutes (Yara, 2018a). The table below illustrates the monthly correlation in fertilizer prices since 2010 that shows a strong positive relationship between all the products. However, it is worth mentioning that even though the products are correlated, prices take time to adjust from changes in input prices, leading to lags between the prices.