Thank you for standing by for Mogo Jawas' First Quarter Results twenty seventeen Conference Call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. I must advise you this conference is being recorded today, Wednesday, 04/26/2017. I'll turn the conference over to your speaker today Mr.
Tor Hosff. Please go ahead.
Thank you very much, and welcome to Yara's first quarter results conference call. Before we open up for questions, I'll now please comment on our results. Gara delivered a weaker result than a year earlier, reflecting lower realized fertilizer prices and margins. Our cash return on gross investment was at 7.8% for the quarter, which is well below our target of 10% or more through the cycle. On the positive side, we delivered increased sales volume on both for fertilizer and industrial products.
Our ammonia production was lower, underlining the need for our ongoing efforts to improve operations. The Yahner improvement program is on track and has already delivered $9,000,000 of the targeted US500 million dollars of annual earnings improvement in 2020. In addition, we are expanding capacity in several plants to drive further growth in Brazil and elsewhere. And applying current market prices, our pipeline growth targets are expected to generate approximately NOK 6 per share of incremental earnings by 2020, thus fully operational. So with these introductory remarks, we're now ready for your questions.
So, operators, if you could please now open up for questions.
Your first question comes from the line of Paul Walsh from Morgan Stanley. Please go ahead.
Thanks a lot guys for taking the questions. Just a couple if I can. You mentioned that as when the savings so far, 90,000,000, close to NOK 800,000,000. Do I assume you've delivered about NOK 200,000,000 of those in Q1? And then how should we think about contribution for the year as a whole?
Second question, just what is your view on the pricing momentum into the second quarter, nitrates premium, NPK premiums, I. E, given where current pricing is, do you see the situation improving in Q2? Or do you see it, on balance, weaker in Q2? I'm just trying to think about phasing of earnings through the year. And just maybe as an add on to that, sorry, it's more like a third question.
There's lots of debate around incremental urea supply this year. Can you give us your view on where you see supply coming from?
Okay. Thank you very much. And I'll get started on the improvement program. And as you rightly point out, impact that we've had now is $90,000,000 annualized for the quarter, which means that to simplify, we would say if we were to redo year 2015, we have currently done, we would have had an impact of $90,000,000 on the full year. So we just divide that $90,000,000 on 4,000,000 and then the other impact to the quarter.
And then the actual impact 2017 will be impacted by or is impacted by prices and gas prices and so on. So the actual impact is lower in 2017, but when we compare it to 2015, it is onefour of about $90,000,000 Yes. And then I think Paul, you asked about the full 2017 effect where we confirm our target of $150,000,000 effect in total for 2017 then.
Understood. And then
on second quarter pricing then, your question there. If you start with value trade second quarter is, I would say, typically the most difficult quarter to forecast in terms of we don't give good forecasting on our pricing. But if you say second quarter is a split between the residual seasonal market in Europe and a typical price situation. And so late in the season is that we just aim to keep current prices until the end of current application season. And then that starts to dwindle down, you have to set a new price to moderate delivery for next season.
And if you look at it typically more or less every year, that typically happens during May then. And if it's on earlier May or later May price setting, the market supply and demand and how long does current application or be running that. And if you look at from an economic point of view, you can at least say that what we have seen in March and a little bit in April, there was some delay in application in quite some areas due to in the North cold weather, wet weather and in the South, a little bit drier weather. But the big uncertainty as always in the second quarter is when do you set a new season price and hope quickly if that new season price accepted by the farmers and distributors and the lift is picking up for the new season. On NPK, I mean, without Kefully, I can add on that.
But of course, when you look at NPK, one thing is the premium that we get on top of
prices, but it's all influenced by commodity prices. And what you've seen there is that phosphate prices have come up a little bit in the first quarter, now they are now then correcting a bit lower again. Potash prices are fairly stable, slightly up, while for urea price has dropped now in April compared to the first quarter. So from a kind of a blend model or a commodity standpoint, I guess, an NPK value has decreased a little bit now in the second quarter compared to the first quarter just looking at the commodity values.
Sorry, did you say increased NPK value?
No, decreased in second quarter compared to the first quarter.
Sorry. Thank you.
And just on the supply side in urea?
Yes. It means there are many plants that are kind of closing in on start that are kind of either in commissioning phase or about to start off. And then we have a slide in the presentation with the CRUs kind of not necessarily their view either. That's the word. We'll add 8,200,000 tonnes outside China, but that the capacity increase is 8,200,000 tonnes outside China.
And when you look at start up of new plants and the timing of those, you will see that it's more the rule than the exception that there are some kind of hiccups, some kind of issues related to starting up a new plant that lead to delays, which are, of course, very difficult to predict. So let's say, our opinion, without being too specific, is that the supply increase from new projects outside China will be significantly less than those 8,200,000 tonnes, but still significant. I don't think it is not easy to kind of to be very specific on that.
Understood. Very clear, guys. Thank you.
Thank you. Your next question comes from the line of Joel Jackson of BMO Capital Markets. Please go ahead.
Hi. Thank you. Good afternoon. A few questions. So my first question is on Brazil.
So I mean, all the color we've gotten has been Brazil has been very strong for ag the last bunch of months. They've been buying a lot of product, maybe even some views that they've been stocking up and buying too much or you in Q1 Yara in Q1 had, I believe, volumes down 1% year over year. So maybe give a little commentary on Brazil. Did Yara lose some share? Is this related to some of your ammonia production problems?
Or what's going on?
Well, our
sales volume, as you indicated, is slightly down in total. However, our premium fertilizer is up by 8%, and this is a result of our focus in the market as well, where we're trying to channel most of our sales efforts into the premium part of the market, where we will realize better margins than in the commodity market. And it also reflects our inventory situation when it comes to commodity products as well that we don't stack huge amounts of commodity products in Brazil, so that we are ready to move on short notice if sales go above our projections. So you should see the fourth quarter last year and the first quarter this year somewhat combined there, where we were lower than the market on commodity products, but where we did see a strong increase in the premium products. But our
lack of sales of commodity products in Brazil is not related to any of our production problems. I think it's also worth mentioning or referring back to the first quarter last year when you make this comparison because first quarter last year, it was a huge step up in sales. Because the market increased 7% compared to a year ago in first quarter twenty sixteen, which probably, in a way, took part of the market as a surprise. While you already have a pretty good sourcing available, and we took a position on that. So we increased sales last year 15%.
So you can say we increased our market share substantially a year ago, and some of that may be taken back now when there was less growth than last year, and competitors were able to catch back some of that. And then it's back to the priority between commodity products and premium, clearly, on what we go after then.
And to my commentary that perhaps the Brazilian market was restocking and inventories are strong and maybe we'll see a little bit of a step down in the next few months. Would you support that? Or would you have a difference of opinion?
Yes. Well, the numbers from under the organization down there, it does show what you say that compared to first quarter last year, there was there has been a stronger import level of imports than development in the sales. So I think if you just look at the numbers, supply versus sales, there is probably added 1,000,000 tons or so on product through the first quarter, whereas first quarter last year was relatively flat. I think you get if you just add the production and imports and compare that to the sales.
Okay. Thank you. My final question would just be coming back to the urea supply demand, which I know, again, you show CRUs forecast and not your own, whatever your own R is, but it's much different than the one you presented three months ago. This forecast is showing capacity in Iran, Russia and Nigeria either pushing out or disappearing to where you're now showing a market that's in balance in 2018 or from the incremental supply and then demand or growing supply in 2019 and 2020. I mean, I don't really care much what CRU says.
I really care what Yara thinks. Is your view that it should be balanced and tighter from 2018 on? And does that play into your planning?
Yes. The problem is that we have the corporate policy of not giving kind of guidance on our value drivers for our share price. So that's kind of complicate things a bit in being too specific on this. Of course, we have our own internal supply demand balances that we work on. And I mean, have said that this period, as we have said for a long time, that this period for 2016 to 2018 looks heavy on supply without being too specific.
And we have talked about the zinc producer role of China and then the importance of the Chinese export costs in the global pricing. But I guess you also see that because of this low price environment, there is less investment in new capacities also. So that is this wave of new capacity that we're not seeing, whether it now comes kind of this year, next year, all that plays out. And also, as you say, there are are a number of Iranian projects, for instance, that are on the drawing board that we are very skeptical to, at least within the medium term, at least before 2020. And so we didn't understand quite all those projects came into the list last time.
Same with this Nigeria project, the big project, Gadankot, it's the owner there. And we understand there is some material sitting in boxes in Nigeria that is imported. But the production has not started, which tells us that at least these are in the kind of earlier phase, three, four years away, even if something started to move. So I think those it's those kind of elements that now have kind of also been kind of sorted out and in this CRU balance. So I guess we can say that the way it now looks, it's more similar to our loan at least.
That was helpful. Thank you very much.
Thank you. Your next question comes from line of Neil Tanner of Redburn. Please go ahead.
Good afternoon. A couple of questions, please. Firstly, on the I was listening to some of your webcast this morning, I prefer I had to leave. But you mentioned the order book creating a three month lag in the nitrate business primarily? I wondered if you could talk a little bit about the Stafford pricing system because I thought the idea was that the that you were aiming to limit volume at a certain price level so as to avoid the sort of situation you just experienced in which customers are able to book more orders at advantageous premium.
And in the past, I think you've been able to hold back volume. And I know there was some sort of lively debate around the period that you did that. Has the mechanism or the sales strategy changed with regards to that pricing system? That's the first question. Another long one, sorry about that.
Secondly, just going back to the step up in the gas price in Pilbara. Can you confirm, is that now is that a fixed price contract still? So that €180,000,000 basically cycles for four quarters and then disappears? Or have you now sort of moved on to a more variable price contract there? And then finally, I think you mentioned $18,000,000 of one off OpEx in your webcast this morning.
That might be the hopefully, that's the right number. Can you help me understand how much of that is within in the bridge, within special items? And how much is contributing to the fixed cost step up?
Okay. If I start on the Pilbara gas contract, and we can never fully disclose, you could say, our pricing structure. But what we have said is that there is a step up in the contract. We said that also when we have cured the remaining part of that plant in 2015. So it's a long term contract where we have a step up by 2016.
So it is a starting reference price, which is indexed with inflation, and that starting price had a step up in 2016. In addition to that, we have a profit sharing there, which kicks in at high or higher significantly higher ammonia prices. And that is this embedded derivative, which from time to time give effect. But for a given ammonia price, yes, there is a lasting step up from 2016 and going forward. And that's where we guide that, that will have roughly a cost effect of NOK 180,000,000 per quarter going forward, and it will be a step up from 2016 to 'seventeen.
Nitrate pricing then, I would say that we have not changed our staffing policy as such, but the staffing policy gets different effects depending on how prices are developing, and you can say, how global prices are developing. In the stuffing or in the delivery in Europe, we have typically at least a one month time lag from we take an order and fix a price until it is delivered. And then seasonal, as you go into the peak season, as you go closer to the holiday period December, you also that order book high tend to increase then to secure delivery also over the holiday season and to be able to optimize logistic growth on the peak where we typically have a two months time lag, you can say, the peak season into first quarter. And what happened this year, which gives quite a big time lag effect, is that you have significant urea price increases in October into November year. Just say, you look at urea prices out of Egypt, which is most relevant for Europe, those increased from, say, 190 up to $260 only in a month's time, 50% up.
So we increased also on nitrate prices significantly late in fourth quarter, but that didn't get an effect before, you could say, last part of first quarter. So we have a significant negative time lag effect in the first quarter this year. Well, actually, last year, it was slightly opposite as the urea prices declined into the first quarter and through the first quarter. We got an increased premium. We lost a little bit of profit on that to U.
A. Year, which has been taken back in a way this year but at lower premiums then. So the policy has not changed, but market dynamics are different from year to year, and it's mainly the UDEA, which has created that both for last year and this year. In addition, I would say that last year, we were in a way a little bit helped on the premium by a tighter nitrate market in Europe because more production was curtailed due to technical reasons. We have won plant out to the factory plant out through a large part of first quarter and some of the competitor plants have planned more problems last year.
And I can make a few comments with regards to your comment on the OpEx of $18,000,000 of one offs. And this should be seen as an accumulated cost. And as we indicated, when we give more detail of this in connection with the fourth quarter presentation, we said that we would have or we had $10,000,000 of one off OpEx cost in 2016 and that it would be at 30 in 2017. So the 18 then refers to the 10 that we had in 2016, and then it would be eight then for the quarter. And in addition to that, we've had some as we also stated, some cash impact through release of mainly working capital that is working in the positive way.
But I just want to underline that these costs are in line with what we communicated before. So we are on track on that spending.
Thank you. Your next question comes from the line of Ben Isaacson of Scotiabank. Please go ahead.
It's Oliver Rowe on for Ben. Thanks for taking my question. You mentioned Chinese supply setting urea prices, and I just want to dig into that a bit. Would you still view Chinese anthracite producers as the current marginal cost producers? And around what price do you see marginal cost at right now?
And finally, how do you see that marginal cost producer changing during low demand seasons?
Yes. We do think still that as I emphasize, the coal producers are zinc producers, but the supply curve with these coal price increases that we've seen since last summer has kind of flattened the curve quite a bit. There are also these high cost non anthracite in non integrated non anthracite producers are very cost position that is kind of approaching those of the anthracite base with very steep because of the high cost increases for also normal coal since last summer. We think that when you only question about the cost level is, that's a little bit difficult because, I mean, if you just pick out, let's say, the variable parts, I mean the cost of purchasing the coal, electricity, all those cash outlets, I mean the variance salaries can be a bit on and off sometimes in China. Then I think you get a fairly kind of good consistency between where prices have been at the floor and where the costs are assessed like around SEK190 million last summer, around SEK210 million at the moment, for instance.
And I think that's also where you see many of the consultants are kind of basing it on. If you then add some fixed cost maintenance, I mean, if you you try to kind of develop a more kind of full cash cost basis over some time, do you think it's higher than that? And others still think it's higher than that. On your question on the weak demand periods, I think that's probably a good point. I mean, so far, we've seen fairly good consistency between the export price from China and all the references that follow each other very closely.
You saw there was an exception in November when India canceled its tender. I mean, traders are basically lined up more than 800,000 tonnes for delivery to India, and it was canceled. And then you saw what kind of happens because then suddenly all those volumes have to find homes, and there was many weeks without a need for further purchasing in China and prices kind of dropped below the China export benchmark. You actually see a little bit tendency of the same in the current market, where the Chinese are now maintaining a price that it went down to almost SEK $210,000,000 they are up again at SEK $215,000,000, really struggling. That's mostly can be no doubt about that.
But still, the Egyptians have not sold at SEK 200,000,000 and even SEK 195 and the same thing in the Black Sea and so on. Obviously, a little bit tendency, as you are indicating, due to the weak demand picture outside China that there is a slight disconnect. So this is something that, of course, can happen then short term from time to time if there is a volume of Chinese urea that is required in the global market is relatively low.
Thank you.
Thank you. Your next question comes from the line of Georgina Iwamoto of Bank of America Merrill Lynch. Please go ahead.
Hello. Good afternoon. It's actually Stephanie Boswell here from Bank of America Merrill Lynch. I had one follow-up question with regards to the realized nitrate premium. So you obviously had a fairly significant drop year on year in the EBITDA within the Crop Nutrition segment.
So I suppose it's reasonably fair to assume that a large part of that was driven by the lower realized nitrate price in Europe year over year. But just following on from the earlier questions, if I was to assume that everything else is equal, so urea prices were to stick where they are today as are nitrate prices, you would have a higher realized premium in Q2 versus Q1. That's the first point. And the second one on the nitrate premium is, can you just confirm what your current list price is for can in Europe? There has been some discussion in the market that you are already selling can product in the European market under the new season lower list price rather than what we all see.
So if you could just confirm that, that would be helpful. And then I had one follow-up question, which I'll give it to afterwards. Yes.
When it comes to nitrate premium in the second quarter, and I think I have to repeat partly what I mentioned before, that second quarter is one of the most difficult to predict if we have a clear guiding on our forecast because it's two periods. One is the end of the current season and to what extent you are able to keep current prices and more demanding for how long. Typically, you set a new season price somewhere to May then. So for how long it will take before we set a new season price, I cannot comment upon. Now it will also depend on how strong the offtake will be by end of this season.
And of course, what the new starting price will be will also depend on the market season and new year prices at that point in time. And that we will announce to the customers then at the same time as you will learn it. So we can and will not announce that for the time being. When it comes to current lift pricing, the last price we have given to publications and lift price in Germany, $2.20 per tonne.
Okay. And the second question was on working capital. I was hoping that you could help me understand the working capital outflow over the course There's obviously a lot of moving parts with regards to pricing and currency, but I'm just struggling to reconcile it with the note within your accounts on the net changes in working capital. Interested to know whether or not anything has actually changed in your business from a fundamental underlying point of view or whether it's just being driven by changes in commodity price environment and FX?
Yes. It's related to season, meaning volumes and prices. So we have an increase in receivables due to higher deliveries in the peak season. We also have a seasonal effect from Brazil, where we have quite a lot of prepayments from customers, and that we typically have more of in the peak seasons of prepayments, seasonal goes down from, therefore, into the early first quarter. And then that is partly offset by lower inventory values then.
Inventory volumes are roughly in line with last year, but or last quarter, but values are down there. So that explains the NOK 1 point roughly NOK 1,200,000,000.0 increase in net working capital. It is receivables by seasonal and prepayment from farmers
or from customers.
But I suppose if I look at the Q1 twenty sixteen number, you had a working capital benefit. So you would have also had prepayments within the first quarter last year. So is it fair to assume that the big change this year versus last year is that prices have actually been more positive this year in 2017, and therefore, it's been an outflow Yes. Yes.
Total prices increased into the first quarter, while they were declining last year. And then, of course, you also have project and geographical mix there.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Felicity Smith of Hempso Hall. Please go ahead.
Good afternoon. Thanks for taking the question. And just clarify, you've got the productivity improvement program where you're still comparing what you will gain from it versus the situation in 2015. But you have restated I think the investments in growing your premium products where the I think the EPS effect is now six and it was 10. What if you apply the sort of current pricing situation onto 2015 instead of the other way around, how much EBITDA improvement would you expect in 2020 then, if that makes sense?
Yes. If you look at the improvement program then and if you look at the 2020 effect, if you look at the split there, one element of it, about SEK 150,000,000 is in procurement then, and that's on running prices. So that wouldn't change as such. Then about SEK 125,000,000 or SEK 150,000,000 is fixed cost. This will not be affected.
Then you have an element of SEK 75,000,000 energy. That will, of course, depend on energy prices. Then energy prices were somewhat higher in 2015 than there are now. So you can say, the savings due to energy efficiency is more there, but so is also our energy costs. So I wouldn't be too unhappy The with that last element, which clearly is price related, is volumes then.
We foresee an effect of $150,000,000 on volumes. That is 400,000 tonnes more ammonia and 700,000 tonnes more of finished fertilizer. And those margins are somewhat lower now than they were in 2015 then.
That's helpful. Thank you.
Thank you. Your next question comes from the line of Andrew Stott of UBS. Please go ahead.
Thanks. Good afternoon. Thanks for taking the questions. Yes, I'll start with U. S.
Deliveries. I mean, I get the fact that imports are down because, of course, we've got new supply, including OCI opening up recently. But are you surprised to see the minus 5% for the, I guess, the entire market as you portray it? I'm looking at Slide 33, think it is of your slide pack. Maybe I'm misinterpreting the data, but can you just explain that slide to me?
Second question was the fire. I wonder if there's any update on the fire at Bozgrund, whether there's any increased ammonia costs for this year? And then finally, I did not understand the answer to the question from Steph just now on working capital. So the way I see it is your receivables are up, which is the answer, but that's probably easily explained by LATAM being well up when LATAM is down. So can you just explain why your receivable terms are worse?
Thank you.
Shall I start on The U. S. Deliveries? And this slide, as you say, we are according to our estimates, there is around roughly 5% drop in total deliveries of nitrogen in the North in The U. S.
Market this season. I mean, that's ammonia produced domestically plus the net trade balance on all nitrogen products we are basically calculating, and we are getting the ammonia production numbers from the TFI statistics plus some estimates for the recent months, and we are using The U. S. Customs data for the trade of nitrogen. So as you say, there's been an increase in domestic production of nitrogen and there's been a decrease in imports.
And all that decrease in the imports came in the third quarter basically, we think that buyers are kind of new supply from domestic producers in The U. S. And we're very reluctant to take positions on imports. It's been stronger recently and we did actually quite strong increase in imports over the last couple of months. And let's see what now happens in April and in the second quarter.
But let's say, if it ends up down, let's say, 2% to 4%, not 5%, but ends up down 2% to 4%, I wouldn't say that dramatic in the view of a 5% drop in corn acreage according to the plantings report from USDA and historically low wheat acreage, etcetera, in addition to low grain prices in general. So to us, it feels like this is fairly consistent with what you might expect.
Okay. So you say it's the soybean acreage expansion that's behind the volume drop is basically what you're seeing?
Right.
Okay. Part of it.
Yes, part of it.
So I can give some reflections on your question on with regards to the ammonia production in Posh Grun. And this is a very recent event that happened very early in the morning on Monday. It will still take some time before we were able to assess the actual damage. I was at the plant myself on Monday evening and there is extensive damage to the property. Still we're working on securing the roof structure of the building so that it's possible to let people into it.
And the fire took place in the area where we have the compressors. Now compared to our first voice when we heard about the fire, we thought that the compressors were lost from a distance. What we've been able to observe might not be damaged to the compressors, but this is something that would be impossible to state anything on until we have the opportunity to remove them and open them up and see whether there is damage to them. And then the amount of damage will determine how long it will take before we're operational again. But what is safe to say is that we will go past our four to five day period before the business interruption insurance kicks in.
But leading up to that period, there will be a pneumonia production loss or contribution from pneumonia production that will be lost of about, say, or on about 40,000 tonnes. Porfirn is set up to run on imported ammonia as
well
and has done so several times in the past. So it's possible to run the plant without internal ammonia production. So I don't expect there to be any major cost increase for ammonia when we get into the period where business interruption insurance kicks in after forty five days.
Okay, perfect. And the last question was on receivables.
Yes, on back on receivables. Then as I said, the main explanation for the increase in operating capital is higher receivables, and that's higher sales revenue as such in this quarter compared to last year on last quarter or fourth quarter than on last year. It's not any change as such in credit days. It is volume and prices.
But can I just stay with this? Because your revenue is down by over GBP 2,000,000,000 year on year. And obviously, you said yourself the GBP 1,200,000,000.0 outflow, it goes against that. So your ratio has changed dramatically or at least materially, I don't I honestly don't understand the math. So what am I missing?
No, no. When it comes to operating capital and the cash effect of that or effect of debt, it's not year over year, and it's the effect from end of fourth quarter to end of first quarter. And that's also not only the total quarter because most of our sales, we have a shorter credit day than a quarter, ninety days. So it is how the situation is on receivables by March this year compared to December. And one thing there is external seasonality is that sales declined in the second quarter of or in the December in large part of the world due to holiday season there.
So it's a quite a normal seasonal effect that receivables are higher by March than by December then.
Okay. So it's swing back in Q2 is what you're saying?
Yes. It will swing up and down depending on how the receivable situation is by end of quarter. But as you're right, it's seasonal. It's a normal increase from end of fourth to end of first quarter. And of course, how it will be by June, again, will be very much back to hold off the new season deliveries in Europe, pick up among us.
Your next question comes from the line of Patrick Lambert of Raymond James.
Again, a bit more precision on the fire in Polskine. Does it mean that the when do you expect any disruption in the NPK production at Polskine due to the fire? Or are you quick enough to use the import of ammonia to compensate for that potential loss of volumes? That's the first question. And the second question is, again, a bit on where we are in the season in terms of applications.
I for me, The U. S. Is clear, the rotation. But Europe is still up 3%. And I think if I look at last year, we second half, we are at 7%.
What is your view on your order book and your demand going into Q2 and the end of the season for Europe in particular? Okay.
I'll start on Porcelain and provide some more clarity on that. As I mentioned, we are able to run the plant based on imported ammonia. And obviously, with the fire plant was fully shut down in the morning hours of Monday, but we were able to start to restart parts of the production of fertilizer already the same day, and we are already now back in full operation in the rest of the plants. So the only part of the plant that is not operating now is the ammonia plant.
Perfect.
Yes. And then back to the second quarter delivery then, particularly in Europe. As I said, that's depending on two elements. It's the end of this season, how it ends, and we have said in our outlook that we are expecting quite a normal consumption for the spring season in total. But bigger uncertainty then, as always, is how quick and how strong will delivery start when we announce a new starting price for the next season.
And that is difficult to predict upfront, and it's significant uncertainty and potential phasing there between the second quarter and early into third quarter.
And if I look just at the current season, you think we are we could see some negative volumes versus last year to finish up the season?
Yes. Maybe, Mark. I mean, the underlying demand growth is probably not 3%. So I mean, you take away the, let's say, the pipeline effects in between seasons and so on, It's I understand your point that we have Because little it was more also
it was plus 7% in H2 also, so seems to be still very high.
It wouldn't be unnatural if the total nitrogen delivery to Europe will drop slightly than in the second quarter for the total market. We we obviously, urea imports coming down at a much slower level than last year, for instance.
Okay. Thank you. Your next question comes
from the
line of Thomas Wigglesworth of Citi. Please go ahead.
Yes. Sorry, it's Andrew Benson here, although colleagues are on the line. I probably want to go back and start here and qualify a couple of Right at the start, you talked about demand and applications in Europe. And obviously, demand is up and with low application rates. So I was and you said that was a potential positive because that if I understand you correctly, you think that perhaps some element of demand in Europe is missing.
I didn't quite understand how you saw that. And in that context, my understanding last year was that you reduced prices pretty early in May, but sort of unusually early. But that was partly because raw material costs had also fallen away. And so you're able to price quite competitively to gain advantage. And I was wondering how you're thinking about that this year given you won't have the same sort of raw material cost flexibility?
The same question on NPKs. Again, I didn't really understand your response to Paul's question right at the start, whether the premiums in the growing related NPKs were under pressure or not? Yes.
If I start, it was you're probably referring to my comments, where I said that we have seen that or that application maybe was some a little bit down in some areas in March due to cold and wet weather in the North, maybe some drought in the South. And in that way, that could be positive for demand into the second quarter to have to put a little bit positive elements on the table also. So that was a difference between, say, March or April, maybe May deliveries or application and deliver it and not for the total season. That's one element. Then your other question then on when is a new season price set?
And you referred to last year that it was set earlier in May. I think one element influencing that also was that if you look at the nitrate premium last year, where urea prices continued to drop through the first half of last year, you got a quite high nitrate premium and you started clearly to get more urea import. You don't see the same situation. This year also, as Tansuide referred to on, it's actually less urea import now. And it's also back to the commentary that we had 3% or nitrogen deliveries have been 3% ahead so far in the seasonal variability then, Well, let's talk to it, let's say, maybe or probably somewhat lower than 3%.
But what is comforting for us then is that urea import have lost quite a lot of market shares, it means that there can be still some more room for nitrate at the end of the season. And maybe latest on your thinking about why and how far the nitrate prices drop for the new seasonal price last year referring to gas prices. There, I would say that we don't see that the nitrogen producers in Europe are the marginal producers and their pricing is cost based there. There we are more pricing it up against alternative than being urea. And out there, have a question what kind of premium we get on top of that urea price.
A large element is maybe on inventories and on nitrate inventories. And back also to the fact that a lot of deliveries have been nitrates this year replacing urea. And we have a slide also in our pack, Page 36, which shows European producers' nitrate stock. And then you'll see there that nitrate stocks by March is not particularly high than it is slightly lower than most of the previous four, five years. On your NPK question, I'm not exactly sure if I got it right, but what we what you asked, but our reference earlier when it comes to the downward pressure was more on the blend value of that.
I mean if at you Slide 13, which I guess you referred to on the right hand side of Slide 13 in the presentation, at least what I tried to kind of convey is that due to the price drops that we have seen for urea, in particular, in April and also a little bit lower DAP prices in April, the blend value of the blend cost will drop from March. That will actually expand and the NPK premium, we assume that we sell NPK at the same price and that's what I'm saying. But our point was that the pressure was a little bit on the blend value and not directly on our rent over NPKs.
Okay. Right. I understand that. So you're definitely not saying that the NPK premium itself is coming under pressure. It's simply that the component value of the underlying commodities will be lower in April and March.
You're not making any further comment on that.
Right, right.
But then can I ask the question, are do you think there's a trend down in that premium? The way the chart looks, it looks like there's something of downward trend in that premium and we're seeing quite competitive markets in Southeast Asia. So I was can you perhaps give an indication of whether you think those the actual premium itself is under some pressure over the coming months?
You can say that if you look at that blend premium on top, it's clearly a little bit lower now than it has been before. I would say it's pretty stable. If you looked at it up to the two, three last quarters, it was pretty stable. Now it's a little bit down. One thing is delays also there as we start to have some pickup in some commodity prices.
There is clearly crop prices because the value of using complex NPK versus more gold blend are different traits and is that you get better yields. And of course, those better yields are more important at higher crop prices. So it's a little bit of crop pricing cyclicality into it. Another element is that quite a lot of our NPKs are sold in Europe. It's a global product, but proportionally, it's significant in Europe.
And there, you also are hit by crop prices, particularly wheat and nitrate premiums are also down then, influencing NPK stem.
Your next question comes from the line of Nithya Matu of Goldman Sachs.
Hi, It's actually Steve Benson here from Goldman. Could I just go back to the supply demand, the crude outlook that you've presented? I think on the webcast this morning, mentioned the 8,000,000 tons of supply for this year was more likely to be 6,000,000 in your view. Is that just shifting volumes 2017 moves into 2018 or is it that this uranium project you think will not come until beyond 2020? The second question was on Chinese net exports, which continue to fall.
If we assume they have again next year or go to even zero, do you think that China still sets marginal cost in the industry if we have no exports in the seaborne market? And given where pricing on urea is sitting today below that marginal cost, are you seeing any supplier response in the market? Are people pulling back from offering product at the moment in response to that low price? Thank you.
Yes. I think for the most part, I think we think it's timing effects. I think there are some exceptions. I don't I really don't like to go into too much details. I mean, we I think we still think that there is a totality.
It's a little bit also on the high side. But I mean, not massively so necessarily, but some But and as I said, yes, there seem to be a systematic bias in these kind of projections. And I'm not accusing CRU or anything. I mean, we're actually choosing them because we think they are among the best and that others are even more biased that tend to kind of include too much capacity and too soon. They think that there is a clear bias to that.
We have also done kind of look back. Is that something possible to do, look back and actually document that? On the China situation, I mean, obviously, if there is no need of Chinese urea in the global market, there is more likely to be disconnect between the export costs from China and other price references and then other producers' costs become more irrelevant. And you could even say that maybe the Chinese import situation could become relevant. And there is, of course, the logistical changes in the flows and also the VAT on the imports and so on.
So there's a shift there. But yes, I mean, that's be an implication if nothing is needed. I mean, that's not the situation in the current market. There's still exports on 450,000 tonnes in March. And so not there.
And I don't think we even look at the CRU numbers as we're predicting Chinese net exports. Reactions to running at lower than marginal costs, yes, I think there is reactions and the industry is believed to run, I mean, numbers are estimates, let's say, 60% capacity utilization at the moment. It's more than 10 percentage points down on last year at this time when the capacity also was higher. There's even stronger decline percentage wise in the production. And January, February production is announced 22% lower than last year.
There's massive reactions to this situation. So far Well, at the moment, it has it doesn't look to be quite sufficient. I mean, obviously, as the price, there are again talks about somewhat higher prices in for urea in China this week and also in the export market. So who knows, maybe it really looks to be balancing a bit better and the capacity utilization rate is reported to have dropped also last week. So there is reactions, but it's not straightforward.
There's a lot of state ownership in these urea plants. There's a lot of employees. There are pensions, all the kind of liabilities. So we understand that banks and others are kind of asked to inject liquidity into this system to at least keep it going at some rate. So they said kind of a trade off also for many of these plants to kind of keep running over despite actually being cash negative.
So it's not an easy call to close the plant, but I guess over time, it's not so easy to run at those losses either. But I would say that even today and so far, has been a massive supply response to the reduced demand from the global market, but also from the reduced demand in the local market.
Okay. Thank you very much.
Thank you.
There are no further questions at this time, sir.
Okay. Then we will thank you all for participating at this conference call about the Aera's second quarter sorry, first quarter results. Thank you.
Thank you. That does conclude our conference for today. Thanks for participating. You may all disconnect.