Thanks for standing by. Welcome to Yara's first quarter results 2017 conference call. At this time, all participants are in listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press star one on your telephone and wait for your name to be announced. I must advise you this conference is being recorded today, Wednesday, 26th of April, 2017. Again, the conference manager for you today, Svein Tore Holsether. Please go ahead.
Thank you very much, welcome to Yara's first quarter results conference call. Before we open up for questions, some brief comments on our results. Yara 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, both for fertilizer and industrial products. Our ammonia production was lower, underlining the need for our ongoing efforts to improve operations. The Yara Improvement Program is on track and has already delivered $90 million of the targeted $500 million annual earnings improvement in 2020. In addition, Yara is expanding capacity in several plants to drive further growth in Brazil and elsewhere.
Applying current market prices, our pipeline growth projects are expected to generate approximately 6 Norwegian kroner per share of incremental earnings by 2020 when fully operational. With these introductory remarks, we are now ready for your questions. Operators, if you could please now open up for questions.
Certainly. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Once again, that is star one if you wish to ask a question on the phone line. 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 there, Svein, the savings so far, $90 million, close to NOK 800 million. Do I assume you've delivered about NOK 200 million of those in Q1, and how should we think about the 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 the phasing of earnings through the year. 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? Thank you.
Okay. Thank you very much. I'll get Svein on the Yara Improvement Program, and as you rightly point out, the impact that we've had now is $90 million 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 million on the full year. You just divide that $90 million on four, and then you add the impact to the quarter. The actual impact in 2017 will be impacted by or is impacted by prices and gas prices and so on and so forth. The actual impact is lower in 2017, but when we compare to 2015, it is one fourth of that, of $90 million.
I think, Paul, you asked about the full 2017 effects where we confirm our target of $150 million effect in total for 2017.
Interesting. Thank you.
On the second quarter pricing, your question there. If you start with nitrate second quarter, it's I would say typically the most difficult quarter to forecast. In general, we don't give good forecasting on our pricing. The second quarter is a split between the residual seasonal nitrate in Europe and a typical price situation. Late in the season is that you just aim to keep current prices until the end of current application season. When that starts to dwindle down, you have to set a new price to motivate delivery for next season. If you look at it typically more or less every year, that typically happens during May. If it's on earlier May or later May price setting depends on the market supply and demand and for how long does current application be running.
If you look at from an agronomic point of view, you can at least say that what we have seen in March and a little bit into April was some delay in application in parts of the areas due to, in the north, colder and wetter weather, and in the south, a little bit drier weather there. The big uncertainty, as always in the second quarter, is when do you set a new season price and how quickly is that new season price accepted by the farmers and distributors and the limit is picking up for the new season.
On NPK, I mean, without Terje Knutsen, I can add on that. Of course, when you look at NPK, one thing is the premium that we get on top of prices. It's also influenced by commodity prices and what we've seen there. It's that phosphate prices have come up a little bit.
In the first quarter.
Yeah.
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. 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 increase NPK value?
No, decreased in the second quarter compared to the first quarter.
Sorry, thank you. Just on the supply side in urea?
There are many plants that are kind of closing in on start, that are in kind of either in commissioning phase or about to start up. I mean, we have the slide in the presentation, with the CRU's kind of not necessarily their view either that the world will add 8.2 million tons outside China, but that the capacity increase is 8.2 million tons outside China. When you look at startup 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.
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 8.2 million tons, but still significant. It is not easy 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. My first question's on Brazil. I mean, all the color we've gotten has been Brazil's 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. In Q1, Yara had, I believe, volumes down 1% year-over-year. 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 indicated, is slightly down in total. 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. 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're ready to move on short notice if sales go above our projections. You should see the fourth quarter last year and first quarter this year, it's almost combined there, where we were lower than the market on commodity price, but where we did see a strong increase in the premium price.
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, there was a huge step up in sales. You could say the market increased 7% compared to a year ago in first quarter 2016, which probably, in a way, took part of the market as a surprise. While Yara had pretty good sourcing available, and we took a position on that, we increased sales last year 15%, because they've increased our market share substantially a year ago. 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. It's back to the priority between commodity products and premium clearly on what we go after then.
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?
Well, the numbers from ANDA, the organization down there, does show what you say, that compared to first quarter last year, there has been a stronger level of imports than development in the sales. I think if you just look at the numbers, supply versus sales, they probably added 1 million tons or so on product through the first quarter, whereby first quarter last year was relatively flat. I think 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 CRU's forecast, and not your own, whatever your own are is. It's much different than the one you presented 3 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 at least in terms of incremental supply and then demand or growing supply in 2019 and 2020. I don't really care much what CRU says. I really care what Yara thinks. If you review that it should be balanced and tighter from 2018 on, does that play into your planning? Thanks.
The problem is that we have the corporate policy of not giving kind of guidance on our value drivers for our share price. That kind of complicates things a bit in being too specific on this. Of course, we have our own internal supply demand balances that we work on. We 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, we have talked about the swing producer role of China and the importance of the Chinese export costs in the global pricing. I guess you also see that because of this low price environment, there is less investment in new capacities also.
That is this wave of new capacity that we're now seeing, whether it now comes kind of this year, next year, all that plays out. Also, as you say, there 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. We didn't understand why all those projects came into the list last time. Same with this Nigeria project. It's a big project. Dangote is the owner there, and we understand there is some material sitting in boxes in Nigeria that is imported. The production has not started, which tells us that at least these are in the kind of earliest phase, three, four years away, even if something started to move.
I think it's those kind of elements that now have kind of also been kind of sorted out and in this CRU balance. I guess you can say that the way it now looks, it's more similar to our own at least.
That was helpful. Thank you very much.
Thank you. Your next question comes to the line of Neil Tyler of Redburn. Please go ahead.
Good afternoon. A couple of questions, please. Firstly, I was listening to some of your webcast this morning before I had to leave. 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 stacking policy or pricing system, because I thought the idea was that you were aiming to limit volume at a certain price level so as to avoid the sort of situation you've just experienced in which customers are able to book more orders at advantageous premium. 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. Rather a long one. Sorry about that.
Secondly, just going back to the step-up in the gas price in Pilbara. Can you confirm, is that a fixed price contract still, so that NOK 180 million basically cycles for four quarters and then disappears? Or have you now sort of moved on to a variable price contract there? Finally, I think you mentioned NOK 18 million of one-off OpEx in your webcast this morning. Hopefully, that's the right number. Can you help me understand how much of that is in the bridge within special items and how much is contributing to the fixed cost step-up? Thank you.
Okay. If I start on the Pilbara gas contract, we can never fully disclose, you could say, our pricing structure. What we have said is that there is a step-up in the contract. We said that also when we acquired the remaining part of that plant in 2015. It's a long-term contract where we have a step-up by end of 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. For a given ammonia price, yes, there is a lasting step-up from 2016 and going forward.
That's where we guide them that we have roughly a cost effect of NOK 180 million per quarter going forward, it will be a step-up from 2016 to 2017.
On the nitrate pricing then, I would say that we have not changed our stacking policy as such, but the stacking policy gets different effects depending on how prices are developing, and you could say how global prices are developing. In the stacking or in the delivery in Europe, we have typically at least a one-month timeline from we take an order and fix a price until it is delivered. Then seasonal, as you go into the peak season, as you go closer to the holiday period, end of December, you also that the order book tend to increase then to secure delivery also over the holiday season and to be able to optimize logistical also in the peak season. We typically have a two months timeline, you could say, in the peak season into first quarter.
What happened this year, which gives quite a big old timeline effect, is that you have significant urea price increases in October into November last year. Just say, if you look at the 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. We increased also nitrate prices significantly late in the fourth quarter, but that didn't get an effect before, you could say, last part of first quarter. We have a significant negative timeline effect in the first quarter. This year was actually last year, it was slightly opposite as 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 urea last year, which has been taken back in a way this year, but at lower premiums then. The policy has not changed, but market dynamics are different from year to year, and it's mainly the urea 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 then. We had one plant out, the Porsgrunn plant out, through a large part of first quarter, and some of the competitor plants also had more problems last year.
I can make a few comments with regards to your comment on the OpEx of NOK 18 million of one-offs. This should be seen as an accumulated cost. As we indicated, when we give more detail of this in connection with the fourth quarter presentation, we said that we had NOK 10 million of one-off OpEx cost in 2016, and that it would be at NOK 30 million in 2017. The 18 refers to the NOK 10 million that we had in 2016, and then it would be NOK 8 million for the quarter. 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. I just want to underline that these costs are in line with what we communicated before. We are on track on that spending.
Thank you very much. That's very helpful.
Thank you. Your next question comes to the line of Ben Isaacson of Scotiabank. Please go ahead.
It's Oliver on for Ben. Thanks for taking my question. You mentioned Chinese supply setting urea prices. I just want to dig into that a bit. Would you still view Chinese anthracite producers as the current marginal cost producers? Around what price do you see marginal cost at right now? Finally, how do you see that marginal cost producer changing during low demand seasons?
Yeah. We do think still the anthracite coal producers are seen 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, non-integrated 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 of what their cost level is, that's a little bit difficult because if you just pick out, let's say, the variable parts, the cost of purchasing the coal, electricity, all those cash outlets, even salaries can be a bit on and off sometimes in China.
I think you get a fairly kind of good consistency between where prices have been at the floor and where the costs are at effect, like around $190 last summer, around $210 at the moment, for instance. 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, if you try to kind of develop a more kind of full cash cost basis over some time, we think it's higher than that
Others still think it's higher than that. On your question on weak demand periods, probably a good point. So far, we've seen fairly good consistency between the export price from China and other references. They follow each other very closely. You saw there was an exception in November last year when India canceled its tender. Traders had basically lined up more than 800,000 tons for delivery to India, and it was canceled. You saw what happened, because then suddenly all those volumes had to find homes, and there were many weeks without a need for further purchasing in China, and prices have 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 as it went down to almost $210. Now they're up again at $215, really struggling.
Can be no doubt about that. Still, the Egyptians have now sold at $200, even $195, and the same thing in the Black Sea. You see a little bit tendency, as you are indicating, due to the weak demand picture outside China, that there is a slight disconnect. This is something that, of course, can happen then short term from time to time if the volume of Chinese urea that is required in the global market is relatively low.
Thank you.
Thank you. Your next question comes the line of Stephanie Boswell 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. You obviously had a fairly significant drop year-over-year in the EBITDA within the Crop Nutrition segment. 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. Just following on from the earlier questions, if I was to assume that everything else was 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. 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. If you could just confirm that'd be helpful. I had one follow-up question, which I'll give to you afterwards. Thanks.
Yeah. When it comes to nitrate premium in the second quarter, I think I have to repeat partly what I mentioned before, that the second quarter is one of the most difficult to predict if you had a clear guiding on a forecast, because it's two periods. One is the end of the current season and to what extent you're able to keep current prices and more demanding for how long. Typically, you set a new season price somewhere through May then. 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 off take 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 urea prices at that point in time.
That we will announce to the customers then at the same time as you will learn it. We can and will not announce that for the time being. When it comes to current list pricing, the last price we have given to publications and list price in Germany, EUR 230 per ton there.
Okay. Thank you. The second question was on working capital. I was hoping that you could help me understand the working capital outflow over the course of this quarter. There's obviously a lot of moving parts with regards to pricing and currency, I'm just struggling to reconcile it with the note within your accounts on the net changes in working capital. I'm interested to know whether or not anything's actually changed in your business from a fundamental underlying point of view, or whether it's just been driven by changes in commodity price environment and FX. Thanks.
Yeah. It's related to season, meaning volumes and prices. 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. That we typically have more of in the peak season. Prepayments seasonal go down from the fourth into the early first quarter. That is partly offset by lower inventory values then. Inventory volumes are roughly in line with last year, or last quarter. Values are down. That explains the roughly NOK 1.2 billion increase in net working capital. It is receivables by season and prepayment from farmers or from customers.
I suppose if I look at the Q1 2016 number, you had a working capital benefit. You would have also had prepayments within the first quarter last year. 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?
Total prices increased into the first quarter while they were declining last year. Of course, you also have the product and geographical mix there.
Okay. Thank you very much.
Thank you. Your next question comes from the line of Felicity Smith at Hargreave Hale. Please go ahead.
Good afternoon. Thanks for taking the question. Just to clarify, you've got the Yara Improvement Program where you're still comparing what you will gain from it versus the situation in 2015. You have restated, I think, the investments in growing your premium products, where I think the EPS effect is now six and it was ten. 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.
Yeah. If you look at the Yara Improvement Program and if you look at the 2020 effect, if you look at the split there, one element of it, about $150 million, is in procurement then. That's on running prices.
Okay.
That wouldn't change as such then. About $125 million or $150 million is fixed cost, which would not be affected. You have an element of $75 million of which are probably on energy. That will, of course, depend on energy prices then. Energy prices were somewhat higher in 2015 than they are now. You can say the savings due to energy efficiency is smaller. So is also our energy costs. I wouldn't be too unhappy.
Yes
With that element. The last element, which clearly is price related, is volume spent. We foresee an effect of about $150 million on volumes. That is 400,000 tons more ammonia, 700,000 tons more of finished fertilizers.
Okay.
Those margins are somewhat lower now than they were in 2015 then.
Okay. That's helpful. Thank you.
Thank you. Your next question comes from the line of Andrew Stott from UBS. Please go ahead.
Thanks. Good afternoon. Thanks for taking the questions. I'll start with U.S. deliveries. I get the fact that imports are down because, of course, we got new supply, including OCI opening up recently. Are you surprised to see the -5 for the entire market as you portray it? I'm looking at slide 33, I 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 Porsgrunn, whether there's any increased ammonia costs for this year. Finally, I did not understand the answer to the question from Steph just now on working capital.
The way I see it is your receivables are up, which was the answer, but that's probably easily explained by LATAM being well up when LATAM is down. Can you just explain why your receivable terms are worse? Thank you.
Shall I start on the U.S. deliveries? According to our estimates, there is around roughly 5% drop in total deliveries of nitrogen in the U.S. market this season. 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. As you say, there's been an increase in domestic production of nitrogen, and there's been a decrease in imports. All that decrease in the imports came in the third quarter, basically, where we think that buyers were kind of anticipating new supply from domestic producers in the U.S. and were very reluctant to take positions on imports.
It's been stronger recently, and there's been 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. Let's say if it ends up down, let's say 2%-4%, and not 5%, but ends up down 2%-4%, I wouldn't say that's dramatic in the view of a 5% drop in corn acreage, according to the plantings report from USDA and historically low wheat acreage, et cetera, in addition to low grain prices in general. To us, it feels like this is fairly consistent with what you might expect
Okay. You're saying it's the soybean acreage expansion that's behind the volume drop, is basically what you're saying?
Right.
Yeah. Okay. Thank you.
Part of it, yeah. Part of it.
I can give some reflections on your question with regards to the ammonia production in Porsgrunn. Since this is a very recent event that happened very early in the morning on Monday, it will still take some time before we are 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. The fire took place in the area where we have the compressors. Now, compared as to our first voice when we heard about the fire, we had thought that the compressors were lost from a distance.
What we've been able to observe, it might not be damage to the compressors, but it's something that would be impossible to state anything on until we had the opportunity to remove them and open them up and see whether there is damage to them. Then the amount of damage will determine how long it will take before we're operational again. What is safe to say is that we will go past our 45-day period, before the business interruption insurance kicks in. Leading up to that period, there will be an ammonia production loss or contribution from ammonia production that will be lost of about, say, on about 40,000 tons. Porsgrunn is set up to run on imported ammonia as well, and has done so several times in the past. It's possible to run the plant without internal ammonia production.
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 45 days.
Okay. Perfect. Thank you. The last question was on receivables.
On back on receivables, as I said, the main explanation for the increase in operating capital is higher receivables, that's higher sales revenue as such 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.
Can I just stay with this, because your revenue's down by over NOK 2 billion year-on-year, and obviously you said yourself the NOK 1.2 billion outflow.
Yeah
it goes against that. Your ratio has changed dramatically or at least materially, sorry. I honestly don't understand the math. What am I missing?
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. That's also not only the total quarter, because most of our sales, we have a shorter credit day than a quarter, 90 days. It is how the situation is on receivables by end of March this year compared to December last year. One thing there, extra on seasonality, is that sales decline in the second quarter or in the second half of December in large part of the world due to holiday season there. It's quite a normal seasonal effect that receivables are higher by end of March than by end of December there.
Oh, okay. It should swing back in Q2, is what you're saying?
Yeah, it will swing up and down depending on how the receivable situation is by end of quarter. You are right, it's seasonal. It's a normal increase from end of fourth to end of first quarter. Of course, how it will be by end of June, again, we'll be very much back to how does the new season deliveries in Europe pick up there among us.
Okay. Thank you very much.
Thank you. Your next question comes to the line of Patrick Lambert of Raymond James. Please go ahead.
Hi, good afternoon. Again, on a bit more precision on the fire in Porsgrunn. Do you expect any disruption in the NPK production at Porsgrunn due to the fire, or are you quick enough to use the import of ammonia to compensate for that potential loss of volume? That's the first question. The second question is, again, a bit on where we are in the season in terms of applications. For me, the U.S. is clear, the rotation, but Europe is still up 3%. I think if I look at last year, 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? Thank you.
Okay. I'll start on Porsgrunn and provide some more clarity on that. As I mentioned, we are able to run the plant based on imported ammonia. Obviously with the fire, the plant was fully shut down in the morning hours of Monday. We were able to restart parts of the production of fertilizer already the same day. We are already now back in full operation in the rest of the plant. The only part of the plant that is not operating now is the ammonia plant.
Perfect.
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. The bigger uncertainty then, as always, is how quick and how strong will deliveries start when we announce a new starting price for the next season. That is difficult to predict up front, and it's significant uncertainty and potential phasing there that's in the second quarter and early into third quarter.
If I look just at the current season, you think we could see some negative volumes versus last year to finish up the season?
Yeah, maybe more. The underlying demand growth is probably not 3%. If you take away the, let's say, the pipeline effects in between seasons and so on, I understand your point.
It was plus seven in H2 also. It seems.
Yeah
still very high.
It wouldn't be unnatural if the total nitrogen delivery to Europe drops slightly than in the second quarter for the total market. We also see urea imports coming down at a much lower level than last year, for instance.
Yeah. Okay.
Thank you. Your next question comes from the line at Thomas Wintersworth, Citi. Please go ahead.
Yeah, 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 questions. Right at the start, you talked about demand and applications in Europe, obviously demand is up and with low application rates. You said that was a potential positive because, if I understand you correctly, that you think that perhaps some element of demand in Europe is missing. I didn't quite understand how you saw that. In that context, my understanding last year was that you reduced prices pretty early in May, sort of unusually early, but that was partly because raw material costs had also fallen away, so you were able to price quite competitively to gain advantage.
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 granulated NPKs were under pressure or not. Thanks very much.
Yeah. If I start, you're probably referring to my comment where I said that we have heard that application maybe was some slid down in some areas in March due to cold and wet weather in the north, maybe some drought in the south. 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. That was a reference between, say, March or April, maybe May, deliveries or application and deliveries, and not for the total season. That's one element. Your other question then on when is a new season price set, you referred to last year that it was set earlier in May.
I think one element influencing that also was when you looked 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, you started clearly to get more urea import. You don't see the same situation this year also, as Torgeir referred to earlier, it's actually less urea import now. It's also back to the comment where we said that we were 3% or nitrogen deliveries have been 3% ahead so far in the season and where will it end. Well, as Torgeir said, maybe or probably somewhat lower than 3%. What is comforting for us then is that urea import have lost quite a lot of market shares. It means that it can be still some more room for nitrates at the end of the season.
Maybe later on you're thinking about why and how far should the nitrate prices drop for a new seasonal price, largely referring to gas prices. 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. We are more pricing it up against the alternative than being urea. Torgeir answers the question what kind of premium we get on top of that urea price. A last element is maybe on inventories than on nitrate inventories. Back also to the fact that a lot of deliveries have been nitrates this year replacing urea. We have a slide also in our pack, page 36, which shows European producers' nitrate stock. Then you see there that nitrate stocks by end of March is not particularly high.
It's slightly lower than most of the previous four, five years. On your NPK question, I'm not exactly sure if I've got it right, what you ask, our reference earlier when it comes to the downward pressure was more on the blend value. If you look at slide 13, which I guess you refer to on the right-hand side of slide 13 in the presentation. At least what I try to convey is that due to the price drops that we've seen for urea, in particular in April, also a little bit lower DAP prices, in April, the blend value or the blend cost will drop from March.
That will actually expand, the NPK premium, we assume that we sell NPK at the same price, that's not what I'm saying, our point was that the pressure was a little bit on the blend value and not directly on our N, over NPKs.
Okay. All right. I understand that. You're definitely not saying that the NPK premium itself is coming under pressure. Simply that the component value of the underlying commodities will be lower in April than March. You're not making any further comment on that.
Right.
Can I ask the question, do you think there's a trend down in that premium? The way the chart looks, it looks like there's something of a downward trend in that premium, and we're seeing quite competitive markets in Southeast Asia. Can you perhaps give an indication of whether you think the actual premium itself is under some pressure over the coming months?
You could 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. The other is clearly crop prices because the value of using complex NPK versus more blend or different strengths and if that you get better yields. Of course, those better yields are more important at higher crop prices. 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, proportionally, it's significant in Europe, and there you also are hit by crop prices at particularly wheat and nitrate premiums are also down and influencing NPKs then.
Okay. No, thank you very much.
Thank you. Your next question comes from the line of Nikhil Mata of Goldman Sachs. Please go ahead.
Hi there. It's actually Steve Benson here from Goldman. Could I just go back to the supply-demand, the CRU outlook that you've presented. I think on the webcast this morning, you mentioned the 8 million tons of supply for this year was more likely to be six in your view. Is that just shifting volumes 2017 moves into 2018, or is it that this Iranian 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 halve 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? 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.
Yeah, I think for the most part, I think we think it's timing effects. There are some exceptions. I really don't like to go into too much details. I think we still think that there is a totality. It's a little bit also on the high side. Not massively so necessarily, but some. There seem to be a systematic bias in these kind of projections. I'm not accusing CRU or anything. We are actually choosing them because we think they are among the best, and that others are even more biased, that they tend to include too much capacity and too soon. We think there is a clear bias to that. We've also looked back. If something possible to do, look back and actually document that.
On the China situation, obviously, if there is no need of Chinese urea in the global market, there is more likely to be disconnects between the export cost from China and other price references. Then other producers' costs become more irrelevant. You could even say that maybe the Chinese import situation could become irrelevant. There is, of course, the logistical changes in the flows and also the VAT on imports and so on. There's a shift there. Yes, that would be an implication if nothing is needed. That's not the situation in the current market. There's still exports, some 450,000 tons in March. Not there. I don't think if you even look at the CRU numbers, they are still predicting Chinese net exports. Reactions to running at lower than marginal cost.
Yes, I think there is reactions, and the industry is believed to run, numbers are estimates, let's say around 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. January, February production is announced 22% lower than last year. There is massive reactions to this situation. So far, at the moment, it doesn't look to be quite sufficient. Although this year, the price, there are again talks about somewhat higher prices for urea in China this week and also in the export market. Who knows, maybe it looks to be balancing a bit better, and the capacity utilization rate is reported to have dropped also last week. 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, other kind of liabilities. We understand that the banks and others are asked to inject liquidity into this system to at least keep it going at some rate. There's a trade-off also for many of these plants to keep running despite actually being cash negative. It's not an easy call to close the plants. I guess over time, it's not so easy to run at those losses either. I would say that even today and so far, there's been a massive supply response to the reduced demand from the global market, 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, we will thank you all for participating at this conference call about the Yara's first quarter results. Thank you.
Thank you. That does conclude our comments for today. Thanks for participating. You may all disconnect.