Construction costs a concern | Final investment decision on Sask. fertilizer plant expected in June
Yara International may be backing away from plans to significantly expand its Saskatchewan nitrogen fertilizer plant.?
The company announced last June that it intended to add 1.3 million tonnes of urea production to its facility near Belle Plaine.?
The expansion would more than double the capacity of the plant.?
Yara received approval from its board of directors for a fast-track process that would see the new facility start up in the second half of 2016.?
“Part of the urea produced will be with sulfur, which will meet the increasing demand from the canola crop segment in the Northern Plains region,” the company in a June 2012 news release.?
However, the fertilizer company is having second thoughts about the project because of escalating construction costs.?
“The price or cost increase in Canada is above what we had expected and we are now negotiating with the different contractors to see how we potentially can get the costs down,” Yara president Jorgen Ole Haslestad said in a conference call with investment analysts, according to a transcript provided by Seeking Alpha.?
“If we are not able to make it a commercially viable project, then we will not build. But hopefully we will be able to.”?
Mark Cooper, president of the Saskatchewan Construction Association, said Yara has raised its concerns with the association and the provincial government.?
“There certainly has been growth in cost and that comes with growth in the economy in general, but at this point we don’t consider that growth to be out of line with what can be expected in other jurisdictions,” he said.?
Saskatchewan’s average hourly wage for construction workers has risen 25 percent over the last six years compared to a 15 percent increase across Canada, but it remains lower than the national average. ?
The average hourly wage for a construction worker in Saskatchewan was $25.78 in March 2013, compared to $26.54 in Canada and $26.06 in the United States. ?
“What I’m hearing from industry leaders is that our costs are not out of line at all,” said Cooper.?
He acknowledged there is lack of skilled tradespeople in Saskatchewan and neighbouring provinces, which forces the industry to recruit from elsewhere in Canada and internationally. ?
Saskatchewan’s employment demand is forecast to peak in 2015, based on expected construction projects, after which labour supply and demand should be in closer balance.?
Yara spokesperson Esben Tumen said the company has legitimate concerns.?
“Prices are high. This is an expensive place to build a plant,” he said.?
Tumen expects a final investment decision to be made in June. ?
“The cost of this project is obviously one of the key factors when we make that decision,” said Tumen, who wouldn’t say what the company hopes to spend on the project.?
David Asbridge, president of NPK Fertilizer Advisory Service, estimates the expansion will cost $1.3 to $1.5 billion.?
He said it doesn’t bode well for the dozens of other proposed nitrogen fertilizer projects if a company like Yara is balking at building a facility.?
Yara has a cost advantage over other projects because it is an expansion project that will use existing infrastructure rather than building from scratch.?
“They’ve already got a head start on somebody like the Egyptian plant in Iowa for instance, which is basically going out in the middle of a corn field,” said Asbridge.?
Green Markets, a U.S. publication that covers the fertilizer industry, published a list of 26 companies in December contemplating the construction of more than 40 nitrogen fertilizer plants in North America. The list has since grown to more than 30 companies.?
Asbridge said Yara has a leg up on about half of the proposed projects, which have never produced or marketed fertilizer, because it already has established distribution and marketing systems in place.