Rabobank’s view on the fertilisers market -...
Transcript of Rabobank’s view on the fertilisers market -...
Global market dynamics and 2020 outlook
Rabobank’s view on the fertilisers market
Dirk Jan Kennes
Food & Agribusiness Research and Advisory (FAR)
Rabobank International
Demand dynamics
Rabobank’s view on the fertiliser market
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Farm inputs – Long term demand drivers remain positive
Supply Demand
Source: Rabobank analysis
As agri demand growth exceeds supply yield improvement has become imperative
YIELD
LOW HIGH
Ha
Food, feed, fuel demand 2005
Food, feed, fuel demand 2020
Ad
dit
ion
al
14
0 m
illio
n
hecta
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30% yield
increase
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Higher and more volatile prices
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700
USD
/ T
onne
Wheat (US) Corn (US) Soybeans (US)
On average
higher and
more volatile
prices
oversupply tight
Source: Bloomberg, Rabobank
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Farm inputs
Crop farming
Trade Livestock farming
Processing Retail Consumer
Crop farming: sustainable intensification
Issues
Increase crop per ha, per drop water and per kg nutrient
Increasing capital intensity
Enabling environment crucial
Managing risks (inputs, prices, production, marketing)
Enable entrepreneurship in a consolidating world
Investment themes
Rising land prices
The emergence of the rural entrepreneur
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Farm inputs – The start of the food & agri chain
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US
D/
Acre
Seed Fertilizer, Lime, and Gypsum
Chemicals Custom Operations
Fuel, Lube, and Electricity Repairs
Hired Labor Other Variable Cash Expenses
Interest Total Fixed Expenses
Total, Gross Value of Production
Gross value of production & expenses for US corn producer
60% 24%
16%
Nitrogen (N)
Potassium (K2O)
Phosphorus (P2O5)
World Fertiliser market: USD100 billion plus
Sources: Global Insight, IFA, Rabobank analysis
Fertiliser prices respond fast to improving farm margins
Fertiliser prices respond fastest to the improving fundamentals in ag market
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US corn farmers see fertilisers and seeds as most important inputs
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Seed
Fertilizer
Chemicals
Fuel and Electricity
US corn farmers’ spending on seed, fertiliser, agrochemicals, and fuel & electricity
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Historical fertiliser demand development explained
The volume of the fertiliser demand is the product of three components:
(1) Area * (2) crop mix factor * (3) application rate = volume of fertiliser market
1. Area: area dedicated to crops that are fertilised
2. Crop mix factor: average number of kg of nutrients per ha for actual crop mix with application rates in base year
3. Application rate: average number of kg of nutrients applied per ha for a specific crop
In the following slides you will see the evolution of the market volume of fertiliser in the top left graph.
The explanatory factors are given in the other slides:
area development in the top right graph,
crop mix changes (change of average application rate due to change in crop mix and assuming base year application rates) in the bottom left graph
application rate changes in the bottom right graph
The average of 2006 and 2007 is taken as the base year for all factors
The next step is to include FAR’s prediction for areas in 2020 for the different crops in the model and make an assumption about application rate development from now to 2020. Based on these two items the 2020 fertiliser demand can be predicted.
Area, crop mix and application rate together explain volume of fertiliser market
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EU27
Area impact (2006-2007 = 100)
Application Rate impact (2006-2007 = 100)
Market Volume (2006-2007 = 100)
Crop Mix impact (2006-2007 = 100)
EU27 = all current EU member states included in all years
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1961 1970 1980 1990 2000 2009 2020
K
N
P
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1961 1970 1980 1990 2000 2009 2020
area
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K
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1961 1970 1980 1990 2000 2009 2020
K
N
P
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North America
Area impact (2006-2007 = 100)
Application Rate impact (2006-2007 = 100)
Market Volume (2006-2007 = 100)
Crop Mix impact (2006-2007 = 100)
North America = Canada, Mexico, United States of America
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1961 1970 1980 1990 2000 2009 2020
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P
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Area
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1961 1970 1980 1990 2000 2009 2020
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Asia
Area impact (2006-2007 = 100)
Application Rate impact (2006-2007 = 100)
Market Volume (2006-2007 = 100)
Crop Mix impact (2006-2007 = 100)
Asia = Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Thailand, Vietnam
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South America
Area impact (2006-2007 = 100)
Application Rate impact (2006-2007 = 100)
Market Volume (2006-2007 = 100)
Crop Mix impact (2006-2007 = 100)
South America = Argentina, Brazil and Chile
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Conclusion Global demand growth of 2% for nitrogen and 3% for potassium towards 2020
Changing farming best-practices
Integrated approach regarding farm inputs necessary
Potential depressed farm earnings in coming 3 years might delay the
penetration of these innovative farming practices
Relative high agricultural commodity prices incentivize farmers towards sustainable intensification
Balanced crop nutrition will gain importance
Improved application technology
Increased regulation (e.g. EU legislation)
Potential depressed farm earnings in coming 3 years might delay the
penetration of these innovative farming practices
Farmers’ instant response to improve yields through increased fertilizer spending not sustainable longer term
Potential depressed farm earnings in coming 3 years might delay the
penetration of these innovative farming practices to materialize beyond 2020
Global demand growth of 2% for nitrogen and 3% for potassium till 2020
Beyond 2020 much lower growth rates for fertilizers likely
Long term volume growth expected to significantly lower resulting from lower application rate growth in Asia and Latin America
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Trade dynamics
Rabobank’s view on the fertiliser market
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The regional fertiliser (im)balance necessitates trade
Source: IFA, Rabobank analysis Figures in thousand tonnes
While nitrogen supply-demand is relatively balanced, phosphates and potash market relies heavily on international trade
Large export region for Potash and Phosphate products
-2000
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4000
6000
8000
Africa
-2000
2000
Oceania
-6000
-2000
2000
Latin America
-10000
-6000
-2000
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6000
10000
14000
North America
-9000
-5000
-1000
3000
7000
East Asia
-10000
-6000
-2000
2000
South Asia
-2000
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Middle East
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9000
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15000
Euro/Asia
-1000
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Central Europe
-6000
-4000
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West Europe
□ Nitrogen balance 2012 □ Nitrogen balance 2016 □ Phosphate balance 2012 □ Phosphate balance 2016 □ Potash balance 2012 □ Potash balance 2016
Large export region for all
nutrients
Major import regions that have large bearing on price
dynamics
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Key importing countries
Urea
Total traded volume of 40 mt
MOP
Total traded volume of 43 mt
DAP
Total traded volume of 16 mt
India is top importer of fertilisers, followed by USA and Brazil
USA 16%
Brazil 7%
India 16%
Thailand
6%
Others 55%
India 48%
Pakistan 4%
Vietnam 4%
France 3%
Brazil 3%
Others 38%
USA 19%
Brazil 16%
India 14%
China 12%
Indonesia
5%
Malaysia 5%
Others 29%
Source: IFA 2010 figures, Rabobank analysis
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Key exporting countries
Source: IFA 2010 figures, Rabobank analysis
Urea - fragmented market
Total traded volume of 40 mt
MOP – oligopolistic structure
Total traded volume of 43 mt
DAP
Total traded volume of 16 mt
Different industry structures impact supply dynamics
Russia 11%
Ukraine 6%
Egypt 8%
Oman 9%
Qatar 7%
Saudi Arabia
8%
China 18%
Others 33%
USA 26%
China 25% Russia
12%
Morocco 12%
Tunisia 7%
Jordan 5%
Lithuania
5% Others
8%
Canada 37%
Russia 19%
Belarus 16%
Israel 11%
Germany
10%
Jordan 4%
Others 3%
Potash supply dynamics
Rabobank’s view on the fertiliser market
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Current oligopolistic structure of industry favors supply side long term
Medium-term supply expected to remain tight despite currently peaking inventories
Recent contract negotiations favored buyer side
Key players/price setters
Decreasing interest from giant miners
Price followers operate in and benefit from strict supply discipline
Supply side
Key drivers include
– Contract negotiations with India and China sets price bottom
– Agricultural commodity prices that drive farm margins
Demand in key markets will continue to rise especially where nutrient-balance needs attention
Securing stable and timely supply of potash is a key priority of Indian, Chinese and Brazilian governments
Demand side
Source: Rabobank FAR
19
Initiatives to break oligopolistic structure fading away
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Winners and losers in potash market
89% 86% 86%
85%
67%
75% 78%
0%
20%
40%
60%
80%
100%
120%
2005 2006 2007 2008 2009 2010 2011
Potash Corp Mosaic Belaruskali
Israel Chemicals K+S Agrium
Uralkali-Silvinit World
Capacity utilisation development
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
K+S BPC Canpotex ICL
World export market share development
Source: Company reports, Rabobank Source: IFA, Rabobank
Observations on capacity utilisation
Distinct differences in capacity utilisation for various players
Observations on potash exports
Rising market share of BPC
But declining market share of Canpotex
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Canpotex carries large burden while peers gain market share
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All 3 scenarios point towards a buyer’s market
BPC and Canpotex players may try to oversupply the market to discourage competition
Overall, pricing dynamics are set to change
– Players outside the cartel can distort the market
– Importers will have more supply options
– Price bottom based on cost of production of marginal producer
Scenario analysis - 2011
Source: Rabobank FAR
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New capacities and players will have impact on the market
High import reliance of India, Brazil and China
Bala
nced d
em
and-s
upply
Excess s
upply
Low import reliance of India, Brazil and China
Wildcard
Base Case
Upside
Current status
Key takeaways and implications
Market less favourable for independent players
China
India Brazil
Brazil
China
India
India
China Brazil
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General assumptions in 2011 scenarios
Demand growth at consistent 3% rate p.a. (exception: Chinese demand growth of 5.6% p.a.)
Part of demand in China, India and Brazil is fulfilled through strategic investments in greenfield projects
Demand
2011 base for world capacity based on IFDC data. Forward expectations based on Rabobank analysis of 63 new projects
Capacity developments that are considered in all scenarios (excluding importer driven supply):
– Greenfield project of BHP Billiton (Jansen); only 1. 2 mt K2O/ 2 mt KCl
– Greenfield project of EuroChem; 2.8 mt K2O/ 4.6 mt KCl
– Greenfield project K+S; 1.6 mt K2O/ 2.7 mt KCl
– Brownfield expansions of Mosaic, PCS, Agrium, Uralkali, Belaruskali; around 6mt K2O
Operating rate of 85% assumed for calculating supply
Capacity and supply
Source: Rabobank FAR
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All three scenarios point towards large potential surpluses
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Three variables will set the extent of oversupply
Brazil, India and China collectively import close to 18 million tonnes KCl
annually
Growing import reliance, frustration from one sided contract negotiations
and strategic importance of potash nutrient for long term viability of their
growing agri sector represent primary drivers
No dearth of options in the form of developing greenfield mines
Importer’s lure to secure stable supply
Elevated potash prices and profitability has attracted investments from
number of new players
Capex of at least $1000/tonne needed to build greenfield mine and securing
financing may represent key bottleneck in realising production
Securing financing for the greenfield projects
Response of existing low cost players and large volume – Potash Corp and
Uralkali- will be critical in limiting the extent of oversupply
Flexible and buyer friendly contract negotiations may dilute importer’s
incentive to make strategic investments in greenfield mines in the short term
Fiercer competition may trigger further consolidation in the market
Response of traditional players to discourage entry of new players
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Looming oversupply in the market (A look at original scenarios in bullish environment)
Wildcard/Downside case
19.5 2,7 1,0 0.9 7.2 3,4 1,2 2,9 0.4 0,7 2 1,2 121
0
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140
Curr
ent capacity
Cert
ain
capacitie
s
(fig
ure
1)
Zhongchuan
min
ing/Q
inghai …
Junio
r m
inin
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investm
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by …
SD
IC X
injiang
Luobupo P
ota
sh, …
Junio
r m
inin
g
investm
ents
by …
Vale
, Arg
entina
Vale
, Bra
zil
Vale
, Canada
Verd
e P
ota
sh,
Bra
zil
Aguia
Resourc
es,
Bra
zil
Pota
ssio
de B
razil,
Bra
zil
Rio
Verd
e, Bra
zil
Capacity in 2
020
55% increase including capacity from Potash juniors and importer driven investments
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Upside case
78 19.5 2,7 3,4 1,2 2,9 107
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Curr
ent capacity
Cert
ain
capacitie
s
(fig
ure
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Zhongchuan
min
ing/Q
inghai Salt
Lake J
V,
Canada
Vale
, Arg
entina
Vale
, Bra
zil
Vale
, Canada
Capacity in 2
020
38% increase including capacity from Potash juniors and importer driven investments
78
97.2
5 4,6 2,7 2,6 2 1,4 0,758 0,5
0
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120
Curr
ent capacity
(2011/1
2) PCS
Euro
Chem
K+
S
Ura
lkali
BH
P
Mosaic
Agrium
ICL
Cert
ain
capacity in
2020
25% increase excluding capacity from Potash juniors and importer driven investments
Certain capacities considered in building scenarios
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111
19.5 2,7 1,0 2 3.4 1,2 2,9 0.4
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Curr
ent capacity
Cert
ain
capacitie
s
(fig
ure
1)
Zhongchuan
min
ing/Q
inghai Salt
Lake J
V
Junio
r m
inin
g
investm
ent
by
Chin
a
Junio
r m
inin
g
investm
ent
by I
ndia
Vale
, Arg
entina
Vale
, Bra
zil
Vale
, Canada
Verd
e P
ota
sh
Capacity in 2
020
43% increase including capacity from Potash juniors and importer driven investments
Base Case
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Extent of oversupply will largely depend on geopolitical factors
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Potash market outlook: Base scenario
44% 41%
43% 46%
48%
57%
66%
70% 72% 73%
19% 16%
18% 19% 20%
26%
29% 30% 31% 30%
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100%
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2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Th
ou
san
d t
on
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Excess capacity on open market (RHS) Excess supply (RHS)
Total global demand Total capacity
New capacity secured through acquisitions by China, India and Brazil
Source: Rabobank FAR, IFDC
Key takeaways
Tight market until 2015
Build up of excess capacity post 2015
Overall, India’s import reliance remains same as that in 2010 peak
China’s import requirement declines by 11% over 2010-2020
Brazil’s import demand declines by 82% over 2010-2020
Net loss of 6 million tonnes KCl in import demand over 2010-2020
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Partial supply secured by importers marking gradual shift towards buyer’s market
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Potash market outlook: Wildcard scenario
44% 41%
43%
48% 51%
70%
88%
97% 100% 100%
19% 16%
18% 20%
22%
31%
37% 39%
42% 42%
0%
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30%
40%
50%
60%
70%
80%
90%
100%
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30000
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50000
60000
70000
80000
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Th
ou
san
d t
on
nes
Excess capacity on open market (RHS) Excess supply (RHS)
Total global demand Total capacity
New capacity secured through acquisitions by China, India and Brazil
Source: Rabobank FAR, IFDC
Key takeaways
Strong shift away from pure market economics
India’s import reliance declines by 82% over 2010-2020
Brazil’s import reliance declines to nil over 2010-2020
China’s imports declines by 28% over 2010-2020
Net loss of 16 million tonnes KCl in import demand over 2010-2020
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Significant part of supply secured through several strategic investments by importers resulting in strong shift towards buyer’s market
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Potash market outlook: Upside case
44%
41% 42%
44% 46%
53%
60% 62%
63%
59%
19% 16%
18% 19% 20%
25% 28% 29% 28%
25%
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100%
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60000
70000
80000
2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20
Th
ou
san
d t
on
nes
Excess capacity on open market (RHS) Excess supply (RHS) Total global demand
Total capacity New capacity secured by China and Brazil
Source: Rabobank FAR, IFDC
Key takeaways
Negotiation power of suppliers remains strong
Biggest implications for players relying heavily on Brazilian market
India’s import reliance further increases by 34% over 2010-2020
China’s import reliance grows by 30% over 2010-2020
Net loss of just 1 million tonnes KCl in import demand over 2010-2020
27
Minimal action from importers to secure supply resulting in continued seller’s market (scenario 1)
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2013 scenario point towards a seller’s market
Uralkali has taken the initiative to oversupply the market to discourage competition
Overall, dynamics are set to change
– Short term price drops play at the advantage to the importers
– Opportunities for further consolidation in the global potash market
Scenario analysis - 2013
Source: Rabobank FAR
28
Oligopolistic structure will survive and optimise value over volume long term
High import reliance of India, Brazil and China
Bala
nced d
em
and-s
upply
Excess s
upply
Low import reliance of India, Brazil and China
Wildcard
Base Case
Upside
Current status
Key takeaways and implications
China
India Brazil
Brazil
China
India
India
China Brazil
2013 status
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Incorporating latest announcements: Upside Case Revisited
Upside case revisited Total capacity share of Canpotex and BPC Key takeaways
Negotiation power of suppliers remains intact and Canpotex and BPC occupy majority of capacity share
Import reliance of all three importers grows and supply options remain unchanged
In fact deferment of two promising mine expansions by Mosiac to add to importers’ woes
Maximum upside for potash prices on tight supply
29
Minimal action from importers and delays in more promising capacity additions by incumbents to tighten supply towards 2020
40%
26%
19%
7%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0
10000
20000
30000
40000
50000
60000
Th
ou
san
d t
on
nes
Excess supply (RHS)
Excess supply (RHS)
Total global demand
Total capacity
New capacity secured by China and Brazil
50%
52%
54%
56%
58%
60%
62%
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Conclusion
Structural shift in supply side requires action from big importers
Market entry of new but significant players
Host of junior mining projects in various stages of development
More competitive pricing of potash likely in future
Change on supply side could be irreversible and structural
Viability of most of the greenfield potash projects under question current
bearish market
Immense pressure on junior and senior miners to secure financing
This could be a positive news for current players
Challenges facing new capacity developments good for the oligopolistic supply structure
Supply concentration will potentially remain unchanged if big importers stay
on sidelines
Junior mining projects only viable under more push from importers
India, China and Brazil need to improve their supply mix
Spotlight on big importers to build a balanced ‘potash supply mix’
30
Urea supply dynamics
Rabobank’s view on the fertiliser market
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Factors affecting future nitrogen supply
Regional urea cost of production in 2012
* Represents current capacity in million tonnes () represents % share in global urea capacity Source: CRU, Rabobank
32
Shale gas has shifted the cost curve for North America triggering new capacity developments; Projects in MEA driven by lowest cost position of the region
27*
7*
7*
118*
13*
9*
0
50
100
150
200
250
300
MEA (15%) North America (4%) Central and South
America (4%)
Asia (65%) FSU (7%) Europe (5%)
US
D/
ton
ne
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New project activity set to accelerate in the top three importing countries: USA, India and Brazil Potential combined loss of 2.4 million tonne urea imports to top three importers
33
Major urea importers
Lowest cost export oriented capacity
+4.2
+7.0
+1.2
+19
+26
+3.5
+3.3
Other key production regions
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China: Key swing exporter of urea
60
80
100
120
140
160
180
19
90
19
91
19
92
19
93
19
94
19
95
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00
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02
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20
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20
11
Index (100 = Jan 2006)
N per tonne of harvested produce (total harvest) N per hectare (total sown area)
Crop yield (total tonnage per total sown area)
Demand: Nitrogen consumption increase has coincided with
productivity gains
-10,000
-5,000
0
5,000
10,000
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Metric tonnes of nutrient (thousands)
China nitrogen balance China phosphate balance
China potassium balance Total macro-nutrient fertiliser balance
Supply: China is world leading exporter of urea
Source: IFA, CNCIC, Rabobank Source: IFA, Rabobank
Domestic production growth concentrated in energy rich Western region
Drive towards consolidation of Chinese urea industry
Future competitiveness in exports is however questionable
Focus to grow on expanding domestic consumption market as tax structure, high cost or production and logistics limit export viability
34
Nitrogen fertiliser use in China has been increasing in-line with gains in agricultural productivity
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India: Largest importer of urea with 26% reliance on imports
22.2
29,5
1,2 1,2
1,2
1,3
1,2
1,3
0,0
5,0
10,0
15,0
20,0
25,0
30,0
35,0
Current capacity
(2011/12)
Chambal Fertilisers Tata Chemicals RCF KRIBHCO AB Nuvo IFFCO Certain capacity in
2020
33% increase in capacity over 2012-2020
Government incentivized urea production expansion
Minimum RoE of 12% ensured by government
Policy applicable for 8 years from start of production
Large import substitution if all planned capacities come onstream
However, cost and availability of natural gas feedstock remains a question
Despite the new capacities, India would still import about 5.5 million tonnes urea in 2020 (down from 7 million tonnes in 2011)
35
But expanding domestic production on the back of Urea Investment Policy will bring import reliance down to 16%
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USA: Second largest importer of urea with 50% reliance on imports
11.2
15.4
1,3
0,3
0,8
1.8
0
2
4
6
8
10
12
14
16
18
Current capacity
(2011/12)
Yara OCI* Agrium CF Industries Capacity in 2020
37% increase in capacity in North America over 2012-2020
North America has strongest investment fundamentals outside MEA region
However, urea imports to decline to just 6 million tonnes in 2020 from 6.5 million tonnes in 2011
36
Substantial capacity expansions on the back of low-priced shale gas to bring import reliance down to 37%
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Brazil: Third largest importer of urea with 70% reliance on imports
1,7
2,9 1,2
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
Current capacity (2011/12) Petrobras Certain capacity in 2020
70% increase in capacity over 2012-2020
Import dependence to decline somewhat by 2020
Brazil’s urea imports expected to decline to 2 million tonnes in 2020 from current level of about 2.5 million tonnes
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New capacity will help reduce import reliance to 40%
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Trend towards self sufficiency by big importers will start to impact global market balance post-2016
Source: IFDC, company reports, Rabobank 2013
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Implications on trade flows, price and supplier strategies
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0
50
100
150
200
250
300
2011
2012
2013F
2014F
2015F
2016F
2017F
2018F
2019F
2020F
Mil
lio
n t
on
nes
Demand
Supply (85% capacity utilisation)
Total Capacity (Rabo estimate)
% Excess supply (RHS)
Need to integrate downstream closer to farm gate in key consumption markets
Keep production cost competitive by building capacities outside high cost regions
Minimise cost for P and K sourcing through upstream integration in NPK marketing
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Conclusion
Global urea market is set to enter an era of oversupply
US shale gas revolution alters global urea trade flows
Delay in capacity expansion resulting from high engineering and construction
costs
Political instability in MENA can delay expansion capacity
New capacity developments in low-cost production regions
Increase in import volumes at international prices has laid out ambitious
plans to achieve self sufficiency in urea in India
Is it wise to pursue this ambition in light of global urea dynamics and specific
state of Indian economy?
Brazil will significantly reduce its dependence in urea imports
Key importing countries driven to reduce their import reliance
High-cost producers need to strengthen their market position through cross
industry partnerships and downstream integration closer to farmers
Winners will be those who can achieve low costs of production and/or are
placed close to a demand market enabling them to quickly respond to
demand dynamics by altering production cycles
Market intelligence and access to growers will be key success factors in this
case
Strategic routes of the urea value chain partners would need to change
39
Thank You!
Rabobank’s view on the fertiliser market