Forgotten fertiliser

By Simon Moores
Published: Thursday, 25 February 2010

As government attention turns to kick starting shattered economies, global food security and the role of fertiliser minerals is put on the back burner

The fertiliser mine to market chain has been hit hard in the last 18 months. Not only has demand for many of its main minerals evaporated as a result of tight credit for consumers, but government focus on food security of which fertilisers were some of the greatest beneficiaries has very much taken a back seat to the banking crisis.

Western governments, which were the driving force behind a push for a significant increase in global food production in the wake of a rocketing population, have turned their attentions to more immediate and pressing internal issues.


courtesy Lars Ploughmann


Last month the subject was gingerly back in the spotlight following protests in India against the introduction of a genetically modified (GM) aubergine (brinjal). The proposal was suspended for future consideration; however, the food supply problem in India will not go away. The country’s population is set to overtake China’s in 2030 and domestic food production is not positioned to satisfy this.

If the GM decision was successful it would have opened India the world’s second most densely populated country with 1.13 billion people to 56 other GM crops. The furore was sparked by the moral implications of such a development, but the key issue at play is one of global food security.

In the same month, Africa’s food crisis was branded a “disgrace” by leading researchers in the UK, the Natural Resources Institute (NRI), after monetary aid from the West was not finding its way to the ground on the continent.

Dr Guy Poulter, director at the NRI said that “the figure of hungry people has now reached over a billion” highlighting the severity of the food shortage issue in large swathes of the globe.

So the question that begs to be asked: why is fertiliser demand still significantly low while its importance in increasing food production is established and well known? Insight begins as high up the market chain with the fertiliser mineral producers.

Half price potash

Potash deals have been a rare sight since 2008. OAO Silvinit’s agreement with India in mid-2009 was greeted with much optimism and hailed as the return of activity. However, the Russian producer’s $460/tonne (delivered) deal for 850,000 tonnes of potash by mid-March 2010 was only to be followed six months later by another.

The deal by marketing and trading firm, Canpotex, saw 350,000 tonnes of potash sold to China’s Sinofert in the “$375/tonne range”, according to Saskatchewan energy and resources minister, Bill Boyd.

Canpotex, the offshore marketing and trading company for Canada’s big three producers PotashCorp., Agrium Inc., and The Mosaic Co. played hard ball with the Chinese by upping the asking price by $25/tonne and by keeping the contract short delivery by the end of Q1 2010.

Contracts with the Chinese usually dictates potash’s price for the rest of the year. Sinofert’s asking price was estimated in the $340-350/tonne region, but Canpotex’s negotiations to up this price were greeted positively in an industry which is desperate for a demand increase, but acutely aware of how low customer stocks are.

PotashCorp.’s chief, Bill Doyle, believes this desperation forced Belarusian Potash Co. (BPC) and Israeli Chemicals Ltd (ICL), into a deal with the Chinese which they will regret.

BPC struck a deal in January 2010 with Chinese importers for $350/tonne and ICL with China National Offshore Oil Corp. Ltd for $355/tonne; both were too low and for too long according to PotashCorp.

“The settlement with China was too low,” said Bill Doyle, chief executive officer of the world’s leading producer PotashCorp. which holds a capacity of 11-12m. tpa or 20% global capacity.

Doyle added: “To tie in at this pricing level for the whole year would have been a mistake for us. BPC have proved to be a bit of a panic seller. They are basically inexperienced marketers. They have panicked in both directions.”

Doyle, dubbed the “King of fertiliser”, believes industry demand, of which stocks are now depleted, will rebound sharply in H2 2010 driven by China’s desperation for tonnages considering its dire domestic capacity of 1.2m. tpa through SDIC Xinjiang Potash.

“From the BPC and maybe even the ICL point of view, I think they will both come to regret their contracts with China by the time the second half of the year rolls around,” said Doyle.

What the BPC/China deal has achieved is a return to activity for potash demand. As a result, potash spot prices are also on the rise.

On the general pricing climate for potash, Filipp Gritskov, a BPC Spokesman, told IM: “[consumers] have been waiting for a ‘price floor’ a price benchmark [which has now been set] as a result of talks held between BPC and China.

“It returned confidence to the market forcing consumers to come out of the woods and purchase fresh volumes of potash fertilisers. We expect prices will continue to rise and our outlook remains very positive,” he added.

Although this rhetoric is identical to that of early 2009, there is widely held belief from producers and independent analysts alike that potash is due for a big come back, particularly now prices are roughly half that of 2008 levels.

North America is already seeing signs of a demand return.

“Shipments of potash from North America in January 2010 where three times higher than the year before,” Harry Vroomen, vice president of economic services at USA based The Fertilizer Institute (IFA) explained.

BPC believes that global demand for potash will reach a minimum of 45m. tonnes this year in comparison with the 2009 volume of 25m. tonnes.

Phosphate falls

Phosphate has experience a similarly tough time to potash with production down close to 20%. Global production has fallen from 165m. tpa to 200m. tpa according to the US Geological Survey (USGS).

Phosphate rock spot prices have also fallen from a value of $350-400/tonne to $90/tonne.

Agrium Inc, one of the USA’s leading phosphate producers, saw its average sales price fall to $392/tonne from a record $1,117/tonne achieved in Q4 2008.

“The fourth quarter of 2009 saw the initial stages of recovery in the crop input sector. We have seen increasing demand for domestic potash and a tight supply situation for nitrogen and phosphate products,” said Mike Wilson, Agrium’s president and CEO.

The global market is also seeing new tonnages of phosphate with Saudi Arabia starting to export from the j-v plant at Al Jalamid plant owned by Saudi Arabia Mining Co. (Ma’aden) and Saudi Basic Industries Corp. (SABIC).

The port authority at Ras al-Zour said it “will receive in December the first ship to export the first cargo of phosphate” from the plant.

Although driven by fertiliser, the market is not the be all and end all for phosphate. It is primarily a feedstock for phosphoric acid which is used to make an array of fertiliser products and is also one of the most widely consumed industrial chemicals. See IM December 2009: “Phosphate face-off” for a global review of phosphate supply and markets.

State controlled fertiliser?

The seriousness of global food production in relation to population growth is one that is of growing and great concern. A topic of discussion is whether governments should take a more active role in the fertiliser industry such as India’s does to mitigate risk.

India is the only country that subsidises fertiliser, tightly controlling supply lines to protecting its agriculture industry from price fluctuations. For this reason, India was the only country in the world to see growth in agriculture sector, an astonishing 11% in 2009 considering that even China, the world’s biggest market for fertiliser, fell by 2%.

Michel Prud’Homme a director at the International Fertilizer Association (IFA) believes that a government controlled industry will damage its long term health.

“State control may facilitate the access to supply in respective home markets but for internationally traded commodity such as potash, for example for which international markets represent 80% of total deliveries such control would be ineffective and would hamper and inhibit any future investment in capacity,” Prud’Homme told IM.

Much of the potash industry experienced this situation between 1985 and 2000 when there were no economic incentives to invest in new capacity, particularly with potash’s trading price languishing around one eighth of its peak value in 2008.

Interest in potash rocketed comparatively overnight between 2007 and 2008 after a boom in fertiliser demand which caused a tightening in supply and the price to rise over $700/tonne. It was only once these market forces and financial incentives came into play that global capacity increases engulfed the industry and over 80 exploration projects emerged.

Many believe state controlled segments of the industry will do nothing but hamper its progression. Despite the issues that farmers have had with potash producers in the past, market forces as it being seen now with a new potash price of $350-370/tonne will eventually correct situation.

With a private potash miner for example, an expansion of capacity is a decision which lies with the chief executive officer and his management. In the main it can be a quick, easy and effective process from initial idea stage to implementation. Now put this decision in the hands of governments and layers of bureaucracy.

The point Prud’Homme makes, that a privately run industry is the most beneficial way to run the fertiliser mine to market chain, is one that many echo. This is despite the worsening situation with global food supply to feed a population which is spiralling out of control. A state-run business will eliminate financial incentives, and a business without financial incentives is a dangerous situation in any way, shape or form.

Has fertiliser been forgotten?

Retuning to the original question, the answer is not that straight forward. It is a mantra that is repeated time and again by the industry and by this publication that: fertiliser is a crop enhancer not a crop necessity.

“I don’t think people have forgotten about fertiliser but they have definitely cut back significantly. Fertiliser prices hit record highs and the whole supply chain was built into a frenzy. It has just taken a while for the high prices to make its way through the system.” Harry Vroomen of US based IFI told IM.

The fertiliser economist explained that very good weather conditions in the USA last year mitigated the impact of the lack of fertiliser use. He said: “Its only when the crop is stressed that we really see a significant drop in yields.”

“This year though, good managers will put more potash down. It’s like your bank account: you can’t go out and buy a sports car every year. You may be able to do so one year, but next year you will have to add more money to your account,” commented Vroomen.

Fertiliser fundamentals are still promising: corn prices are still high ($3.50/bushel), demand for food globally is only heading one way, and the need for balanced fertilisation is well known to agronomists and farmers alike.

While the industry is focussed on the when big demand will return, few are considering the implications of the bigger and longer term picture of global food security that is becoming a greater challenge day by day.

John Beddington, UK government’s chief scientist summed this up best: “It is predicted that by 2030 the world will need to produce 50% more food and energy, together with 30% more available fresh water, whilst mitigating and adapting to climate change. This threatens to create a ‘perfect storm’ of global events.”

COMMENT: Fertiliser drives M&A in 2010

Yara, BHP, Vale could spark emergence of fertiliser giants


BHP has become increasingly aggressive in acquiring
potash assets. The group’s chief, Marius Kloppers (pictured),
expects fertiliser to ‘go the same way as metals’.

Last month Norwegian phosphate miner, Yara International ASA, was involved in one of the biggest fertiliser deals of recent times after it agreed to purchase US fertiliser producer Terra Industries Inc. for $4.1 billion.

In addition, mining giant Vale SA has agreed to acquire The Mosaic Co.’s 20.27% stake in Brazil’s largest phosphate and nitrogen fertiliser producer Fertilizantes Fosfatados SA (Fosfertil) for $1.03 billion.

These huge developments at the start of 2010 look set to spark a host of industry mergers and acquisitions with mining focused players keen to capitalise on potential profits of downstream fertiliser products.

This is what potash and phosphate producer Agrium Inc. has been attempting to do for more than a year with nitrogen and phosphate fertiliser maker CF Industries, to no avail.

Agrium was one of the first to comment on Yara’s deal with Terra.

“I think Terra recognised that being a regional local player is probably not going to cut it in the global market and they had to be part of a bigger global organisation,” said Agrium spokesperson, Richard Downey.

He added: “I think CF will likely come to that realisation as well, but I’m not sure how long that will take,”

Integration is becoming a theme emerging from the midst of the global economic gloom and it could well turn into a trend in this decade.

The entry of the world’s biggest miners, Vale (again) and BHP Billiton PLC, in fertiliser minerals is adding fuel to this fire. Keen to a diversify away from metals which have been hit hard by in the last year and a half, both mining giants are progressing potash and Vale developing an additional phosphate mine.

BHP Billiton has been particularly active in recent months adding junior potash miner Athabasca Potash Inc. for $320m. to Jansen Project in Canada Ð expected to be the world’s biggest potash mine when it becomes active in six years.

Vale also has its huge Bayovar project in Peru that is set to become 3.9m. tpa mine by the middle of this year.

With Agrium keen to expand, PotashCorp. a continuing acquisition target of interest, and BHP becoming increasingly aggressive, M&A could well be here to stay for the fertiliser industry. and we could well be stating to see the emergence of true fertiliser giants.




 

Global fertiliser application



For copies of this one page map, email IM at marketing@indmin.com

1. North America

Fertiliser use: 118 kg/ha

North America’s agriculture industry experienced a strong year in 2009. Long periods of favourable weather conditions mitigated the lack of nutrients applied. Soil nutrient credits and fertiliser stocks have since expired therefore 2010 will see a return in mineral demand.

2. South America

Fertiliser use: 105 kg/ha

Brazil and Argentina account for the lion’s share of this average. Brazil’s push to turn the Amazon Basin into a crop growing hub together with Argentina’s grain production to feed its significant cattle industry is set to ensure strong and steady long term fertiliser demand. However the Argentina’s naturally fertile soil means reduced fertiliser use when prices are high.

3. Europe

Fertiliser use: 163 kg/ha

European customers are fully aware of the need for balanced fertilisation, particularly in countries with limited land such as the UK. Agricultural strongholds such as Poland, France and Germany have and will continue to see robust demand for fertiliser which is well above the global average which is presently at 108 kg/ha.

4. Africa

Fertiliser use: North Africa 73 kg/ha; Sub Sahara 7 kg/ha; South Africa 44 kg/ha

There is a huge disparity between the three regions of Africa. North Africa is benefitting from a renewed focus by its respective governments to build up its agricultural production power. Libya is one such country which, through the irrigation of the Great Man Made River, is opening up new areas of fertile land.

Poverty, primitive farming techniques, and lack of financial support has resulted in Sub-Sahara Africa becoming the most fertiliser depletion region on the planet. There is a target from African heads of state to increase average fertiliser use here from 7 kg/ha to 50 kg/ha.

5. China

Fertiliser use: 255 kg/ha

China is the world’s agricultural powerhouse through the production of a host of foods such as rice, wheat and potatoes. Domestic agriculture has been critical to supporting the most populous county on the planet feeding over 1.3 billion. Rapid and steady population growth has added significant stress on farming areas which are most dense in the north-west and to boot, China has limited domestic fertiliser production. The sheer fertiliser volumes China requires will continue to lead the world.

6. South East Asia

Fertiliser use: 155 kg/ha

In terms of proportionate growth prospects, South-East Asia is the most promising region in the world. Agriculturally intensive counties such as Indonesia and Malaysia are set to significant increase production of palm oil and rubber. The challenge is to persuade farmers, mainly individuals rather than corporations, for the need for balanced fertilisation.

7. India

Fertiliser use: 98 kg/ha

India’s present fertiliser consumption rate is probably the starkest of all considering it hosts a population of 1.1 billion, just 200m. shy of China’s total. The country is acutely aware of the need for fertiliser and the need to significantly boost domestic agriculture. Like China, India is a big importer of fertiliser minerals lacking domestic potash and phosphate supply to satisfy internal demand.


Contrasting yields

The irregular impact of fertiliser application

The benefits of fertiliser depend on a number of controlling factors including weather patterns, soil quality and crop variety. So if fertiliser prices rise, there is a greater benefit for some than others.

35kg of corn

For every 1kg of nitrogen fertiliser applied on average in developing countries

9kg of corn

For every 1kg of nitrogen fertiliser applied in Zambia

Source: AFA


Fertiliser minerals at a glance


The big three

Consumption in 2009

Total: 163.2m. tonnes

Source: IFA


Phosphate (>90% fertiliser use)



(phosphorous feedstock)

Phosphate rock production: 165m. tpa

Phosphate rock capacity: 200m. tpa


Potash
(>95% fertiliser use)



(potassium feedstock)

Potash production: 26m. tonnes

Potash capacity: 61m. tonnes

Source: IFA, USGS, AFA, IM database


Nitrogen
(75% fertiliser use)



Nitrogen production:
133.5m. tonnes

Nitrogen capacity: 126.9m. tonnes

Note: under 5% comes from sodium and potassium nitrates (solid form) from the Atacama Desert, Chile; the majority is a by-product of gas production.


Sulphur
(~60% fertiliser use)



Sulphur production:
72m. tonnes

Sulphur capacity: 72m. tonnes

Secondary minerals: magnesium (magnesite) and calcium

* including Kazakhstan, Japan, India, Chile, Italy and Mexico

Note: sulphur is a secondary fertiliser nutrient, and is now produced as a by-product of oil and gas production