So you want to be a fertilizer producer….

The international fertilizer industry appears to be getting back on its feet after the downturn that followed the global credit crunch of 2008. Demand has picked up in all key consuming regions; capacity utilisation has improved; prices of all leading nutrients are firm and are expected to remain so for the immediately foreseeable future; and the leading producers are again reporting healthy earnings and margins. In effect, the global fertilizer industry is carrying on where it left off in mid-2008.
These factors create a very sound climate for new investment, and there is no lack of new participants who are keen to enter the fertilizer and associated raw materials industries. The list of new projects and proposals around the world continues to mount. Whether promoting greenfield or brownfield projects, potential entrants have not been deterred by the long gestation periods that are involved in converting the gleam of an idea into a positive cash flow. There are the various feasibility studies that have to be commissioned, environmental permits, negotiations with government and local interests, the rounds of roadshows to present the case to potential investors, and much else besides.
The start-point and the common denominator in so many of the brochures that are being published to appeal to investors are the FAO’s forecasts of population growth and the consequent impact on the demand for food and fibre. Global population is expected to reach 9.1 billion by 2050, compared with around 6.0 billion today, and this in turn will require world food production to rise by 70% during this period, FAO states. Food production in the developing world would furthermore need to double.
Some analysts contend that the FAO under-estimates the food production requirements, as no account is taken of any increase in agricultural production for biofuels. Another factor is the continuing advance towards higher protein diets, away from grains, which requires the intensification of agriculture. As The Population Institute observes, the projected 70% increase in food production will have to overcome rising energy prices, the depletion of underground aquifers, loss of farmland to urbanisation and the potentially adverse impacts arising from climate change. In other words, for the increase in world population to be sustained, there must be a step-change in agricultural productivity.
The International Fertilizer Industry Association (IFA) picks up the baton: fertilizers are the primary catalysts that will achieve this higher agricultural productivity, as they did in the previous decades of the original Green Revolution. The FAO forecasts translate into a steady increase in the global demand for nutrients, in the order of between 2.5-3% per year for the foreseeable future. In developing markets, that percentage may be even higher, at up to 7%/year.
The prospect of steady demand growth, sustained over the life of a project, is exactly what investors like to hear. However, in addition to the time that must be consumed in the project permitting and financing process, there are other daunting barriers to entry, the most important of which is the sheer cost of setting up the business, covering the construction of the plant and associated infrastructure, securing markets for the final product, recruiting and training the operating staff. Greenfield fertilizer projects now have a price tag in excess of $1 billion. Account should also be taken of the potential responses of established producers in the sector to preserve their status in the market. Potential investors must retain their faith as they must wait for a minimum of at least seven years - and more likely ten - before a positive cash flow emerges.
“No man is an island” and similarly, no project is entirely isolated from the context of its impact on global supply/demand balances. Thus, IFA comments that in the nitrogen sector, there are close to 65 new plants under construction or being planned to come on stream in the five years to 2014. These projects equate to a net expansion of 37.4 million t/a capacity, which would result in an annual growth rate of 4%. In the nitrogen sector overall, IFA forecasts a mounting surplus, equivalent to 3% of global supply. Could this capacity increase have a softening effect on prices? Did the financial submissions take account of this factor?
In the phosphates sector, not only are large expansion projects being developed by established producers in China, Morocco, Jordan, Algeria, Tunisia, Brazil and Vietnam, but new potential production has been announced for the near-to-medium term by potential suppliers in Australia, Kazakhstan, Russia and Namibia. Peru has just joined the ranks of phosphate rock producers, and Saudi Arabia waits in the wings. The key to whether these projects affect global market equilibrium is the securing of offtake agreements at an early stage in the development stage.
The potash scenario is the most intriguing. There have been no new entrants among the producers for fully two decades, but that has been no deterrent to potential investors. Before BHP Billiton turned its attention to acquiring PotashCorp – the world’s largest fertilizer producer – it pledged its commitment to the greenfield project at Jansen, Saskatchewan. One industry analyst estimated that BHP Billiton would not break even on its $10 billion investment until 2026. This prospect has not deterred other junior potash producers from forging ahead with their planned projects and each hopes a steal a march on the others by securing blue-chip strategic partners and coming on stream first.
Investors in fertilizer projects – like punters at the races – will meanwhile sit tight and hope.