The globalised fertilizer industry of today is underpinned by almost two centuries of steadily enhanced scientific knowledge of human and plant nutrition, and matched by a spirit of inventiveness in the fields of production and the use of resources. These are the factors that largely put paid to the Malthusian theories which held that while unchecked population growth was exponential (1>2>4>8), the growth of the food supply was arithmetical (1>2>3>4). The Green Revolution showed that a long-term growth in human population could be achieved, and not only has that world population grown by 50% from 4 billion in 1974 to 6 billion by 1999, and to an expected 7 billion by the end of this year, but that population is also enjoying in ever more regions of the world an enhanced diet in terms of protein and variety.
Despite these achievements, there is increasing recognition among scientists, political parties and other decision-makers that mankind has now reached a fresh cross-roads. Indeed Malthusian theories have made a come-back in certain circles, and there are those who contend that the basic concept of population growth eventually outstripping resources is still fundamentally valid. The notion of Peak Phosphorus, for example, may be said to fall into the category of Neo-Malthusian.
The term Malthusian can sometimes have pejorative undertones, hinting at excessive pessimism, inhumanity or an inaccurate understanding of the future. Few of the agronomists or production engineers who have helped to propel the fertilizer business during the past decades would have devoted much intellectual energy to the merits of this debate: “Can-do” has been their by-word over the years, and there is no lack of that same spirit in the world fertilizer industry of today.
The world appears to be advancing towards a global population peak of around 9.5-10 billion by 2050. The issue not merely how to feed that increased population, but how we allocate, use and sustain the resources of land, water and raw materials that are harnessed to provide this diet. The continuing scaling upwards and evolutionary fine-tuning of present techniques and technology will be required, but radically new paths must also be sought. A few false trails may inevitably be followed in such a quest: it is a virtual truism that “Success always starts with failure.”
The challenge of finding sustainable ways of providing for the growing world population comes at a time of fundamental change in the concept of science itself. Whereas major advances in science had once involved little more than a keen and a vivid imagination, the process of invention today is a more convoluted one. It has been observed at a time when approximately 3,000 scientific articles are published per day, the percentage of human knowledge that one scientist can absorb is rapidly heading towards zero. The typical science paper or patent is now produced by a large team. Likewise in the commercial field, teams of engineers and/or marketing experts, rather than single visionary individuals, now account for most innovations.
Finding (and funding) new ideas is also getting more expensive. Some observers comment that scientific and technological innovation is becoming an issue of organisation. Commercial organisations may shy away from funding R&D work that promise few short- or medium-term returns. Nor do governments have deep pockets, and in much of the western world, governments seek to appeal to their electorates by promising lower taxes. This in turn can lead to cuts in the funding of scientific projects. Risk and enterprise become early casualties in such a climate.
One notable facet of the SYMPHOS Symposium was that academics shared the podium in equal measure with fertilizer industry experts on technology and commerce. This is a welcome development, as the grand challenges faced by mankind and society – be it climate change, energy consumption, food security or combating poverty – are transnational and cross-disciplinary. Addressing them requires collaboration between universities, commercial businesses, NGOs and other decision-makers, together with the pooling of resources at pan-national levels. This very pertinent point was made by Prof. Jean-Marc Repp and Prof. David Drewry of the European University Association.
Their conclusion applies to the increasing recognition of participants in the international fertilizer industry of the fundamental need for more research and greater innovation: all money spent on improved collaboration between stakeholders will add value by bringing people together, sharing knowledge and creating synergies.
Tuesday, 26 July 2011
A new light on Peak Phosphorus
Fact, fact, fact,” said Thomas Gradgrind in Dickens’ Hard Times. “Never let the facts get in the way of a good story,” say others with a point to make. Both adages may be applied in the continuing debate on Peak Phosphorus. This is a debate that has become rather heated.
To begin with a definition, Peak Phosphorus is the point of time at which the maximum phosphorus production rate is reached. Phosphorus is a finite resource with no known substitute. Some researchers believe that the world’s phosphorus reserves will be
wholly depleted within the next 50-100 years and that the peak phosphorus production level will be reached between 2030 and 2035.
One positive effect from the debate to date has been the stronger spotlight that has been shone on the issue of recycling P, especially via the greater recycling of human and animal wastes. However, the accurate determination of peak phosphorus is dependent on knowing the world’s phosphate reserves and the future demand for phosphate rock. One primary source of information in this respect has been the US Geological Survey (USGS), which has estimated that there are currently 62 billion tonnes of phosphate rock worldwide, of which 15 billion tonnes are mineable. Although widely used for predicting future peak phosphorus, the USGS estimates have raised many doubts about their accuracy: the figures have been obtained from foreign governments and have not been independently verified by the USGS.
The recent report by the International Fertilizer Development Center (IFDC), summarised in Fertilizer International, suggested that there is no indication that phosphate production will peak in the next 20-25 years - or even within the next century. IFDC reached this conclusion on the basis of an entirely revised estimate of global phosphate reserves, of around 290 billion tonnes. This total included estimated product reserves of 60 billion tonnes. Assuming current rates of usage, world phosphate rock reserves and resources should be available for the foreseeable future, IFDC said. USGS subsequently revised its reserve estimates upwards.
IFDC’s intervention has by no means stifled the arguments pro and con, and it is clear that certain parties in the debate hold entrenched positions. Those who disagree with the Peak Phosphate theory centre their arguments on three prime points, as summarised in IFA’s position paper on the subject:
Phosphate rock reserves are a dynamic concept and are regularly revised upwards with discoveries of new deposits, technological advances and increases in commodity prices. Modelling of future phosphate rock demand has not been adequate to establish how quickly reserves could be exhausted. Nor have such models considered soil P dynamics or the need to build soil P levels up to a critical level that optimises P use efficiency by plants.
Predictions of Peak Phosphorus ignore the practicality of economic feasibility of P recycling and re-use. IFA endorses the IFDC contention that we are not facing a Peak Phosphate event. IFA also contends that attention should be focused away from a possible peak in P supply and more towards any potential peak in phosphorus demand. Since P accumulates in agricultural soils, P requirements do not increase linearly with agricultural production. “There is a need to increase P levels to a critical level that optimises P availability to plants while maintaining soil fertility,” IFA notes. “The steady improvement in soil P levels in Asian and Latin American countries, possibly leading to a peak in world phosphate fertilizer demand by 2050, is a scenario that has so far been overlooked.” IFA is following this line of enquiry further, having set up an industry-wide task force on phosphate fertilizer demand, looking at different consumption scenarios.
Meanwhile, Michael Mew, Director of Fertecon Research Centre has opened a fresh angle in the debate. Michael challenges the use of the Hubbert’s Peak Oil Theory to predict a peak phosphate event.
The phosphorus debate is undoubtedly to be welcomed, as it has caused many interested parties to stop and think. The fertilizer industry is keen to promote Best Management Practices, declaring its commitment to the sustainable use of all P resources and the encouragement of research and nutrient BMPs for better recycling of all safe phosphorus sources of organic and inorganic origin. Meanwhile, in February 2011, the Phoenix Phosphorus Declaration was issued, after scientists, engineers, farmers, policy-makers and others gathered to participate in the Sustainable Phosphorus Summit at Arizona State University. They reached a consensus on the essential but finite nature of P, its key role in global food security and called for its responsible use and recycling.
From these various standpoints, there should in due course arise a vastly enhanced knowledge base on the phosphorus resources we have available, how best we may exploit them and how best we may conserve them.
To begin with a definition, Peak Phosphorus is the point of time at which the maximum phosphorus production rate is reached. Phosphorus is a finite resource with no known substitute. Some researchers believe that the world’s phosphorus reserves will be
wholly depleted within the next 50-100 years and that the peak phosphorus production level will be reached between 2030 and 2035.
One positive effect from the debate to date has been the stronger spotlight that has been shone on the issue of recycling P, especially via the greater recycling of human and animal wastes. However, the accurate determination of peak phosphorus is dependent on knowing the world’s phosphate reserves and the future demand for phosphate rock. One primary source of information in this respect has been the US Geological Survey (USGS), which has estimated that there are currently 62 billion tonnes of phosphate rock worldwide, of which 15 billion tonnes are mineable. Although widely used for predicting future peak phosphorus, the USGS estimates have raised many doubts about their accuracy: the figures have been obtained from foreign governments and have not been independently verified by the USGS.
The recent report by the International Fertilizer Development Center (IFDC), summarised in Fertilizer International, suggested that there is no indication that phosphate production will peak in the next 20-25 years - or even within the next century. IFDC reached this conclusion on the basis of an entirely revised estimate of global phosphate reserves, of around 290 billion tonnes. This total included estimated product reserves of 60 billion tonnes. Assuming current rates of usage, world phosphate rock reserves and resources should be available for the foreseeable future, IFDC said. USGS subsequently revised its reserve estimates upwards.
IFDC’s intervention has by no means stifled the arguments pro and con, and it is clear that certain parties in the debate hold entrenched positions. Those who disagree with the Peak Phosphate theory centre their arguments on three prime points, as summarised in IFA’s position paper on the subject:
Phosphate rock reserves are a dynamic concept and are regularly revised upwards with discoveries of new deposits, technological advances and increases in commodity prices. Modelling of future phosphate rock demand has not been adequate to establish how quickly reserves could be exhausted. Nor have such models considered soil P dynamics or the need to build soil P levels up to a critical level that optimises P use efficiency by plants.
Predictions of Peak Phosphorus ignore the practicality of economic feasibility of P recycling and re-use. IFA endorses the IFDC contention that we are not facing a Peak Phosphate event. IFA also contends that attention should be focused away from a possible peak in P supply and more towards any potential peak in phosphorus demand. Since P accumulates in agricultural soils, P requirements do not increase linearly with agricultural production. “There is a need to increase P levels to a critical level that optimises P availability to plants while maintaining soil fertility,” IFA notes. “The steady improvement in soil P levels in Asian and Latin American countries, possibly leading to a peak in world phosphate fertilizer demand by 2050, is a scenario that has so far been overlooked.” IFA is following this line of enquiry further, having set up an industry-wide task force on phosphate fertilizer demand, looking at different consumption scenarios.
Meanwhile, Michael Mew, Director of Fertecon Research Centre has opened a fresh angle in the debate. Michael challenges the use of the Hubbert’s Peak Oil Theory to predict a peak phosphate event.
The phosphorus debate is undoubtedly to be welcomed, as it has caused many interested parties to stop and think. The fertilizer industry is keen to promote Best Management Practices, declaring its commitment to the sustainable use of all P resources and the encouragement of research and nutrient BMPs for better recycling of all safe phosphorus sources of organic and inorganic origin. Meanwhile, in February 2011, the Phoenix Phosphorus Declaration was issued, after scientists, engineers, farmers, policy-makers and others gathered to participate in the Sustainable Phosphorus Summit at Arizona State University. They reached a consensus on the essential but finite nature of P, its key role in global food security and called for its responsible use and recycling.
From these various standpoints, there should in due course arise a vastly enhanced knowledge base on the phosphorus resources we have available, how best we may exploit them and how best we may conserve them.
Tuesday, 5 April 2011
Stormy MENA waters
What began as protests against escalating food prices in various countries in the Middle East and North African (MENA) region quickly escalated into riots against long-established governments. Regime change was quickly achieved in Tunisia, while Egypt followed suit after three weeks of vigorous civil protests in Cairo and other cities. The desire for political change spread to Libya, but there the Gaddafi regime dug in more firmly and extremely violently, and at the time of writing, it seems set to prevail. Meanwhile, protestors have taken to the streets in the Arab Gulf states, notably in Bahrain and Saudi Arabia. To date, bloodshed are been largely avoided in these states, but the undercurrent of civil discontent remains.
The term MENA covers the region that extends from Morocco to Iran, and includes the majority of both the Middle Eastern and Mahgreb countries. The region’s population of around 381 million is about 6% of the world total. MENA is well-known as a region of global economic and strategic significance because of its vast reserves of oil and natural gas. The MENA oil reserves are estimated to total 811 billion barrels, representing 60% of the world’s oil reserves, while the gas reserves of 2,868.9 trillion ft3 are 45% of the world’s total. Of the 12 members of OPEC, eight are within the MENA region.
The eruption of civil unrest and the threat, potential or actual, posed to the authoritarian governments the length and breadth of the MENA region inevitably reverberated in global commodity markets, above all in oil. Oil prices promptly jumped some 20-30%, reaching in excess of $118/barrel for Brent crude. Any element of instability in the MENA region prompts nightmare scenarios involving fears of a major cut-off in oil supplies, and memories remain vivid of the 1973-74 Arab oil embargo.
Tunisia and Egypt are not oil producers, but Libya is – and the country’s supply to world markets has been disrupted. However, while Libya has been an active member of OPEC, its output of 1.8 million bbd represents less than 5% of world output. A truly nightmarish oil scenario would hinge on oil production being withdrawn from global markets if Saudi Arabia erupts into civil strife.
Meanwhile, what has been the impact of the MENA rumblings in global fertilizer markets? The story has been a mixed one so far. Of the MENA countries which have so far been affected by the political upheavals, Egypt, the Arab Gulf countries and Libya are significant exporters of ammonia and urea, while Tunisia is a key player in phosphate markets. Overseas partners also have fertilizer investments in the MENA region, notably Yara in Qatar and Libya. In the latter country, Yara was obliged to suspend production at its joint-venture Lifeco complex at Marsa el-Brega. The facilities there comprise the Brega 1 and Brega 2 units, which have a rated capacity of around 900,000 t/a of prilled urea, while about 150,000 t/a of ammonia are normally available for export. (Fertilizer Week, 25 February 2011)
By contrast, production of ammonia and urea in Egypt was scarcely affected by the three weeks of civil unrest during late January and into February. Indeed, the period was one of softening urea prices as Egyptian stocks of unsold product were high, while US offtake slipped back. Egyptian prices of urea rose to $425/t fob in the first half of February but offers were later made at around $380/t, even then only attracting limited interest from buyers.
Supplies of phosphate rock and downstream fertilizers from GCT, Tunisia were disrupted for some time after the change in government, as labour disputes at the Sfax, Gabes and La Skhira production sites continued. It was reported that production at the GCT 330,000 t/a DAP plant was continuing at just one-third of normal capacity. These factors helped ensure continuing firm prices in phosphate markets, but there has been no spiking, as potential buyers have proven willing to hold back on their purchases rather than be stampeded into panic buying.
Fertilizer markets may thus be praised for keeping their nerve. However, the scenario for fertilizers remains uncertain, and not simply because of the unclear MENA political outlook.
Fertilizer prices have been buoyant because of the perceived low cereal stocks and escalating global food prices. Crop commodity markets appear to be particularly vulnerable to shocks arising from bad weather and the like, such as disappointing harvest in India, drought in China and floods in Australia. During the past 12 months, coffee prices have risen by 94%, corn has risen by 88% and wheat has gone up by 74%. (Financial Times, 18 February 2011)
Analysts meanwhile debate the short- and medium-term direction of crop markets. While some believe that prices have peaked, others say that they have further to go: they see food inflation as a growing problem in the medium to long term because supply will struggle to keep up with the growing demand from a rapidly rising population. These factors have ensured that fertilizer shares are performing well in international stock exchanges, as are those for agricultural technology companies, machinery and equipment and other inputs.
Combating food inflation poses a challenge for all concerned with mankind’s long-term security. The ultimate answer will come from further enhancements in agricultural productivity, food distribution systems and nutrient use efficiency. Riots over escalating food prices that spill over into efforts to seek new governments emphasise the urgency of the task.
The term MENA covers the region that extends from Morocco to Iran, and includes the majority of both the Middle Eastern and Mahgreb countries. The region’s population of around 381 million is about 6% of the world total. MENA is well-known as a region of global economic and strategic significance because of its vast reserves of oil and natural gas. The MENA oil reserves are estimated to total 811 billion barrels, representing 60% of the world’s oil reserves, while the gas reserves of 2,868.9 trillion ft3 are 45% of the world’s total. Of the 12 members of OPEC, eight are within the MENA region.
The eruption of civil unrest and the threat, potential or actual, posed to the authoritarian governments the length and breadth of the MENA region inevitably reverberated in global commodity markets, above all in oil. Oil prices promptly jumped some 20-30%, reaching in excess of $118/barrel for Brent crude. Any element of instability in the MENA region prompts nightmare scenarios involving fears of a major cut-off in oil supplies, and memories remain vivid of the 1973-74 Arab oil embargo.
Tunisia and Egypt are not oil producers, but Libya is – and the country’s supply to world markets has been disrupted. However, while Libya has been an active member of OPEC, its output of 1.8 million bbd represents less than 5% of world output. A truly nightmarish oil scenario would hinge on oil production being withdrawn from global markets if Saudi Arabia erupts into civil strife.
Meanwhile, what has been the impact of the MENA rumblings in global fertilizer markets? The story has been a mixed one so far. Of the MENA countries which have so far been affected by the political upheavals, Egypt, the Arab Gulf countries and Libya are significant exporters of ammonia and urea, while Tunisia is a key player in phosphate markets. Overseas partners also have fertilizer investments in the MENA region, notably Yara in Qatar and Libya. In the latter country, Yara was obliged to suspend production at its joint-venture Lifeco complex at Marsa el-Brega. The facilities there comprise the Brega 1 and Brega 2 units, which have a rated capacity of around 900,000 t/a of prilled urea, while about 150,000 t/a of ammonia are normally available for export. (Fertilizer Week, 25 February 2011)
By contrast, production of ammonia and urea in Egypt was scarcely affected by the three weeks of civil unrest during late January and into February. Indeed, the period was one of softening urea prices as Egyptian stocks of unsold product were high, while US offtake slipped back. Egyptian prices of urea rose to $425/t fob in the first half of February but offers were later made at around $380/t, even then only attracting limited interest from buyers.
Supplies of phosphate rock and downstream fertilizers from GCT, Tunisia were disrupted for some time after the change in government, as labour disputes at the Sfax, Gabes and La Skhira production sites continued. It was reported that production at the GCT 330,000 t/a DAP plant was continuing at just one-third of normal capacity. These factors helped ensure continuing firm prices in phosphate markets, but there has been no spiking, as potential buyers have proven willing to hold back on their purchases rather than be stampeded into panic buying.
Fertilizer markets may thus be praised for keeping their nerve. However, the scenario for fertilizers remains uncertain, and not simply because of the unclear MENA political outlook.
Fertilizer prices have been buoyant because of the perceived low cereal stocks and escalating global food prices. Crop commodity markets appear to be particularly vulnerable to shocks arising from bad weather and the like, such as disappointing harvest in India, drought in China and floods in Australia. During the past 12 months, coffee prices have risen by 94%, corn has risen by 88% and wheat has gone up by 74%. (Financial Times, 18 February 2011)
Analysts meanwhile debate the short- and medium-term direction of crop markets. While some believe that prices have peaked, others say that they have further to go: they see food inflation as a growing problem in the medium to long term because supply will struggle to keep up with the growing demand from a rapidly rising population. These factors have ensured that fertilizer shares are performing well in international stock exchanges, as are those for agricultural technology companies, machinery and equipment and other inputs.
Combating food inflation poses a challenge for all concerned with mankind’s long-term security. The ultimate answer will come from further enhancements in agricultural productivity, food distribution systems and nutrient use efficiency. Riots over escalating food prices that spill over into efforts to seek new governments emphasise the urgency of the task.
Tuesday, 1 February 2011
The food crisis is back on the agenda
Most fertilizer suppliers and traders can look back on 2010 as a very satisfactory year for business, reflecting the buoyancy of commodity markets overall. Consumption for the year is expected to show a worldwide increase of some 4.5% over 2009, with notably higher increases evident among the economic pace-setters of China, India and Brazil. Across the nutrient sectors, fertilizer supply and demand are in good balance and prices have continued to firm, boosting company margins. Fertilizer producers and traders can draw particular satisfaction from the uplift in prices throughout the past year. At the start of 2010, urea prices were around $265-272/t fob Yuzhny. Urea began trading in 2011 at around $377/t – a year-on-year uplift of around 41%. The gains posted in the phosphate sector were even higher. The Tampa DAP benchmark price was in the $390-395/t fob range in early January 2010: the January 2011 equivalent was
$597-600/t – a year-on-year gain of 52%.
Only in the potash sector did average prices remain static, the old year ending as it began, with spot-market KCl being quoted at around $390/t fob Vancouver. The leading potash suppliers rolled most contracts over on previous price levels or else posted very marginal increases. However, all this is set to change in 2011 as buyers appear more prepared to accept higher prices. Recently, Belarus Potash Company announced that it had settled first-half 2011 contract terms with China at $400/t cfr – an increase of $50/t on the 2010 price. The rise is similar to increases in the international market between the second quarter of 2010 and the first semester of 2011. Industry analysts forecast further rises in world potash prices this year, noting the strong demand for all fertilizers and high crop prices.
A farming bonanza is particularly evident in North America. The US Department of Agriculture (USDA) has noted falls in stock-todemand ratios, which pushed corn prices to $6.37/bushel in the first week of January, the highest level since July 2008. (Financial Times, 12 January 2011) The United States is the world’s largest corn supplier, meeting more than half of global import needs. As an important component of animal feed, corn availability has tightened in the wake of the continuing surge in demand for meat in emerging markets. Record ethanol production is also expected
to take up nearly 40% of the US corn crop.
Looking further afield, USDA notes a tighter availability for grain and oil seeds worldwide. The effects of the floods in Queensland, Australia are still being assessed but initial estimates are for Australia’s production of wheat to be down by 500,000 tonnes. By contrast, Argentina and Brazil have suffered from chronic drought,
making the prospects for the imminent crop harvests look increasingly fragile. The Financial Times reports that agricultural traders and analysts warn that the latest global yield and stocks data provide no further room for weather problems. Although rice prices have been stable, the tightness of wheat, corn and soybean markets has led international market prices for these commodities to surge. The jump in these prices has in turn prompted the FAO to warn of a repetition of the 2008 global food crisis if they rise further, with a high risk of a recurrence of food riots in developing countries. Meanwhile, Libya, Jordan and Morocco have taken measures to control food prices after Algeria and Tunisia were wracked by violent protests.
Representing the worldwide fertilizer industry, IFA is monitoring these developments. Noting that the speed and extent of the recovery in fertilizer sales and consumption in 2010 surprised most industry analysts, IFA is projecting growth in global fertilizer consumption of 4.7% for 2010/11 and 3.8% for 2011/12, by when nutrient application rates would have recovered to the levels seen before the economic crisis of 2008.
It may be argued that among the several causes of the current low cereal stocks, reduced nutrition application rates in the immediate aftermath of the 2008 crisis have led to the lower crop yields reported in the United States and several other strategic cereal exporters. Now that the demand for nutrients has revived and is set to rise further, could fertilizers again be a limiting factor that holds back the growth in food production that will be vital in feeding a growing world population? IFA believes not, stating that the fertilizer industry has learned the lessons of the earlier food crisis and is undertaking extensive development projects that will add new production capacity.
According to IFA’s estimates, between 2010 and 2015, some 55 urea units, 20 potash expansion projects and 40 processed phosphate facilities are planned for completion worldwide. Having spent an estimated aggregate cost of nearly $40 billion on new capacity for the three major nutrients since 2008, the industry is set to invest a further $80 billion in bringing new capacity on stream. While global urea capacity is projected to expand by 30% between 2009 and 2014, and potash and phosphates capacity by 25% and 31% respectively during the same period, supply/demand balances may well remain tight if global nutrient demand continues to rise at the current robust rates. The challenge furthermore remains to ensure that farmers everywhere in the world can
procure the nutrients they need at affordable prices.
$597-600/t – a year-on-year gain of 52%.
Only in the potash sector did average prices remain static, the old year ending as it began, with spot-market KCl being quoted at around $390/t fob Vancouver. The leading potash suppliers rolled most contracts over on previous price levels or else posted very marginal increases. However, all this is set to change in 2011 as buyers appear more prepared to accept higher prices. Recently, Belarus Potash Company announced that it had settled first-half 2011 contract terms with China at $400/t cfr – an increase of $50/t on the 2010 price. The rise is similar to increases in the international market between the second quarter of 2010 and the first semester of 2011. Industry analysts forecast further rises in world potash prices this year, noting the strong demand for all fertilizers and high crop prices.
A farming bonanza is particularly evident in North America. The US Department of Agriculture (USDA) has noted falls in stock-todemand ratios, which pushed corn prices to $6.37/bushel in the first week of January, the highest level since July 2008. (Financial Times, 12 January 2011) The United States is the world’s largest corn supplier, meeting more than half of global import needs. As an important component of animal feed, corn availability has tightened in the wake of the continuing surge in demand for meat in emerging markets. Record ethanol production is also expected
to take up nearly 40% of the US corn crop.
Looking further afield, USDA notes a tighter availability for grain and oil seeds worldwide. The effects of the floods in Queensland, Australia are still being assessed but initial estimates are for Australia’s production of wheat to be down by 500,000 tonnes. By contrast, Argentina and Brazil have suffered from chronic drought,
making the prospects for the imminent crop harvests look increasingly fragile. The Financial Times reports that agricultural traders and analysts warn that the latest global yield and stocks data provide no further room for weather problems. Although rice prices have been stable, the tightness of wheat, corn and soybean markets has led international market prices for these commodities to surge. The jump in these prices has in turn prompted the FAO to warn of a repetition of the 2008 global food crisis if they rise further, with a high risk of a recurrence of food riots in developing countries. Meanwhile, Libya, Jordan and Morocco have taken measures to control food prices after Algeria and Tunisia were wracked by violent protests.
Representing the worldwide fertilizer industry, IFA is monitoring these developments. Noting that the speed and extent of the recovery in fertilizer sales and consumption in 2010 surprised most industry analysts, IFA is projecting growth in global fertilizer consumption of 4.7% for 2010/11 and 3.8% for 2011/12, by when nutrient application rates would have recovered to the levels seen before the economic crisis of 2008.
It may be argued that among the several causes of the current low cereal stocks, reduced nutrition application rates in the immediate aftermath of the 2008 crisis have led to the lower crop yields reported in the United States and several other strategic cereal exporters. Now that the demand for nutrients has revived and is set to rise further, could fertilizers again be a limiting factor that holds back the growth in food production that will be vital in feeding a growing world population? IFA believes not, stating that the fertilizer industry has learned the lessons of the earlier food crisis and is undertaking extensive development projects that will add new production capacity.
According to IFA’s estimates, between 2010 and 2015, some 55 urea units, 20 potash expansion projects and 40 processed phosphate facilities are planned for completion worldwide. Having spent an estimated aggregate cost of nearly $40 billion on new capacity for the three major nutrients since 2008, the industry is set to invest a further $80 billion in bringing new capacity on stream. While global urea capacity is projected to expand by 30% between 2009 and 2014, and potash and phosphates capacity by 25% and 31% respectively during the same period, supply/demand balances may well remain tight if global nutrient demand continues to rise at the current robust rates. The challenge furthermore remains to ensure that farmers everywhere in the world can
procure the nutrients they need at affordable prices.
Monday, 15 November 2010
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.
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.
Thursday, 9 September 2010
They came, they saw….
But will they conquer? The entry of the BHP Billiton fox into the PotashCorp hen-coop with a hostile bid on 17 August, valuing the company at $40 billion or $130/share, was not a surprise to industry analysts. The first speculative suggestion that the Anglo-Australian mining giant might take a look at PotashCorp had been made a full two years ago: indeed, some reports suggest that BHP Billiton had been preparing its move for fully four years.
BHP Billiton has given PotashCorp shareholders until 19 October to mull the bid on the table. Since the offer was set out, the parties involved have followed virtually a textbook pattern in such contested M&A activities: PotashCorp’s immediate riposte was the offer was unacceptably low and undervalued the company. Its shares duly began to gain value, reaching $149.50 in the week commencing 23 August. They were widely expected to make further gains that would prompt BHP Billiton to submit a fresh bid, only to slip back to $146 by Friday, 27 August. Financial analysts had earlier speculated that BHP Billiton would ultimately win the day with a revised offer of $155-160/share. Meanwhile, likewise in textbook manner, BHP Billiton adopted a poker player’s stance, indicating that no new bid was forthcoming and that it was offering a very fair price to shareholders.
The next step, again as per textbook, was PotashCorp’s reported search for partnerships with potential White Knights to stave off BHP Billiton. This was the case with the most recent contested M&A deal in the fertilizer industry, involving a three-way fight between Agrium, Yara International and CF Industries to gain control of Terra Industries. Vale of Brazil promptly denied that it had any interest in bidding for PotashCorp. While M&A stories tend to generate feverish excitement among commentators, the official stance that Vale has adopted appears plausible, as the Brazilian mining giant is currently preoccupied with absorbing the Fertifos operation in Brazil. It is also expected to spearhead the drive urged by Brazil’s President Lulas to accelerate the development of additional sources of phosphate and potash within the country. In this context, PotashCorp may seem a distraction too far.
Sinochem’s name is also mentioned as being keen to ensure PotashCorp’s continuing independence, above all from BHP Billiton, with whom the Chinese have experienced recent tense relations over iron ore contract terms. Sinochem and PotashCorp are partners in the Sinofert joint venture, in which PotashCorp holds a 22% stake. The prospect of some form of Sinochem stake in the supply of potash from Canada – its principal supplier of a resource which the country partly lacks – does have a certain merit. However, outright Sinochem ownership of PotashCorp appears unlikely as the group has recently extended itself financially through a spate of acquisitions of domestic fertilizer producers.
Could Rio Tinto mount a counter-bid? This company had itself been the target of an unwelcome take-over bid from BHP in 2008. As part of the price it paid to retain its independence, Rio Tinto sold off several assets, including its interest in the Potasio Rio Colorado potash project in Argentina and its Regina potash asset in Canada. Earlier this year, Rio Tinto CEO Tim Albanese stated that the company is interested in re-entering the potash business. He also confirmed that potash is one of the minerals that the Rio Tinto exploration team continues to evaluate. “Rio has always thought this a good mineral to be in,” he added. But is re-entry into the potash sector worth $40 billion? Rio Tinto appears to think not, at least in its public statements to date.
Another facet when a company strives to preserve its independence from an unwelcome suitor is the use of the “poison pill”. PotashCorp followed previous companies’ form by announcing a shareholder rights issue, designed to prevent anyone acquiring more than 20% of the company.
The story to date has followed textbook patterns of behaviour by the suitor and the take-over target. Ultimately, however, each M&A story is unique, reflecting such factors as the personalities of the CEOs involved, the attentions of the regulatory institutions, the possible effect on other companies in the same business, and not least, the expectations of the shareholders being courted.
BHP Billiton’s declaration that it will operate PotashCorp’s mines at full capacity if its bid succeeds has dismayed Mosaic and Agrium, which also operate potash mines in Saskatchewan and which partner PotashCorp in the Canpotex export consortium. They have identified a threat to the global market balance, whereby output is tailored with supply to ensure buoyant prices. In conjunction with PotashCorp, they could lobby Canadian regulators and politicians to block the take-over. Under the Investment Canada Act, a foreign investor is required to demonstrate that a deal brings a “net benefit” to Canada. Recognition of this threat may explain why BHP Billiton subsequently took a more conciliatory approach towards any post-acquisition production and marketing of potash.
Shareholders will have reached their decision by the 19 October deadline, but there is one more hurdle that BHP Billiton must cross before it can assume victory: the approval of the Saskatchewan Financial Services Commission. The head of the commission is getting prepared for the task ahead: “Buckle up, because it’s going to be a crazy ride,” he is reported to have told his wife. Financial and industry analysts around the world may be inclined to agree.
BHP Billiton has given PotashCorp shareholders until 19 October to mull the bid on the table. Since the offer was set out, the parties involved have followed virtually a textbook pattern in such contested M&A activities: PotashCorp’s immediate riposte was the offer was unacceptably low and undervalued the company. Its shares duly began to gain value, reaching $149.50 in the week commencing 23 August. They were widely expected to make further gains that would prompt BHP Billiton to submit a fresh bid, only to slip back to $146 by Friday, 27 August. Financial analysts had earlier speculated that BHP Billiton would ultimately win the day with a revised offer of $155-160/share. Meanwhile, likewise in textbook manner, BHP Billiton adopted a poker player’s stance, indicating that no new bid was forthcoming and that it was offering a very fair price to shareholders.
The next step, again as per textbook, was PotashCorp’s reported search for partnerships with potential White Knights to stave off BHP Billiton. This was the case with the most recent contested M&A deal in the fertilizer industry, involving a three-way fight between Agrium, Yara International and CF Industries to gain control of Terra Industries. Vale of Brazil promptly denied that it had any interest in bidding for PotashCorp. While M&A stories tend to generate feverish excitement among commentators, the official stance that Vale has adopted appears plausible, as the Brazilian mining giant is currently preoccupied with absorbing the Fertifos operation in Brazil. It is also expected to spearhead the drive urged by Brazil’s President Lulas to accelerate the development of additional sources of phosphate and potash within the country. In this context, PotashCorp may seem a distraction too far.
Sinochem’s name is also mentioned as being keen to ensure PotashCorp’s continuing independence, above all from BHP Billiton, with whom the Chinese have experienced recent tense relations over iron ore contract terms. Sinochem and PotashCorp are partners in the Sinofert joint venture, in which PotashCorp holds a 22% stake. The prospect of some form of Sinochem stake in the supply of potash from Canada – its principal supplier of a resource which the country partly lacks – does have a certain merit. However, outright Sinochem ownership of PotashCorp appears unlikely as the group has recently extended itself financially through a spate of acquisitions of domestic fertilizer producers.
Could Rio Tinto mount a counter-bid? This company had itself been the target of an unwelcome take-over bid from BHP in 2008. As part of the price it paid to retain its independence, Rio Tinto sold off several assets, including its interest in the Potasio Rio Colorado potash project in Argentina and its Regina potash asset in Canada. Earlier this year, Rio Tinto CEO Tim Albanese stated that the company is interested in re-entering the potash business. He also confirmed that potash is one of the minerals that the Rio Tinto exploration team continues to evaluate. “Rio has always thought this a good mineral to be in,” he added. But is re-entry into the potash sector worth $40 billion? Rio Tinto appears to think not, at least in its public statements to date.
Another facet when a company strives to preserve its independence from an unwelcome suitor is the use of the “poison pill”. PotashCorp followed previous companies’ form by announcing a shareholder rights issue, designed to prevent anyone acquiring more than 20% of the company.
The story to date has followed textbook patterns of behaviour by the suitor and the take-over target. Ultimately, however, each M&A story is unique, reflecting such factors as the personalities of the CEOs involved, the attentions of the regulatory institutions, the possible effect on other companies in the same business, and not least, the expectations of the shareholders being courted.
BHP Billiton’s declaration that it will operate PotashCorp’s mines at full capacity if its bid succeeds has dismayed Mosaic and Agrium, which also operate potash mines in Saskatchewan and which partner PotashCorp in the Canpotex export consortium. They have identified a threat to the global market balance, whereby output is tailored with supply to ensure buoyant prices. In conjunction with PotashCorp, they could lobby Canadian regulators and politicians to block the take-over. Under the Investment Canada Act, a foreign investor is required to demonstrate that a deal brings a “net benefit” to Canada. Recognition of this threat may explain why BHP Billiton subsequently took a more conciliatory approach towards any post-acquisition production and marketing of potash.
Shareholders will have reached their decision by the 19 October deadline, but there is one more hurdle that BHP Billiton must cross before it can assume victory: the approval of the Saskatchewan Financial Services Commission. The head of the commission is getting prepared for the task ahead: “Buckle up, because it’s going to be a crazy ride,” he is reported to have told his wife. Financial and industry analysts around the world may be inclined to agree.
Friday, 23 July 2010
A major new scenario
We look in this issue how well the leading fertilizer companies are performing financially. (Financial performance – a slow return of confidence, p18.) The short answer is not too badly. Most producers managed to withstand the worst effects of the credit crunch and collapse in demand to return to profitability by the fourth quarter of 2009. That positive momentum continued in the first quarter of 2010.
Another manifestation of the improved financial climate is the resurgence of merger and acquisition activity, marked by the final resolution of the long-running battle for control of Terra. Financial analysts love a good M&A battle and they have been salivating at the thought that such activity will accelerate during the course of the year. They believe that the nitrogen sector is particularly ripe for consolidation, as fragmentation is much greater. Some analysts have been eager to suggest the names of the companies that are thought to be susceptible to take-over bids, but their speculative writings have so far turned into nothing concrete.
Of much greater interest to all market observers has been the intense interest that leading mining companies have begun to manifest in fertilizer raw materials. BHP Billiton’s acquisition of the junior mining company Athabasca Potash was concluded in January 2010 at $323 million – a sum that was seen as small beer for this, the world’s largest mineral resource company. BHP Billiton previously picked up the potash assets in Argentina and Canada that Rio Tinto had briefly held. Having sloughed off other under-performing assets, including the White Elephant of the Ravensthorpe nickel project, BHP Billiton had been widely expected to withdraw from the potash sector - one which it should be noted has yet to yield the group a single dollar of revenue.
BHP Billiton’s recent capital market presentations have placed potash to the forefront of the group’s development strategies, and the company has declared that “to create a world-class potash business will require more than a single mine.” The Jansen project is the most advanced project in BHP’s potash development portfolio and BHPhas indicated that the neighbouring greenfield projects at Boulder and Young, Saskatchewan are waiting in the wings to proceed with development. “Potash is strategically important for BHP Billiton, offering the group an avenue for significant growth and further diversification by commodity, customer and geography,” said one BHP president.
Brazilian mining group Vale has issued a similar declaration of strategic intent. Its fast-expanding fertilizer commitments embrace both the potash and phosphate sectors. The group’s chief financial officer, Fabio Barbosa, said in August 2009 that Vale’s ambition was to become a major force in the phosphates and fertilizer sector, and its interests went “further than just mining.” The subsequent months proved a veritable whirlwind as Vale spent over $5 billion in acquiring fertilizer assets, including gaining a majority stake in Fosfertil, Brazil’s largest producer. “Carnaval has come early to Brazil this year,” commented a Financial Times editorial (14 February 2010).
Vale’s rapid advance was seen as partly the result of prodding from President Luiz Inácio Lula da Silva, who had berated the country’s hitherto fragmented (and partly foreign-owned) fertilizer industry for being slow to exploit the country’s mineral reserves and raise self-sufficiency. It is clear that President Lula had the Chinese model in mind: within barely a decade, China had transformed its nitrogen and phosphate fertilizer sector from being one reliant mainly on imports to become an exporter with a global-market impact.
The FT observed that President Lula had previously exerted pressure on Vale to invest in the Brazilian steel industry in order to reduce the risk of Brazil exporting all of its iron ore output to Brazil and in consequence would have to import Chinese steel. The FT questioned whether Vale’s sudden foray into downstream fertilizers was a rational move for a company whose core activity had been iron ore or another response to political bidding. It noted that the government still retained a 40% golden share in Vale and speculated whether the Vale move was part of an official strategy to strengthen Brazil’s role as a global fertilizer producer. Vale meanwhile insists that its investment in fertilizer and associated raw material assets is market-driven, and notes that analysts are unanimous in indentifying the sector as one offering consistent long-term growth.
The Financial Times seems to have accepted Vale’s wisdom in that respect, noting also that “previous Vale bets on coal and nickel have paid off.”
The costs of entry into fertilizers and associated raw materials is high. Expect to pay around $3 billion to bring a new potash mine into production and between $1-1.5 billion for new nitrogen and phosphate facilities. This has not deterred a large number of junior mining companies from proposing new developments around the world, including such locations as offshore Namibia, Ethiopia and the Democratic Republic of Congo. These companies had announced their projects in the heady days of escalating commodity prices in 2007 and early 2008. Despite the subsequent poor climate for investment, the junior minors have not gone away: most of their projects report continuing progress with exploratory drilling programmes and feasibility studies.
Established potash and phosphate producers may view the junior miners as upstarts, as was evidenced at the recent BMO Capital Markets fertilizer conference. BMO itself noted that ”financing commitments have not materialised for any of the leading potash projects managed by the junior developers.” Representing the established potash producers, Bill Doyle swatted away any notion of intensified competition from the wave of new projects, whether promoted by a major or a junior: “People ask us about our competitors, but they are not producing,” he said. “So they are not competitors. No-one knows more about building potash capacity than we do, and we are not too worried.”
A major new scenario for fertilizers and raw materials? Or just a group of financial analysts getting over-excited? Let us return to the issue one year hence.
Another manifestation of the improved financial climate is the resurgence of merger and acquisition activity, marked by the final resolution of the long-running battle for control of Terra. Financial analysts love a good M&A battle and they have been salivating at the thought that such activity will accelerate during the course of the year. They believe that the nitrogen sector is particularly ripe for consolidation, as fragmentation is much greater. Some analysts have been eager to suggest the names of the companies that are thought to be susceptible to take-over bids, but their speculative writings have so far turned into nothing concrete.
Of much greater interest to all market observers has been the intense interest that leading mining companies have begun to manifest in fertilizer raw materials. BHP Billiton’s acquisition of the junior mining company Athabasca Potash was concluded in January 2010 at $323 million – a sum that was seen as small beer for this, the world’s largest mineral resource company. BHP Billiton previously picked up the potash assets in Argentina and Canada that Rio Tinto had briefly held. Having sloughed off other under-performing assets, including the White Elephant of the Ravensthorpe nickel project, BHP Billiton had been widely expected to withdraw from the potash sector - one which it should be noted has yet to yield the group a single dollar of revenue.
BHP Billiton’s recent capital market presentations have placed potash to the forefront of the group’s development strategies, and the company has declared that “to create a world-class potash business will require more than a single mine.” The Jansen project is the most advanced project in BHP’s potash development portfolio and BHPhas indicated that the neighbouring greenfield projects at Boulder and Young, Saskatchewan are waiting in the wings to proceed with development. “Potash is strategically important for BHP Billiton, offering the group an avenue for significant growth and further diversification by commodity, customer and geography,” said one BHP president.
Brazilian mining group Vale has issued a similar declaration of strategic intent. Its fast-expanding fertilizer commitments embrace both the potash and phosphate sectors. The group’s chief financial officer, Fabio Barbosa, said in August 2009 that Vale’s ambition was to become a major force in the phosphates and fertilizer sector, and its interests went “further than just mining.” The subsequent months proved a veritable whirlwind as Vale spent over $5 billion in acquiring fertilizer assets, including gaining a majority stake in Fosfertil, Brazil’s largest producer. “Carnaval has come early to Brazil this year,” commented a Financial Times editorial (14 February 2010).
Vale’s rapid advance was seen as partly the result of prodding from President Luiz Inácio Lula da Silva, who had berated the country’s hitherto fragmented (and partly foreign-owned) fertilizer industry for being slow to exploit the country’s mineral reserves and raise self-sufficiency. It is clear that President Lula had the Chinese model in mind: within barely a decade, China had transformed its nitrogen and phosphate fertilizer sector from being one reliant mainly on imports to become an exporter with a global-market impact.
The FT observed that President Lula had previously exerted pressure on Vale to invest in the Brazilian steel industry in order to reduce the risk of Brazil exporting all of its iron ore output to Brazil and in consequence would have to import Chinese steel. The FT questioned whether Vale’s sudden foray into downstream fertilizers was a rational move for a company whose core activity had been iron ore or another response to political bidding. It noted that the government still retained a 40% golden share in Vale and speculated whether the Vale move was part of an official strategy to strengthen Brazil’s role as a global fertilizer producer. Vale meanwhile insists that its investment in fertilizer and associated raw material assets is market-driven, and notes that analysts are unanimous in indentifying the sector as one offering consistent long-term growth.
The Financial Times seems to have accepted Vale’s wisdom in that respect, noting also that “previous Vale bets on coal and nickel have paid off.”
The costs of entry into fertilizers and associated raw materials is high. Expect to pay around $3 billion to bring a new potash mine into production and between $1-1.5 billion for new nitrogen and phosphate facilities. This has not deterred a large number of junior mining companies from proposing new developments around the world, including such locations as offshore Namibia, Ethiopia and the Democratic Republic of Congo. These companies had announced their projects in the heady days of escalating commodity prices in 2007 and early 2008. Despite the subsequent poor climate for investment, the junior minors have not gone away: most of their projects report continuing progress with exploratory drilling programmes and feasibility studies.
Established potash and phosphate producers may view the junior miners as upstarts, as was evidenced at the recent BMO Capital Markets fertilizer conference. BMO itself noted that ”financing commitments have not materialised for any of the leading potash projects managed by the junior developers.” Representing the established potash producers, Bill Doyle swatted away any notion of intensified competition from the wave of new projects, whether promoted by a major or a junior: “People ask us about our competitors, but they are not producing,” he said. “So they are not competitors. No-one knows more about building potash capacity than we do, and we are not too worried.”
A major new scenario for fertilizers and raw materials? Or just a group of financial analysts getting over-excited? Let us return to the issue one year hence.
Subscribe to:
Posts (Atom)
