Phosphate-Fertilizer-Market-Outlook-2019-Long-Term-Outlook PDF

Phosphate Fertilizer
Market Outlook
Chris Lawson
Head of Fertilizer Analysis
+44 20 7903 2148
chris.lawson@crugroup.com
NOVEMBER 2019
 SUMMARY
CRU long term outlook

CRU’s long-term agricultural production and long run marginal cost models offer clients a
robust insight into the longer-term outlook for the phosphate industry. This document and its
associated excel file look at global agricultural P2O5 demand split by regions, accounting for
various trends on how fertilizer is consumed. It also analyses the long run marginal cost
(LRMC) of the downstream phosphate industry – a key metric used for long term strategic
planning. The LRMC uses a selection of future capacity projects and helps to provide a link
between medium term price forecasts and longer-term prospects for the industry.
©2019 CRU International Ltd | All rights reserved

Talk to CRU
You can’t beat a one-on-one conversation. That’s why we invite
you to talk to us. You can contact CRU’s analysts, any time, to
discuss issues of particular relevance to you.
Our expertise and our independence make CRU one of the most
valuable partners in your business. We help customers make
important business decisions. Invite us to meet your colleagues
and present our view of the market.
We welcome our view being challenged and by challenging your
view we can help you towards a deeper understanding of what’s
really happening in the market and how it will affect you.
Make the most of your relationship with us.
Call or email us to arrange a private briefing for your colleagues.
CRU – big enough to deliver a high quality service, small enough to

care about all of our customers.
crugroup.com
Editor
Chris Lawson
Research Manager, Fertilizers
t +44 20 7903 2148
e chris.lawson@crugroup.com
CONTRIBUTORS
CRU London CRU London CRU London CRU London CRU London
Glen Kurokawa Imane Ghrib Jay Morrod Rajiv Ram Alexander Derricott
Analyst Analyst Analyst Senior Analyst Cost Analyst
t +44 20 7903 2065 t +44 20 7903 2256 t +44 20 7903 2168 t +44 20 7903 2122 t +44 20 7903 2237
e glen.kurokawa@crugroup.com e ghrib.imane@crugroup.com e jay.morrod@crugroup.com e rajiv.ram@crugroup.com e alexander.derricott@crugroup.com
CRU London CRU Mumbai CRU Shanghai CRU North America
Tom McIvor Koyel Choudhury Isabel Chen Mike Rahm

Senior Markets Editor Fertilizer Analyst Analyst Principal Analyst
t +44 20 7903 2142 t +91 22 4504 5710 t +86 21 6028 6810
e tom.mcivor@crugroup.com e koyel.choudhury@crugroup.com e isabel.chen@crugroup.com e mike.rahm@crugroup.com
Phosphate Fertilizer
Market Outlook
This report is supplied on a private and confidential basis to the customer. Its contents must not be disclosed
to any other company, organisation or individual, nor be photocopied or otherwise reproduced in whole or in
part, without the prior written permission of CRU International
This report is delivered on the understanding that CRU International’s liability is limited to the provision
of the professional services outlined in the contract for this report. Although every effort has been made
to undertake this work with care and diligence, CRU International cannot guarantee the accuracy of any
forecasts or assumptions or that the proposed investment will be successful. If the client uses our work in any
information Memorandum or similar document for the purpose of raising funds, CRU International accepts no
liability to third parties however arising and without limitation.
© CRU International Ltd. 2019. All rights reserved

Phosphate Fertilizer Market Outlook NOV EMBER 2019
CO NT ENT S
► KEY SUMMARY INFORMATION _____________________________________________________ 5

► LONG TERM OUTLOOK FOR FERTILIZER DEMAND ____________________________________ 5
Methodology _____________________________________________________________________ 5
CRU’s ‘new’ long-term fertilizer demand model _________________________________________ 6
► THE LONG TERM: MARGINAL COSTS_______________________________________________ 13
Long Run Marginal Costs __________________________________________________________ 13
Marginal Cost Theory and Concepts_________________________________________________ 14
New capacity will be focused in Asia and MENA _______________________________________ 15
The base year is driven by medium cost producers _____________________________________ 19
Changes in the 2018 LRMC project basket ___________________________________________ 20
Cost escalators – raw materials and macro-economics __________________________________ 20
The forecast is positive for long term prices ___________________________________________ 24
Scenario Analysis: Saudi Arabia and Morocco expansion ________________________________ 26
LI ST O F T ABLES
Table 1: LRMC Summary Data Points ___________________________________________________ 13

Table 2: Selected project details ________________________________________________________ 19
Table 3: Long Run Marginal Cost - Nominal and Real _______________________________________ 24
crugroup.com PAGE 4 OF 27
► KEY SUMMARY I NF O RMAT I O N
P2O5 demand growth by major region DAP Long Run Marginal Costs netted back
Mt P2O5 to Tampa FOB
North America Europe Long Run Marginal Costs, USD/t (nominal)
South America Eastern Asia
18 Southern Asia DAP Long Run Marginal Cost
Thousands
1200
Historic Prices
15
12 900
9
600
6
300
3
- 0
DATA: CRU
► LO NG T ERM O UT LO O K F O R F ERT I LI ZER DEMAND
Methodology
CRU has developed an enhanced nutrient demand model that improves our projections for
long term fertilizer consumption. The starting point for our long-term global forecast is the
Rajiv Ram end of our five-year medium-term forecast, 2024, with a twenty-year projection to 2044. Our
Demand Analyst medium-term forecast starts at 2019, meaning our long-term forecast covers a period of 25
years. An overview of the methodology that underpins our long-term model is provided in the
following pages.
Key drivers of long-term fertilizer demand

Demand for fertilizers is determined by the outlook for agricultural production, which is closely
related to food consumption, as well as the need for animal feed, natural fibres and biofuels.
To forecast medium term fertilizer consumption, CRU uses a bottom-up forecast of nutrient
demand, based on forecasts of food demand and harvested areas. These forecasts consider
factors such as crop plantings, application rates (which are affected by crop and fertilizer
prices), economic cycles and population growth (and in turn changes in income and diet).
Over the long term it becomes more difficult to predict the development of many of these
variables, especially the timing or duration of economic cycles driving income changes. The
focus of this analysis is on the structural elements that determine trend levels and rates of
growth through time. The key drivers of fertilizer demand that will persist over the long term
will be food consumption (driven by population growth and changes in income) and changes
in productivity. These are the main factors we incorporate into our fertilizer demand
methodology. CRU appreciates there are significant issues with wide ranging implications
such as farm size, technological advances and climate change that cannot be fully
investigated within the context of this report.
The ‘old’ long-term fertilizer demand model

CRU’s previous model used a simplistic top-down approach to estimate long-term fertilizer
demand from a ‘world’ view only. There were two major assumptions used in the model:
1. We assumed fertilizer consumption moved in line with agricultural production. This

was based on historic trends, particularly since the end of the Green Revolution,
where there has been an extremely high correlation between consumption of mineral
fertilizer and agricultural production.
2. Having determined a forecast of total nutrient consumption, we estimated how

nutrient ratios may change given projected changes to crop mix and to nutrient
intensity under two scenarios:
a. Fixed case: nutrient ratios do not change in the long run. For example, N:P:K
usage ratio stays the same.
b. Base case: the most likely case using historical evidence, where consumption of
P and K outperform N usage in the long run.
CRU’s old long-term model
Income
Global Food Forecast
(kcal/cap/day)
Population Global Food Consumption

(kcal/cap/day)
Calorie
content N P & K consumption
Global Agricultural production grows with agricultural
(million tonnes) production
DATA: CRU
CRU’s ‘new’ long-term fertilizer demand model

CRU’s current model combines a top down and bottom up approach to provide a more
sophisticated view on long term fertilizer demand. Our model includes the following four
major enhancements:
1. Fertilizer consumption is split regionally providing a more granular view on demand.

A split by country is not included.
2. Crop nutrient demand and production is calculated within each region and trade is
used to balance supply/demand. This is an important inclusion because some
regions will become increasingly important agricultural producers (South America
being the best example) and respond to the food requirements of net importers.
3. Food demand/production is divided into crop categories (cereals, oilseeds, sugar,

fruit & vegetable and other) and by end use (food and non-food). This allows us to
forecast agricultural production that is driven by non-food uses, most notably biofuel
production.
4. We take land availability into account by including the potential of arable land in our
modelling. This improves our view on how crop area expansion/contraction will occur
by region.
Our methodology incorporates three models in a staircase process to calculate long term
nutrient consumption:
Calorie forecast model
The calorie forecast model forecasts vegetable and animal calorie demand on a country
basis; which is then aggregated into a regional figure. Over the long run, population growth
and income growth will determine food consumption. As income per capita rises in
developing countries, calorific intake also increases rapidly, but over time growth in calorific
intake does not keep pace with growth in income.
Changes in income also impact diets. As income rises, people tend to spend money on more
expensive foods – moving away from staple foods, such as cereals, to consuming to more
meat, edible oils, and dairy products. The switch towards meat consumption requires higher
levels of agricultural production and resource use, so total oilseeds and grain production per
capita rises as income increases.
Food demand and production model
Using calorie forecasts as a basis, future food demand by crop and end use is calculated.
Regions with lower incomes per capita are assumed to experience faster growth rates in food
consumption than those with higher incomes per capita. Approximately 100 crops are divided
into five main categories (cereals, oilseeds, sugar, fruit & vegetable and other) and five end
uses (food, animal feed, processed food, industrial and seed waste). Using crop demand and
dependency ratios (which factor the net trade element) total crop production is calculated.
Whilst crop production is subject to seasonal and cyclical variations, such as the influence of
unpredictable weather conditions and changes in crop prices, over the long-term production
growth in agricultural crops tracks demand.
Nutrient consumption model
Total fertilizer demand is function of crop area and crop yields. Crop area is formulated using
the potential arable land available in each region. Total crop production provides a foundation
to calculate yields, which are a key driver of application rates. There is an inverse relationship
between the crop area and yields. If crop area increases then yields fall and hence fertilizer
demand, since the land is being used more intensively and vice versa. Total fertilizer demand
is then split into Nitrogen (N), Phosphate (P2O5) and Potassium (K2O) consumption using
nutrient ratios. Using trends and analysis judgement, assumptions are made on how the
nutrient balance may change in each region to forecast nutrient consumption.
Risk factors that could affect the forecast
Forecasting fertilizer consumption over a long period of time is fraught with exogenous
factors, risks and uncertainty which effect agricultural production. These are some factors
that are not included in our methodology:
• Resource constraints: availability of land and water scarcity. Agricultural producers

need to increase land area/or yields but there are concerns that the availability of
arable land could be a limiting factor. Water scarcity is region dependent but could
be addressed by improving water use efficiency in agricultural production.
• Agricultural productivity: historically, rising agricultural production has been driven by

improved crop yields as opposed to land expansion. However, there are doubts on
whether further improvements to productivity have environmental limits.
• Government policy: biofuels/ethanol programmes, trade disputes, subsidies and

export taxes can affect crop demand and hence nutrient consumption.
• Climate change: the long-term impact of climate change is uncertain and greater
unpredictability of weather events is expected.
• Biotechnology and new farming technologies: There are both upside and downside
risk associated with biotechnology. On the upside, technology can boost crop
production and bring marginal land back into a use, a positive for nutrient demand.
However, many new methods focus on maximizing fertilizer efficiency resulting in
lower consumption.
• Environmental degradation could result in constraints to agricultural production.
• Farm structure: farm size and knowledge of fertilizers differs across regions
CRU’s new long term fertilizer demand model
Global demand split regionally 1. Calorie forecast model

(Per capita vegetal & animal calorie
demand)
North Europe
Central Asia
East Asia 2. Food crop demand and production model
East Europe
West Europe (Total demand for crops and production within each
region. Net trade used to balance supply/demand)
North America South Europe
West Asia
North Africa
Caribbean Food Non food Trade
Animal feed
West Africa submodel submodel submodel submodel
South Asia
Central America East Africa Southeast Asia
Central Africa
South America
South Africa 3. Nutrient consumption model
Oceania
(Total fertilizer demand with nutrient ratios
applied)
Crop
Yields vs
area/potential Crop Yields
Fertilizer use
arable land
DATA: CRU
Phosphate Fertilizer Market Outlook NOVEMB ER 2019
The long-term outlook for P2O5 demand

Total fertilizer demand is forecast to increase from 206 million nutrient tonnes (N + P 2O5 +
K2O) in 2018 to 290 million nutrient tonnes in 2042. The long-term annual growth rate from
2018-2042 is forecast at 1.4% per annum. In terms of global nutrient growth, P 2O5 and K2O
have more upside because of the rebalancing in nutrient ratios away from N. The projected
annual growth rates for each macro nutrient between 2018-2044 is:
N: 1.3% per annum to 163 million tonnes nitrogen in 2044.
P: 1.5% per annum to 74 million tonnes P2O5 in 2044.
K: 2.0% per annum to 62 million tonnes K2O in 2044.
Over the long-term we believe there is scope for P2O5 consumption growth to outperform
nitrogen resulting from changes in the global crop mix and policy shifts to develop balanced
fertilizer use in countries such as India. Other regional shifts are explained further below. The
key driving factor is that additional phosphate application will have a beneficial impact of crop
and or livestock production.
Global nutrient demand forecast

Mt nutrient
300
N P K
250
200
150
100
50
0
2000 2006 2012 2018 2024 2030 2036 2042
DATA: CRU, IFA
Regional demand dynamics
In our methodology, we include 19 world regions to provide a granular view of long-term

global phosphate fertilizer demand. The greatest share of the growth is projected in regions
with emerging economies, where populations and incomes are rising rapidly. Demand is set
to grow at the highest rates in Africa, South America, Eastern Europe, Southeast Asia and
South Asia over the next 25 years. The regions in Africa exhibit extremely high growth rates
because they are starting at a low base, but in terms of volume they will remain relatively
small.
In contrast, consumption growth in Eastern Asia, Western Europe and North America is
forecast to remain stagnant and, in some cases, negative.
Long term P2O5 demand growth skewed towards developing markets

%, 2019-44 CAGR
6.0%
4.0%
2.0%
0.0%
-2.0%
DATA: CRU
In terms of volumes, five major regions; South America, Southern Asia, Eastern Asia, North
America and Europe will constitute close to three quarters of global phosphate fertilizer
demand by 2044. The following points are some of the key regional drivers of demand.
Europe: Environmental policy that emphasizes fertilizer efficiency will continue to pressure
fertilizer consumption in Western, Southern and Northern Europe. However, consumption in
the region will be supported by Eastern Europe, where rising grains and oilseeds area and
modernisation of farming methods will drive fertilizer use and application rates.
North America: Out of all ‘mature consumption’ regions, North America has the most upside.
It will continue to be a key exporter of soybean, canola and corn. Fertilizer efficiency per unit
of agricultural production has improved significantly, but this has been in line with yield gains,
meaning application rates have remained steady. This trend is expected to continue over the
long term.
South America: This region has ample water resources and land area potential. Much of
the forecast in P2O5 demand growth is likely to stem from increased soybean plantings in
Brazil. The country has the best global prospects for agricultural expansion over the long
term. Much of the new land being brought into production is of low fertility. Therefore, this
land will require high application rates, supporting overall demand.
East Asia: The fall in P2O5 consumption is expected to be driven by China’s measures to
reduce fertilizer overapplication and focus on quality rather than quantity. The economic
arguments of grains production in the long term are less convincing, suggesting China will
become a net grains importer, further applying downward pressure on demand.
Southern Asia: The shift in nutrient ratios from N to P will support demand growth in South
Asia. Consumption in India will be driven by increasing agricultural productivity, where
irrigation will increase double cropping in India.
P2O5 demand growth by major region shows falls in Eastern Asia

Mt P2O5
North America South America Europe
18000 Eastern Asia Southern Asia
16000
14000
12000
10000
8000
6000
4000
2000
0
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
DATA: CRU
In some of the fastest growing regions, fertilizer demand is likely to be driven by rising
application rates to maximise yield potential. Many countries in Africa have a huge scope to
bridge the gap between attainable and actual yields through improvements in technology,
fertilization, irrigation practices and improved education.
For example, in Africa there are still very basic methods of farming, where farmers use
organic matter as fertilizer. There is potential to develop fertilizer distribution systems as
countries shift from traditional crops to nutrient intensive crops such as rice, wheat, corn and
soybean. Public policy is also important. For instance, in Asia government measures are
increasingly emphasizing a rebalancing of N to P and K.
P2O5 intensity of use, which measures the kg of nutrient per tonne of agricultural production
will fall in North America, Western Europe and Eastern Asia due to rising fertilizer efficiency.
However, there is still potential to expand intensity of use in other regions, suggesting
phosphate fertilizers will continue to play a role in increasing yields and agricultural
production.
Crop yields will continue to rise P2O5 intensity

Total agricultural yields, t/ha kg/P2O5 per tonne of agricultural production
Eastern Africa Western Africa North America Western Europe

South America North America South America Eastern Asia
South-Eastern Asia Southern Asia
15 16
12
12
9
8
6
4
3
- -
DATA: CRU
► T HE LO NG T ERM: MARG I NAL CO ST S
Long Run Marginal Costs

CRU has revamped its Phosphate Fertilizer Long Run Marginal Cost (LRMC) methodology
to better reflect the cyclical nature of phosphate markets. Previously, the LRMC was based
on project and production costs and escalations for producing DAP in Morocco, which holds
Alexander Derricott 75% of global phosphate reserves, but is in the first quartile of the cost curve. We now base
Analyst, Fertilizer the LRMC on the forecasted costs of producers and projects who will most likely be marginal,
Costs around the 95th percentile of the future cost curve.
A range of confirmed and potential phosphate fertilizer projects were selected as the likely
marginal producers. Capital costs were also factored in. The selection of projects was
determined by our Project Gateway selection methodology and CRU production cost and
economic data. Accordingly, long-term DAP fertilizer prices are projected at USD1118/t (on
a DAP FOB Tampa basis) in 2044. This projection captures how marginal producer cost
escalation and capital expenses will support prices.
DAP Long Run Marginal Costs netted back to FOB DAP Tampa
Long Run Marginal Costs, USD/t (nominal)
DAP Long Run Marginal Cost Historic DAP Tampa Prices

1200
1000
800
600
400
200
DATA: CRU
Table 1: LRMC Summary Data Points

CAGR
2010 2018 2023 2030 2044
2018 - 2044
LRMC (nominal) USD/t 531.3 517.3 575.6 742.6 1118.2 3.26%
LRMC (2018$/t) USD/t 609.9 517.3 523.4 587.9 685.9 1.18%
Phosphate Rock Index 0.91 1.00 1.10 1.48 2.52 3.93%

Sulphur Index 1.00 1.00 1.12 1.48 2.14 3.22%
Ammonia Index 0.94 1.00 1.14 1.37 1.86 2.63%
Labour Index 0.86 1.00 1.27 1.97 3.99 5.93%

Power Index 0.98 1.00 0.80 0.93 1.23 0.87%
Consumables Index 0.91 1.00 1.10 1.31 1.82 2.52%
Freight Index 1.37 1.00 1.26 1.70 2.47 3.83%
Capital Index 1.05 1.00 1.07 1.33 1.86 2.62%
DATA: CRU
Marginal Cost Theory and Concepts

According to economic theory, competition among producers should set the price of a good
at the Marginal Cost (MC), which is equivalent to the cost of producing the last unit of output
required to meet demand. There are two marginal cost concepts that are used to determine
prices, the Short Run and the Long Run.
Short Run Marginal Costs (SRMC) uses a time period, five years by CRU definitions, where
capacity remains relatively fixed. Capacity changes can occur, but only to due to
debottlenecking, closure or incorporating capacity already under development. There is no
scope for rapid expansion of capacity due to a sharp increase demand. In the short term, a
producer only can respond to changes in demand and prices by controlling its variable costs,
but some input costs maybe also be fixed in the very short term. Therefore, operating
decisions are based on market prices and operating costs. In the short run, the marginal
producers are those producers who are at the top of the industry cost curve.
Long Run Marginal Costs (LRMC) is when the time period extends further ahead, past
2024, and capacity is flexible. This includes the potential for projects that have not been
conceived yet. Over the long term, all costs become variable and the decision to operate or
not is dependant not just on price and operating costs, but also the impact of capital costs.
Projects that aim to enter the market over the long term must not only operate profitably, but
also generate a better return on capital than other potential investments. As seen in Cost
Escalators, capital costs make up a major portion of any phosphate fertilizer plant’s costs
and can make an operationally profitable project unviable.
New capacity will be focused in Asia and MENA

To develop the average LRMC, CRU has selected projects in 12 countries. The selection
contains countries that have recently developed projects or have plans for future projects.
We also include projects in countries that already have established industries, e.g. Jordan
and China; or those areas that have strong demand and therefore the rationale to expand
domestic industry, e.g. Brazil, Vietnam and India. Inclusion in the selected group does not
mean that CRU has forecasts expansions, nor does it suggest CRU has received information
that a project could develop. Not all projects are included within the LRMC average.
Exclusions are made at the lower end of the cost estimates, while extremely high-cost
projects are also discarded.
DATA: CRU
Morocco
Moroccan phosphate producer OCP has expanded rapidly in downstream granular

phosphate fertilizer production as part of its industrial development plan launched in 2008.
The development of the Jorf Lasfar production hub has added over 4Mt of export focused
fertilizer capacity into the market. The commissioning of the Jorf Lasfar Phosphate Hubs
(JPH) I – IV between 2015 and 2018, will be followed by the next round of expansions, due
to commence in 2022 (JPH VI – XI). OCP’s strategy revolves around the modular nature of
these projects, which will allow OCP to stagger it capacity ramp-up while minimising market
shocks.
Morocco plays a key role within the phosphate industry, holding 75% of the phosphate rock
reserves globally. It supplies raw, intermediate and finished materials. Though self-sufficient
in phosphate rock, OCP has no hydrocarbon resources to source sulphur and ammonia. To
source these key materials, OCP is reliant on the traded markets, leaving it exposed to price
changes.
In terms of financing, OCP regularly turns to the bond markets to source capital for its
expansion projects. Due to the importance of OCP within the general Moroccan economy, it
operates with a de facto state guarantee on its debt.
We do not include Morocco in our LRMC calculations because of its low-cost availability of
phosphate rock.
Saudi Arabia
Saudi Arabia is a relative newcomer to the phosphate fertilizer market, with its first major
production unit commissioning in 2010. The first facility, a joint venture between Ma’aden
and Saudi Basic Industries Corporation (SABIC), has a phosphoric acid capacity of 1.5Mt
P2O5; while the second facility, a joint venture between Ma’aden SABIC and Mosaic,
commissioned in 2017 with a phosphoric acid capacity of 1.6Mt P2O5.
Ma’aden has expressed that it will continue to expand its phosphate fertilizer production
capacity over the longer term. A third project, of similar size as the two previous, is targeted
to commission after 2024.
Saudi Arabia is undergoing significant economic change with a drive to diversify the economy
away from oil. The third project has strong political backing and the company has access to
investment from the “Public Investment Fund” (Saudi Arabian sovereign wealth fund). Saudi
Arabia does not have the high quantity of phosphate rock reserves compared to Morocco,
but it is completely self-sufficient in both sulphur and ammonia. Because of the low-cost
nature of this project we exclude it from our LRMC calculations.
Russia
Russian phosphate production commenced in the early 1930’s and expanded under the
planned economy of the Soviet Union. The collapse of the Soviet Union meant a collapse in
domestic demand, and newly formed private producers looked to the global market.
Phosphate fertilizer production is currently split between four major companies: PhosAgro,
Eurochem, Acron and UralChem. Phosphate rock reserves are high quality, owing to the
igneous nature of the deposits, and producers have the advantage of being able to source
cheap ammonia and sulphur.
The main disadvantage is the vast distances needed to transport both raw materials and
finished product to markets. The country is now ripe for expansion, with high utilization rates
and strong domestic demand growth. Because of low production costs in Russia we exclude
these projects from the LRMC.
Jordan
Jordanian Phosphate Mining Company (JPMC) operates all phosphate mining and
processing within Jordan. The main fertilizer production site at Aqaba was debottlenecked in
2016, increasing DAP capacity.
Future expansion in capacity is possible, the country has high quality rock reserves and
access to ammonia and sulphur from other countries on the Arabian Peninsula. There are
headwinds facing Jordanian production, traditionally high electricity prices, increasing water
scarcity, major expansions by nearby competitors, and continued political instability within
the wider region. Higher capital repayments on projects faced by Jordan combined with
higher site costs means that the project is excluded in the LRMC calculations.
Algeria
Algeria has an underdeveloped phosphate fertilizer industry. Algeria has its own deposits of
phosphate rock and large-scale gas production; however, the nature of the gas reserves
means sulphur production in the country is minimal.
The phosphate rock deposit is part of the geological band that runs through from Morocco,
however the average P2O5 content is lower. There have been multiple projects that have
aimed to develop phosphoric acid capacity within the country but have been hindered by a
lack of financing and bureaucratic red tape. Algeria is included in our LRMC calculations.
China
China rapidly expanded phosphate fertilizer capacity at the turn of this century. However,
since 2015, development of projects has slowed, and some capacity has closed permanently.
The government has prioritised improved environmental management as the economy

moves forward. This, combined with declining domestic demand, increasing export
competition, increasing production costs and an end to cheap loans backed by local
governments, indicates future development within the country seems unlikely.
China, however unlikely, does remain a potential area of future capacity growth given its
phosphate rock reserves and competitive government-backed financing options. However,
we do not include China in our LRMC calculations.
India
India is forecast to be a major source of phosphate demand growth, with a forecast CAGR
of 1.8% y/y, and will be integral in absorbing much of the increased production from new
capacity in the Middle East and North Africa. India already has an established phosphate
fertilizer industry, even though the region lacks significant reserves of the raw materials.
Imports of phosphate rock, phosphoric acid, sulphur and ammonia supply the domestic
phosphate fertilizer industry and, consequently, Indian producers all sit within the fourth
quartile of the global DAP site cost curve. However, government subsidies and initiatives to
encourage domestic industrial production mean projects are viable. While there is some risk
the government may change its stance on fertilizer subsidies, we believe this is unlikely,
given the sensitivity around food security.
Because of the dependence on government subsidies for projects in India, we have not
included India in our LRMC calculations.
Tunisia
Until the Arab Spring in 2011, Tunisia had a functioning phosphate industry that suppled
around 500ktpa P2O5 of DAP to the traded market. Since then, the domestic industry has
suffered constant issues due to strikes and disruption. Rock production at Gafsa has been
crippled and rail links between the mines and the coastal production centres blocked. Groupe
Chimique Tunisien (GCT, the phosphate fertilizer producer) has one project over the medium
term, M’dhilla II, demonstrating that the group is still looking to invest and develop the
industry.
Political and social instability leading to higher capital repayment costs make further
expansion in the phosphate industry requiring significant government support. The
government itself is under severe pressure to rationalise expenditure. Future expansion will
be politically driven, therefore we excluded Tunisia from our LRMC calculations.
Southeast Asia
Southeast Asia is set to expand its fertilizer industry over the medium term. Longer-term
demand trends indicate that the region will continue to grow, and therefore future expansions
are possible. Vietnam is in the strongest position, as it has access to locally sourced
phosphate rock, sulphur and ammonia. This will be further supported by strong domestic
demand and its geographic advantage to place product into other growing Southeast Asian
markets such as Indonesia.
Because of the high cost nature of the project, we have excluded it from our LRMC
projections.
Brazil
Brazil has access to local high-quality phosphate rock mines, small quantities of sulphur from
offshore oil fields, renewable electricity generation and a growing labour force. Yara is
already investing in the Serra Do Salitre phosphate rock and phosphate fertilizer project, and
Mosaic, via its acquisition of Vale Fertilizantes, is likely to increase its investment into the
country.
There are currently two major barriers for fertilizer production in Brazil, one is concern over
political stability and economic outlook. This pushes Brazil’s country risk premia higher than
Mexico, another large well-developed Latin American country. The other issue is poor
transportation infrastructure, making long distance transportation expensive.
Despite these issues, we include Brazil in our LRMC calculations.
Turkey
The phosphate fertilizer industry in Turkey is well established, served by both local production
and imports. The Eti Bakir - Mazadagi project commissioned in 2019. Turkey has limited
reserves of phosphate rock but is well place to import ammonia from southern Russia and
the Ukraine. It also has domestic sources of sulphur or sulphuric acid.
Because projects in Turkey are mainly dependent on domestic demand and the procurement
of by-product sulphuric acid, we do not include this in our LRMC calculations.
Egypt
Egypt has long been a supplier of low-grade phosphate rock and SSP into various Asian and
European markets. The government is now financing expansions in Egypt’s downstream
fertilizer market. The country currently has two major projects in development. The NCIC –
Ain Sokhna project focuses on production of phosphoric acid, TSP and DAP. The WAPHCO
– Abu Tartour phosphoric acid project, forecast to commission in 2021, is forecast to supply
phosphoric acid into the Indian market.
Over the long term, further expansion of the phosphate fertilizer capacity within the country
is likely. All of the projects are reliant on government support; therefore, we have excluded
these from our LRMC calculations.
The base year is driven by medium cost producers

The LRMC calculation is based on two main cost components: business costs and economic
costs. Business costs are calculated on a cash costs basis, before being adjusted to include
additional costs associated with the sales and marketing of the DAP, central overheads and
working capital. Full economic costs include an additional capital charge to account for the
market value of the asset over its remaining productive lifetime, charged at the weighted
average cost of capital (WACC).
Table 2: Selected project details

Plant location Algeria Brazil
Build type Greenfield Greenfield
Target market India Brazil
Plant specifications Units
Capex $M 1,155 220

DAP Capacity ktpa Prod. 3,000 300
Phosphoric acid cost $/t 212.3 198.0
Ammonia cost $/t 44.3 62.0

Labour cost $/t 0.8 4.4
Power cost $/t 4.1 3.1
Consumables cost $/t 1.9 5.1
Maintenance cost $/t 2.4 3.1
Overhead $/t 0.3 1.5
CRU Site Cost $/t 266 277
Net realisation $/t 21 -62
CRU Business Cost $/t 287 215
Capital recovery $/t 154 250

CRU Economic Costs $/t 503 531
DAP LRMC $/t 517
CRU’s business costs methodology requires that maintenance, sustaining capital and central
sales and admin expenses be charged on a per tonne basis. Business costs are calculated
with an additional realisation charge or credit. This net realisation adjusts the business costs
back to DAP FOB Tampa, allowing for direct comparison. All production costs have been
netted-back to Tampa, allowing for differences in land and ocean freight to each plant’s target
market.
The economic costs are based on the plant’s market value, amortisation period and the
industry weighted average cost of capital (WACC). Each plant’s market value is estimated
based on observed, real-world announced capital expenditure and assumptions around
project cost overruns. A portion of the plant’s capital expense needs to be charged during
the construction period and this is again accounted for in the final capex numbers in the plant
specifications above. The capex is amortised over 25 years, the period over which investors
will be looking to make returns and charged at the real WACC.
The return to equity is taxed at the local corporate tax rate (dividends returned to equity
holders are taxable). To avoid double counting the tax shield on financing (inherent in the
WACC), the implied cash flows must be treated as if each project were 100% equity financed.
CRU’s WACC is calculated using 20-year US Treasury bills as the benchmark for the risk-
free interest rate and the total return on the S&P 500 index over 40 years for the return to
equity in the cost of equity component. The beta coefficient is calculated using an average
beta of listed fertilizer companies, while the cost of debt is based on corporate debt yields of
the major industry players. A country risk premium ranging from 1% to 8% has been added
to the WACC to account for regional risk as perceived by an international investor.
Changes in the 2018 LRMC project basket

The current LRMC uses a base year of 2018. This results in some changes to both the
economic costs and projects included in the LRMC basket. We have reviewed the site costs
and longer-term potential of all projects.
CRU has also reviewed the capital expenditures at each site and the country risk premiums
that are applied to each project. The impact has raised the capital repayment costs for most
projects. The LRMC base is higher than editions of this report published throughout 2018.
The impact has been some increases in the costs occurred by these projects, and this led to
Tunisia, Vietnam and Jordan being removed from the basket.
CRU has also reviewed the impact of short-term price variations. As a result, we use the
historic 5-year average economic cost to formulate the base point. The modification allows
for sustained significant longer-term changes in raw material markets to be accounted for,
while removing much of the short-term impact of price fluctuations.
Cost escalators – raw materials and macro-economics

Once the base case has been determined it must be escalated to form the Long Run Marginal
Cost to 2043. Phosphate fertilizer costs are made up of multiple cost inputs, and not all have
an equal impact on the economic costs. To construct a representative cost escalation, the
following weightings have been used:
Inflator
Phosphate
Weighting Rock
Phosphate Rock 5% Sulphur
Sulphur 5% Ammonia
Ammonia 11%
Labour
Labour 10%
Power
Power 3%
Consumables 4% Consumables
Freight 9% Freight
Capital 53% Capital
Total 100%
DATA: CRU
Phosphate Rock
Phosphate rock costs are an integral part of phosphate fertilizer site or operational costs and
indicator of the overall profitability of the site. The phosphate rock cost makes up 5% of the
total DAP economic cost. Most of the rock costs pass through phosphoric acid production
and is factored into this cost. There are three major cost components in phosphate rock
mining; labour, power and consumable/supply costs. The phosphate rock cost escalates at
the same rate as the input components, on a country specific level, by a weighting determined
by CRU:
• Labour – 38%
• Power – 22%
• Consumables – 40%
Sulphur
Sulphur costs were escalated via the sulphur long run marginal cost, based around the FOB
Vancouver price benchmark. Canada is the marginal sulphur producer. Sulphur is a by-
product of hydrocarbon extraction and therefore does not operate under the same market
dynamics as a typical commodity. The two major costs in sulphur stock drawdown are fuel
costs to remelt the sulphur blocks, and then costs to move the sulphur to port.
Ammonia
Ammonia costs for phosphate fertilizer production are based off CRU’s ammonia long-run
marginal costs. Ammonia plays an important role in producing DAP, making up 14% of costs.
The drivers for ammonia cost escalation include labour, power, consumables, much like for
DAP, but also gas costs. Gas costs vary region by region, as the transportation of gas still
relies primarily on pipelines. In certain regions such as MENA, gas is still a stranded resource
but as LNG technology develops, and most importantly becomes less expensive, the traded
gas market is projected to become less regional, meaning that costs will be spread over a
tighter range.
Labour
Labour costs were escalated for each project using country specific long-term forecasts
supplied by CRU’s economics team. Labour costs are increasing across both developing and
developed nations. Developed nations such as China, USA, Canada and much of Europe
will experience a decline in working age population, leading to a tightening labour market,
dependant on how automation technologies progress. Developing nations in Africa, South
Asia and Southeast Asia are forecast to have working age populations growing at a CAGR
of 0.8% between 2025 and 2050. This should loosen the labour market, but outside of Sub-
Saharan Africa this benefit will be offset by the economic transition from a manufacturing
based to a service-based economy. As workers opt for improved working environments,
wages must be raised in heavy industry to attract labour.
Power
Power costs cover electricity costs at the site. The long-term forecast was supplied by CRU’s
inhouse economics team on a country level. CRU forecasts the structure of global electricity
generation to change over the long-term, primarily due to policy developments to manage
climate change. By 2035, CRU forecasts that electricity generation capacity will increase to
10.9 Terawatts, up from 6.7 Terawatts in 2016, and 72% of this new capacity will be supplied
by renewable energy. The portion of renewable to non-renewable energy will be 52:48 in the
same year. This change will cause a shift in the cost structure as fuel costs decline in
importance but will be replaced by an increased importance of initial capital expenditure.
Consumables
CRU’s chemical supplies index represents inflation from both services and site consumables
(such as parts and non-process materials) required to keep the business functioning and the
plant operating at its optimum efficiency. The weighted average index of countries is
expected to inflate at 2.5%, just above the level of GDP inflation.
Ocean Freight
Ocean freight rates over the long term will be linked to the price of bunker fuel and time-
charter rates for large gas carriers. As oil prices recover over the medium term, time charter
rates are forecast to rise and the bulk shipping market will move into balance in 2021. To
curb greenhouse gas emissions, the UN International Maritime Organization announced a
new regulation on shipping fuel which requires sulphur emissions to be cut from the current
maximum of 3.5% of fuel content to 0.5% from 2020. The change in bunker fuel standards
will translate to higher fuel prices over the long term, inducing higher freight rates as owners
shift to more expensive low sulphur fuel. This could result in scrapping older vessels,
reducing supply and supporting higher freight rates.
Capital
The capital index is calculated using CRU’s expectations for chemical plant specific capital
expense and includes construction, equipment and local inputs. An annualised growth rate
of 2.1% over 25 years, slightly above the US GDP deflator indicating a gradual, long-term
real increase in costs, is forecast. Chemical plant equipment costs follow similar trends to
other process equipment costs such as mining and metallurgy; these are underpinned by
their exposure to macroeconomic fundamentals. In the medium term, chemical equipment
costs are forecast at historically high levels, though remaining below the current level of
inflation.
Raw material costs are driven by the same underlying drivers

Index global raw material cost inflators, Index 100=2018
Rock Sulphur Ammonia
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Labour costs are forecast to increase over the long term

Indexed global cost inflators, Index 100=2018
Labour Power Consumables Freight
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Capital costs will experience modest growth over the forecast

Index global capital cost inflator, Index 100=2018
2.0
1.8
1.6
1.4
1.2
1.0
0.8
DATA: CRU
The forecast is positive for long term prices

Using the weighted basket of potential capacity expansions highlights a positive picture for
fertilizer prices. Demand increases, partially offset by expansions by low cost producers, will
require expansion in countries deemed marginal. The inclusion of these marginal cost
producers will support prices as the higher economic costs incurred by these projects will be
passed on to the consumer. CRU forecasts that by 2044 the LRMC in nominal terms will be
USD1118/t and USD686/t in real 2018 terms.
DAP Long Run Marginal Costs netted back Tampa FOB

Long Run Marginal Costs, USD/t (nominal)
DAP Long Run Marginal Cost Historic DAP FOB Tampa Prices
1200
1000
800
600
400
200
DAP Long Run Marginal Costs netted back Tampa FOB

Long Run Marginal Costs, USD/t (Real 2018$)
DAP Long Run Marginal Cost Historic DAP FOB Tampa Prices
1200
1000
800
600
400
200
Table 3: Long Run Marginal Cost - Nominal and Real

2018 2019 2020 2021 2022 2023 2024 2025 2026
LRMC (nominal) 517 516 535 545 558 576 601 624 647
LRMC (2018$/t) 517 507 516 516 518 523 536 545 554
2027 2028 2029 2030 2031 2032 2033 2034 2035
LRMC (nominal) 670 694 718 743 766 792 819 847 877
LRMC (2018$/t) 563 571 580 588 595 603 611 620 629
2036 2037 2038 2039 2040 2041 2042 2043 2044
LRMC (nominal) 902 929 956 983 1010 1037 1064 1091 1118
LRMC (2018$/t) 635 642 649 656 662 668 675 680 686
DATA: CRU
Marrying medium term prices and long-term prices
For long term price indications, CRU has a methodology for determining a ‘meeting point’
between medium term prices (forecast to 2024) and the Long Run Marginal Cost. The basis
for determining the meeting point is based on long phosphoric acid utilization projections.
Phosphoric acid is the intermediate product for all high analysis phosphate fertilizers and
therefore is representative of total phosphate fertilizer production. After examination of
historic trends, it has been determined that once global phosphoric acid utilization rates,
averaged over a five-year period, exceeds 80% then this triggers the commissioning of new
capacity. The 80% utilization rate trigger is applicable because certain capacities are
stranded or disconnected from the market, and therefore are unable to supply demand on a
global basis. As the 80% utilization rate denotes that the phosphoric acid market is tight,
investment should therefore ensue.
CRU forecasts that the five-year average 80% utilization rate will be reached in 2031. This
factors in the firm capacity additions from OCP JPH 6-11, Ma’aden 3 and selected other
small projects that could commission between 2025-2030. Capacity creep, i.e.
debottlenecking or efficiency gains, globally will be offset by capacity declines in China
meaning a net neutral capacity growth between 2033 and 2044. The long term P2O5 demand
forecasts have been accounted for when calculating long term P 2O5 demand.
Utiliziation rates hit the investment trigger point in 2030

LHS: Phos. acid cap. and demand; RHS: 5 year average util. rate, RHS: Mt P2O5; RHS:
%
Capacity WPA P2O5 Demand 5 Year Average Utilization Rate
100 100%
80 80%
60 60%
40 40%
20 20%
0 0%
Medium prices are forecast to reach LRMC by 2030

Historic, Medium Term and Long Term Prices, USD/t (nominal)
DAP Long Run Marginal Cost Historic Prices Price Forecast
1200
1000
800
600
400
200
DATA: CRU
Scenario Analysis: Saudi Arabia and Morocco expansion

The CRU LRMC methodology focuses on the potential expansion of capacity in marginal
cost counties, however a large portion of phosphate fertilizer expansion will be focused in
Morocco and Saudi Arabia. In CRU’s standard LRMC methodology, both Saudi Arabia and
Morocco are excluded from the LRMC base basket. Both countries have access to low-cost
raw materials and any expansions in these countries are unlikely to occupy the marginal
producer cost position.
While CRU’s LRMC methodology still drives the current long run forecast for the phosphate
fertilizer industry, we have also examined the alternative scenario based off Moroccan and
Saudi Arabian expansions. In this scenario, capacity expansions in both countries continue
at a rate that would lead to costs at these capacity expansions driving the price relationship.
The Moroccan and Saudi LRMC would significantly lower the base case
Historic, Medium Term and Long Term Prices, USD/t (nominal)
MOR/SAU LRMC Original LRMC Historic Prices Price Forecast
1200
1000
800
600
400
200
In real terms as well there would be a substanital reduction

Historic, Medium Term and Long Term Prices, USD/t (real)
MOR/SAU LRMC Original LRMC Historic Prices Price Forecast
1200
1000
800
600
400
200
DATA: CRU
About CRU
CRU’s reputation with customers across mining, metals and
fertilizers is for integrity, reliability, independence and authority.
CRU’s insights are built on a twin commitment to quality primary
research and robust, transparent methodologies.
You can rely on our work – our data, our views, our models -
because we have built them ourselves, from the ground up,
since our foundation in 1969.
The requirement for exclusive, first-hand knowledge has driven

us to invest in a global team of analysts, the key to gaining a real
understanding of critical, hard-to-reach markets such as China.
CRU’s people - whether delivering market outlooks, price

assessments, cost analysis or consulting - focus on helping
customers to make important business decisions. Across a
comprehensive range of commodities, we strive to provide
customers with the best service and the closest contact -
flexible, personal and responsive.
CRU - big enough to deliver a high quality service, small

enough to care about all of our customers.

Phosphate-Fertilizer-Market-Outlook-2019-Long-Term-Outlook PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Phosphate-Fertilizer-Market-Outlook-2019-Long-Term-Outlook PDF

Uploaded by

Copyright:

Available Formats

Phosphate Fertilizer

CRU long term outlook

©2019 CRU International Ltd | All rights reserved

Call or email us to arrange a private briefing for your colleagues.

CRU – big enough to deliver a high quality service, small enough to

CRU London CRU Mumbai CRU Shanghai CRU North America

Tom McIvor Koyel Choudhury Isabel Chen Mike Rahm

© CRU International Ltd. 2019. All rights reserved

► KEY SUMMARY INFORMATION _____________________________________________________ 5

Table 1: LRMC Summary Data Points ___________________________________________________ 13

► KEY SUMMARY I NF O RMAT I O N

► LO NG T ERM O UT LO O K F O R F ERT I LI ZER DEMAND

Key drivers of long-term fertilizer demand

The ‘old’ long-term fertilizer demand model

1. We assumed fertilizer consumption moved in line with agricultural production. This

2. Having determined a forecast of total nutrient consumption, we estimated how

CRU’s old long-term model

Population Global Food Consumption

CRU’s ‘new’ long-term fertilizer demand model

1. Fertilizer consumption is split regionally providing a more granular view on demand.

3. Food demand/production is divided into crop categories (cereals, oilseeds, sugar,

Calorie forecast model

Food demand and production model

Nutrient consumption model

Risk factors that could affect the forecast

• Resource constraints: availability of land and water scarcity. Agricultural producers

• Agricultural productivity: historically, rising agricultural production has been driven by

• Government policy: biofuels/ethanol programmes, trade disputes, subsidies and

• Environmental degradation could result in constraints to agricultural production.

CRU’s new long term fertilizer demand model

Global demand split regionally 1. Calorie forecast model

The long-term outlook for P2O5 demand

N: 1.3% per annum to 163 million tonnes nitrogen in 2044.

P: 1.5% per annum to 74 million tonnes P2O5 in 2044.

K: 2.0% per annum to 62 million tonnes K2O in 2044.

Global nutrient demand forecast

DATA: CRU, IFA

Regional demand dynamics

In our methodology, we include 19 world regions to provide a granular view of long-term

Long term P2O5 demand growth skewed towards developing markets

P2O5 demand growth by major region shows falls in Eastern Asia

Crop yields will continue to rise P2O5 intensity

Eastern Africa Western Africa North America Western Europe

► T HE LO NG T ERM: MARG I NAL CO ST S

Long Run Marginal Costs

DAP Long Run Marginal Cost Historic DAP Tampa Prices

Table 1: LRMC Summary Data Points

Phosphate Rock Index 0.91 1.00 1.10 1.48 2.52 3.93%

Labour Index 0.86 1.00 1.27 1.97 3.99 5.93%

Marginal Cost Theory and Concepts

New capacity will be focused in Asia and MENA

Moroccan phosphate producer OCP has expanded rapidly in downstream granular

The government has prioritised improved environmental management as the economy

Despite these issues, we include Brazil in our LRMC calculations.

The base year is driven by medium cost producers

Table 2: Selected project details

Plant specifications Units

Capex $M 1,155 220

Ammonia cost $/t 44.3 62.0

Capital recovery $/t 154 250

DAP LRMC $/t 517

Changes in the 2018 LRMC project basket

Cost escalators – raw materials and macro-economics