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Fertilizer Industry Handbook
Fertilizer Industry Handbook
Fertilizer Industry Handbook
31 May 2005
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Oxygen
Boron
Nutrient behaviour Nutrients have specific and essential functions in plant metabolism They cannot replace each other, and lack of any one nutrient limits crop growth
YIELD
Phosphorus
Potassium
Calcium
Less driven by supply-side economics and stimulus of support policies More driven by demand and consumer food preferences Food quality characteristics can be fostered by farmers Profitable farming will shift from raw material to food value producers
Source: McInerney, J (2002) The production of food: From quantity to quality. Quoted in Farming for Health: The future for agriculture by Welch, R. 30th IFA Enlarged Council Meeting, Santiago, Chile 1-3 December 2004
No fertilizer
9.3
1042
885**
157
95
* Assuming grain market price: 112 EUR/tonne (EU intervention price = 101 EUR/tonne) ** Cost increase due to intensive production inclusive purchase of N fertilizer Source: Winter wheat, long term trial, Broadbalk, Rothamsted (since 1856). Production cost: data from KTBL Germany
Income /ha
Source: Winter wheat yield data: Long term trial, Broadbalk, Rothamsted (since 1856).
Correct use of fertilizers may give more than 700% return on investment
At the optimum nitrogen rate of 192 kg N/ha (winter wheat in Europe), it is possible to produce 9.3 tonnes of grain per hectare. The fertilizer cost at this optimum nitrogen level is approximately 192 kg N/ha * 0.5 /kg N = 96 /ha With wheat prices of 112 /t, the farmer gets the following alternative revenue scenarios: Optimal nitrogen level: 9.30 t grain/ha * 112 = 1042 /ha No nitrogen fertilizer added: 2.07 t grain/ha * 112 = 232 /ha The difference in revenues is 810 /ha resulting from an input cost of 96 /ha, i.e., a return on investment of more than 700%.
Seed 5%
Labour 19%
Energy creation and fixation of carbon dioxide by the use of mineral fertilizer
Yield response (monetary value) to N fertilizer rate
Energy creation
140 120 100 GJ/ha grain 80 60 40 20 0 -20 -40
ton CO2/ha 25 20 15 10 5 0 -5
Energy balance
CO2 fixation
30
CO2 balance
Without nitrogen
Without nitrogen
10
17% 24%
Nitrogen (N)
59%
Industry more fragmented, under consolidation More volatile prices, but stable volume
Among the major plant nutrients, nitrogen is the most important for higher crop yields
The fertilizer market is composed of three main nutrients nitrogen, phosphorous and potassium. Nitrogen is by far the largest nutrient, accounting for 60% of total consumption, and Yara is the leading producer of this nutrient. Phosphorus (phosphate) and potassium fertilizers are primarily applied to improve crop quality. Although balanced fertilization is recommended, annual application is not always done, as the soil absorbs and keeps these two nutrients for a longer period compared with nitrogen. There are fewer large suppliers of phosphate and potash fertilizers, as phosphate rock and potash mineral deposits are only available in certain regions of the world. When comparing phosphate with potash, the potash industry is the more consolidated one. Nitrogen is mainly used to increase the crop size or biomass, and must be applied every year. Nitrogen fertilizers are produced in many countries, reflecting the wide availability of key raw materials - natural gas and air, needed for its production on an industrial scale. The global nitrogen market is therefore less consolidated, but some regions such as Europe and the US have undergone significant restructuring of the nitrogen industry during the past years.
11
Nitrogen in ammonium and nitrate forms are readily available to plants, while urea needs to be transformed
Plant uptake
Urea
Ammonium
Nitrate
Hydrolysis
Nitrification
12
Organic fertilizer
Crop residues and animal manures Low concentration Variable
Mineral fertilizer
Nitrogen from the air and minerals from the soil High concentration
Often inconsistent
13
The basis for mineral fertilizer: Energy, ammonia and natural minerals
Finished products:
Urea, UAN Nitrates (CAN, AN) NPK Specialty fertilizers Industrial products
14
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
15
Fertilizers
70
60
40
USD billion
16
100 90
Million Tonnes Nutrient
80 70 60 50 40 30 20 10 0
P K
2004E
2006E
Source: IFA
Nitrogen is the largest nutrient with an expected annual growth of 1.7% per year
The fertilizer markets will continue to grow, due to higher population and improved diet. In addition, industrial use will increase. Examples are bio energy and reduction of NOX emissions. The International Fertilizer Association (IFA) forecasts the fertilizer demand growth for nitrogen at 1.7% per year up until 2008. A higher growth rate of 2.7% a year is estimated for phosphate and potassium. The difference is mainly due to the fact that nitrogen historically has grown more than the other nutrients due to the immediate and significant benefits of this nutrient. It is expected that the others will catch up going forward. Note that the expected consumption growth of each finished nitrogen fertilizer product is different from the general nitrogen growth as some products are expected to grow more than others, e.g., for urea a higher growth rate is expected as this product is taking market share from other nitrogen products.
2008E
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
17
40 30 20
Asia
1999
2001
2003
2005E 2007E
Source: IFA
Asia is the largest fertilizer market, but Latin America has the highest growth rate
Asian share of global fertilizer consumption is 54%, and still growing. Developments in Asia will continue to play a major role in how the global fertilizer market will develop. Demand in Latin America has been increasing quickly due to the strong development in the agricultural sector. But in volume terms, it is still at a fairly low level. Growth is expected to continue. Consumption in the mature markets of North America and Europe is stable, and forecasted to stay stable.
18
Potash K2O
Other 8%
AN/CAN 10 %
Phosphate P2O5
Other 34 % DAP/MAP 43 %
85 million tonnes
NPK 28 % MOP 64 %
23 million tonnes
Key products for pricing of the nutrients nitrogen, phosphate and potash are urea, DAP and MOP
In order to follow price developments for nitrogen, phosphorus and potassium products, urea, DAP and MOP should be used. They have a large market share and are widely traded around the globe. Urea contains 46% nitrogen, and its market share is increasing. The majority of new nitrogen capacity in the world is in urea. DAP contains 46% phosphate, measured in P2O5 units, as well as 18% nitrogen. MAP is a similar product, the main difference being that the nitrogen content is only 11% MOP is potassium chloride containing 60% potash, measured in K2O units.
19
France
Other 7% Urea 10% ABC 25% Nitrates (CAN/AN) 43% NPK 13%
China
Other 5%
UAN 27%
Ammonia 27%
Brazil
DAP/MAP 14%
NPK 8%
India
Other 11%
Urea 60%
Urea 47%
Urea 81%
Countries show different preferences for use of nitrogen products - China and India predominantly use urea as main source of nitrogen
There is considerable difference in the product mix for different regions/countries in the world. Urea, the fastest growing nitrogen product, is particularly popular in warmer climates. UAN is mainly used in Europe and North America. Nitrates are mainly used in Europe. In China, urea is the most popular. China is also the only country in the world using ammonium bicarbonate (ABC) to any degree. ABC has 25% market share in this country.
20
Rice 17%
Corn 17%
Source: FAO
The three large grain crops, wheat, rice and maize (corn) consume about half of all fertilizer used in agriculture
The fertilizer market is not only a significant market in terms of size, but also an essential industry serving global food production. Grain production is the most important agricultural activity in the world, with the global output exceeding two billion tonnes in 2004. To achieve this scale of production would not be possible without intensive agriculture and use of mineral fertilizers. Therefore, grains are naturally the largest end-market for fertilizers (~60%) this is followed by cash crops (~20-25%), such as vegetables, fruits, flowers and vines. However, in order to get a good understanding of the fertilizer market, it is necessary to understand both the grain market and the market for cash crops.
21
6.4
10
USD billion
* For companies reporting in EUR, revenues are based on average USD/EUR rate for the year 2004: 1.25 ** Mosaic pro forma figures for year ending 31 May 2004.
22
2003
17.4
17.4 16.2 15.2 13.7 12.6 11.1 10.2 10.2 9.1 7.5 10 20 30
2004
BASF Yara** Agrium Air Products K+S PCS Kemira GrowHow DuPont Dow Syngenta Mosaic***
0 7.0 10 20 30 21.7
21.4
20.2 16.6 14.9 14.1 13.9 12.4 12.4 12.2
* Gross return on assets defined as EBITDA (excluding non recurring items) divided by Total assets (book value) ** Yara pro forma numbers *** Mosaic from 01 June 2003 to 31 May 2004, pro forma
Fertilizer industry performs at least as well as the chemical industry when comparing return on capital
Yaras primary financial goal is to deliver a good return on capital to its shareholders. Since year 2000 Yara has benchmarked its Gross return on assets against a defined group of chemical peers, including both leading fertilizer companies and other chemical companies. From the comparisons one can see that there is no systematic difference between fertilizer and other chemical companies, and there is also no systematic difference between nitrogen fertilizer companies and potash/phosphate fertilizer companies, although both nitrogen-focused Yara and Agrium have performed well during the period. Position within the industry is more important than the characteristics of the industry per se.
23
Global no 1 in nitrates1
Production capacity (mill t)
6 4.6 4
2.3 2
2.1
1.5
1.4
1.4
0
ra r ra ch S m PC Ya r iu Ko Te
0
ra n ir a M y ro Ya ss DS m Ac ka
0
* GP ir a n ro Ac ra Ya m
Ke
Ag
Ch
er
Measured in terms of production capacity, Yara is the global no. 1 both in ammonia, nitrates and NPK
Yaras position gives it unique opportunities to reap economies of scale and spread best practices across a large network of similar plants, and forms part of the explanation for Yaras competitive returns.
Ke
Po
l ic
24
Nitrates
Yara
Agrium
PCS Nitrogen
Terra
Source: Annual reports of companies
25
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
26
NPK 19%
Urea 18%
Imports 22%
Yara 20%
Nitrate is the preferred fertilizer in Europe with Yara being the leading supplier
Europe (EU25) consumes about 11.3 million tonnes of nitrogen, out of which 42% is in the form of nitrates (like CAN or AN). NPK fertilizers as a product category, occupies second place and urea, the third. Yara is the leading fertilizer company in Europe, with approximately 20% of the market. Yara is mainly active in West Europe, with a 24% market share. In West Europe the total market is 9.2 million tonnes.
27
Capacity
5,000 kt nitrogen 4,000
Consumption
3,000 2,000 1,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: EFMA
28
19 94
19 95
19 96
19 97
19 98
29
100 90 89 85
80 60 40 20 0
Source: EFMA
Yara benefits from a favorable cost position in its European home market for all its core products
Ammonia. Yara has established a stable cost position 5-10 percent below European competitors. The relative position is negatively influenced in 2003 by improvement in average other EFMA due to closure of least productive plants (IFI Cork). Yara had lower production in Sluiskil in 2003 due to turnaround and unscheduled stops. As Yaras gas costs are heavily linked to LSFO, the relatively high LSFO prices in 2003 compared to other oil products, had a negative effect. Nitrates. Also nitrate costs were affected by the fire in Sluiskil in 2003. The ammonia price increase affected the relative position as Yara has a relatively high share of non-integrated nitrate plants. This effect was strengthened by the productivity increase in competitors non-integrated plants. NPK. Increasing ammonia prices in 2003 made the own production of ammonia in Porsgrunn more valuable, and improved the relative cost position compared to non-integrated NPK plants. Contribution also came from productivity improvements.
30
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
31
Substitutes: Low Organic fertilizers only relevant where land or wealth surplus
Buyer power: Moderate National/regional distributors/ coops Need security of supply Suppliers power: Low Raw materials readily available
Competition: Moderate to High Regional fragmentation (consolidation in progress) Limited differentiation Separate regional dynamics
Entry barriers: Moderate Basic technology available, but: Capital intensive Economies of scale required Low cost energy only in some regions Transportation costs
32
Mitigating factors
Industry participants more rational, private investments replacing state funds Spin-offs from chemical/energy companies followed by consolidation US gas prices could remain higher due to lack of pipeline capacity from Caribbean region and higher LNG costs WTO accession Operational excellence Increased management awareness of risk management
International trade restrictions Regulatory regimes Terrorism, accidents, country, customer and currency risk
33
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Ammonia
Ammonia is the key intermediate product in the production of all nitrogen fertilizers. A strong ammonia position and understanding of the ammonia market is key for a leading nitrogen fertilizer company.
34
Ammonia production
Total production
40 35
Million tonnes ammonia
10 largest producers
30 25 20 15 10 5 0
Indonesia Germany Pakistan Ukraine Canada China Russia Trinidad India USA
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
35
Ammonia trade
18 16 14
Million tonnes ammonia
12 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
Yaras trade
36
Nitrochem
Yara
Trammo
Koch
Mitsui
PCS
Shipping capacity
300 250 200 150 100 50 0 264
1000 mt
106
102
96
80
1000 mt
Yara
Agrium
Pemex
* Total Yara deep sea trade 2004. When incl. cfr purchases, Yara has 5 million tonnes. Source: Fertecon. For shipping capacity: various brokers; For maritime storage: IFA
Yara is the clear global no. 1 not only in ammonia trade, but also in shipping capacity and storage.
This is important because it enables Yara to do trades and enter long-term agreements requiring access to an extensive global distribution network. Yaras ammonia shipping needs are covered with a balanced combination of 15 ships split on fully-owned ships, JVowned ships and long-term bare boat and time charters. Due to Yaras size in the ammonia market, the limited number of suppliers of ammonia shipping capacity and the special nature of ammonia relative to other gas liquids, Yara is able to have a high capacity utilization and extract significant cost synergies.
Terra
Koch
Yara
Nitrochem
Trammo
PCS
Mitsui
37
7 6
M illio n to n n e s a m m o n ia
10 largest exporters
7 6
M illio n to n n e s a m m o n ia
5 4 3 2 1 0 B e lg iu m G e rm a n y T u rk e y USA T a iw a n F ra n c e S p a in In d ia M o ro c c o K o re a
38
1.3 0.8 1.8 0.5 3.7 1.9 0.4 0.7 0.6 1.0 0.5
79% of the ammonia trade happens on the specific routes shown in the map, mainly from countries with cheaper gas
The key centre for ammonia trade is Yuzhnyy in the Black Sea. This is the most liquid location, and where most spot trades take place. Russian and Ukrainian ammonia is sold wherever netbacks are the highest, and since they are key suppliers to USA, Europe and Mediterranean, relative pricing for the various locations West of Suez is very stable. Asia is almost in a balanced situation. If there is a deficit, imports from the Black Sea are necessary, and fob prices in Asia increase. If there is a surplus, Asian exporters have to compete West of Suez, and Asian fob price levels suffer.
39
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Urea
Urea is the largest finished nitrogen fertilizer product and is traded globally. Even though many markets prefer other nitrogen fertilizers for better agronomic properties, urea is the commodity reference product with an important influence on most other nitrogen fertilizer prices.
40
Urea production
140 120
Total production
40 35
Million tonnes urea
10 largest producers
100
Million tonnes urea
30 25 20 15 10 5 Saudi-Arabia Bangladesh 0 Indonesia Pakistan Canada Ukraine China India USA Russia
80 60 40 20 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Urea is the main nitrogen fertilizer product. Approximately 50% of all ammonia is upgraded into urea
Urea production is estimated at 115.3 million tonnes in 2003. During the years 1994-2003, urea production grew at 3.5% per year. The largest producers are also the largest consumers, namely China and India. Both countries are basically selfsufficient on nitrogen fertilizer. Most of the new nitrogen capacity in the world is urea, so it is natural that the production/consumption growth rates are higher for urea than for ammonia/total nitrogen. Lately, the difference has been quite large, since urea has taken market share, particularly from ammonium bicarbonate in China. In addition, a major share of the capacity shutdowns in high energy cost regions have been standalone ammonia plants. As urea has a high nitrogen content (46%), transport is relatively cheap. In addition, demand growth is to a large extent taking place in climates where urea is suitable. 90% of all urea is consumed as fertilizer, whereas the remaining 10% is used for technical applications (CRU estimate).
41
Urea trade
30
25
20
15
10
0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
42
Urea trade
6 5
M illio n to n n e s u re a
6 5
M illio n to n n e s u re a
10 largest exporters
10 largest importers
43
1.3 1.4 2.2 0.9 4.4 0.9 3.3 1.8 0.9 1.0 0.5 2.2 0.6
Trade pattern shown (22 million tonnes) represents 76% of global trade
There are two main hubs to follow in the urea trade market, Black Sea and Arab Gulf. These flows determine the global prices. Black Sea supplies Europe and Latin America, while Arab Gulf supplies North America and Asia/Oceania. All the other flows, of more regional nature, like Venezuela to USA, Indonesia to other Asian countries etc, are only interesting to the extent they affect the need for Black Sea/Arab Gulf material. As an example, if China reduces its export, the Arab Gulf is not able to supply Asia on its own. Black Sea urea will flow to Asia, and an upward price movement will take place. The relative pricing between Black Sea and Arab Gulf depends on where they compete on the marginal volume. If the main drive is from Latin America/Europe/Africa, Black Sea will lead. If it is Asia/North America, Arab Gulf will lead. It is wise to follow price quotations for both locations.
44
Agrium
Kaltim
NFC
Pusri
CF
Qafco
Yara
The largest urea producers in the world are found in China and India
Both China and India are large producers and consumers of urea as this fertilizer is considered highly suitable to its agricultural conditions. Both countries are basically self-sufficient on nitrogen fertilizer, with China exporting approximately 4 million tonnes of urea in 2004.
RCF
45
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
46
US gas price Grain inventories/prices New urea capacity vs. closures Global urea demand vs. supply Urea price Market segmentation
Floor price for urea Urea demand Urea supply Urea price (above floor) Most other nitrogen fertilizer prices Value-added margins
Main revenue drivers are the raw material costs for swing producers and grain inventories/prices
Since 1999 the US gas price has established a floor price for the ammonia price due to US producers going in and out of the market. In general, when energy prices are relatively high and/or demand relatively low, there tends to be a supply economy where there is a price floor established that indirectly determine fertilizer prices. On the other hand, when fertilizer demand is high and/or energy prices are low, there is typically a demand economy driving fertilizer prices well above the minimum prices determined by energy costs. During such times, fertilizer prices can be very high as the customer benefits from fertilizer generally are much higher than production costs. What finally determines the urea price, which again drives other nitrogen fertilizer prices, is the fertilizer market balance where capacity utilization is the key factor. Both Yaras Downstream and Industrial segments offer (differentiated) products and services to different market segments. These segments are largely unaffected by energy prices and fertilizer prices and have margins driven by the ability to offer a superior product to targeted customer segments.
47
48
49
95
96
97
98
99
00
01
02
03
04
95
96
97
98
99
00
01
02
03
04
95
96
97
98
99
00
01
02
03
04
49
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Drivers of demand
The main driver of demand for fertilizer is peoples demand for food which translates into demand for grain and other farm products.
50
Industrial consumption
Economic growth Environmental limits (e.g. reduction of NOx emissions)
51
Increasing population and reduced land available for food production per capita
Almost no increase in farmable land is possible
P opula tion (billion)
0.5
H e c ta r e s /pe r s on
Increased standard of living leads to growing protein consumption per person, requiring more grain for animal feed
Per capita arable land available for cultivation is decreasing, while demand for food keeps growing
The Food and Agriculture Organization of the United Nations (FAO) confirms that a key challenge for agriculture is to increase the productivity. Key ways of doing this is replacing nutrients removed with the harvest, improving resource management, breeding new crop varieties and by expanding agricultural knowledge.
52
Cereal production: 1961: 877 million tonnes 2004: 2,252 million tonnes Land spared
Land used
Since 1960, the use of land for cereal production has been quite stable, while total grain production has increased by 150%
The increase is due to improved technologies, such as better farm practices, superior seeds, use of pesticides, and increased use of fertilizers. The roughly 1 billion hectares land saved through the improved yield would not have been available for food production, and global starvation would have been the consequence.
53
Mineral fertilizer
Increased production of mineral fertilizers necessary to meet future nutrient demand Limited potential of recycling organic material Nutrient reserves in the soil do not increase
54
No nutrient replacement
Fertilizers increase yield substantially and enable food production without depleting valuable soil nutrients
Trials conducted without replacing nutrients show that the productivity of the land is dramatically reduced. This not only leads to low farmer income and food shortages, but also contributes to erosion and destruction of agricultural land. Effects of soil mining are reduced soil fertility poor yield soil compaction reduced humus content increased erosion
55
56
2,100 2,050 2,000 1,950 1,900 1,850 1,800 1,750 1,700 1995 1997 1999 2001 2003 2005E
Source: FAO, April 2005
Consumption
Production
Grain production exceeded grain consumption in 2004 for the first time since 1999
FAOs estimates global grain production to go down in 2005-2006 after the record crop in 2004. If consumption increases or stays flat, this will lead to a reduction in global grain inventories in 2006 which normally supports a healthy demand for fertilizers.
56
800
4 3
Million tonnes
700
Maize (corn) price
USD/bu
600 2 500
Grain inventory
400
300 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
57
135 130 125 Index (1990=100) 120 115 110 105 100 95 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
135 130
Total
Index (1990=100)
Total
125 120 115 110 105 100 95 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
No change in diet
No change in diet
Source: FAO
The increase in total calorie consumption is driven by both population growth and by change in diet
Total calorie consumption in 2002 was 22% higher than in 1990 ( 1.7% yearly growth ), of which 80% explained by population growth. Calorie consumption from animal products in 2002 was 33% higher than in 1990 ( 2.4% yearly growth ), of which only 56% explained by population. Diet change is nearly as important a driver for demand growth for animal products as population growth.
58
Developed countries
3,000 Calories 2,800 2,600 2,400 2,200 2,000 1990 1992 1994 1996 1998 2000 2002
Source: FAO
Developing countries
59
130 125 120 Index (1990=100) Index (1990=100) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 115 110 105 100 95 90
150 140 130 120 110 100 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: FAO
Change in diet in developing countries increases demand for fertilizer in these regions beyond what could be expected from population growth
The diet in the developed countries has not changed significantly since 1990. In the developing countries, the calorie intake has increased, with the contribution coming from more meat being included in the diet. This means that the per capita consumption of animal food increased particularly strongly. Per capita consumption of meat has increased by 40% since 1990. As the growth rate for animal products has been higher than for the total per capita consumption, there has been a shift from vegetarian products to meat products as well. As a consequence, grain production now has to meet the growing demand for feed in those countries. Since the availability of new arable land is limited, higher grain production has to come from higher productivity (yield per unit area). To achieve higher productivity, increased use of fertilizers will be necessary.
60
Total
61
Stocks
350 300
15 25 20
Net import
250 Million tonnes 200 150 100 50 0 2005F 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Million tonnes
10 5 0 -5 -10 -15 -20 2005F 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: FAO
62
Grain
450 400 350 Million tonnes Million tonnes 300 250 200 150 100 50 0 03/04E 04/05F 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 45
Soybeans
Consumption Production
40 35 30 25 20 15 10 5 0 03/04E 04/05F 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03
Consumption
Production
Source: USDA
Soybean consumption in China shows a dramatic increase, while production has remained steady
Grain consumption in China has grown only modestly over the last decade, while production has decreased. Behind the numbers are an increase in maize (for animal feed), while rice and wheat consumption have lost popularity. Grain production rebounded last year. In addition to increased maize consumption, consumption of soybeans has increased dramatically, driven by demand for animal feed. Soybean production has been relatively stable during the last years. China has chosen to import their requirement instead.
63
500
1000
1500
2000
2500
Vegetables
20
15
Asparagus Eggplant 1991 2004
10
Onions
Fruits
5
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Carrots
Source: FAO
Cultivation of high-value cash crops has increased dramatically in China during the past decade
China has previously not given priority to increasing the production of grain or oilseeds, although there is definitely increased attention to the grain/oilseed situation at the moment. However, China has chosen to use more and more land for higher value crops. Given limitations of land and abundance of labor, this is of great economic value to China, and a logical development. It also means increased demand for fertilizer, and creates a strong market for higher value fertilizer products like NPK in which Yara is the global leader.
64
65
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Drivers of supply
The main driver of supply is the cost of natural gas which is the main raw material in the production of nitrogen fertilizer.
66
Raw material
Intermediate product
Finished products
Natural gas
Fertilizer Industrial
products
67
Alaska 1.5 1.5 Netherlands 4.4 US Henry Hub 5.9 Trinidad 1.6 0.9 Ukraine 1.6 Middle East 0.5-1.0 Indonesia 1.7 Russia
68
* Ammonia price: fob US Gulf barge, Cost structure: Production cash cost fob US Gulf barge Source: Blue Johnson & Associates.
69
* Urea price: US Gulf granular fob. Cost structure: Production cash cost fob US Gulf barge Source: Blue Johnson & Associates.
70
258
Fr.+duty: 40 218
71
180
72
45,000 40,000 35,000 kt ammonia 30,000 25,000 20,000 15,000 10,000 5,000 0 1997 1998 1999 2000 2001 2002 2003
Source: CRU
73
2006
5.4% (4.4%)
2007 2008
Average urea consumption growth has been 3.7% since 1990, corresponding to a nitrogen growth of approximately 2%
* Excluding possible closures. Previous estimate presented at Yara Capital Markets Day in brackets () Source: Fertecon, update April 2005
Expected urea capacity growth roughly in line with historical consumption growth
Global urea production capacity in 2003 was approximately 135 million tonnes. In the period 2004 to 2008 the expected addition of new urea capacity varies between 2.0 and 5.4% according to Fertecon. With the exception of China, all new capacity is expected in the Middle East or in other areas with low-cost gas. The expected production growth (ignoring possible closures) seems to match reasonably well with the expected annual consumption growth of 2.5-3.5% with the exception of 2006. Note that in 2006, 53% of the capacity additions are in China. If you believe that the Chinese need the urea themselves (no new export), the 2006 supply additions may be not so important for the global supply-demand balance.
74
Fertecon
Industry analysts expect no major changes in capacity utilization next few years
The reasonable match between expected consumption and production growth of urea is also reflected in the estimates for capacity utilization going forward by CRU and Fertecon. The estimates indicate a fairly flat development, but with a slight deterioration in the case of CRU.
75
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Price relations
Based on the demand and supply drivers this section explores how prices in the end are determined.
76
7 6 5 4 3 2 1 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank, Platts (average import price into EU from World Bank used up to 1999 )
Natural gas prices in the USA influence the floor prices of nitrogen fertilizer
The high gas price differential between US and Europe from 2003 continues in 2004. This supports good margins for Yara as Yara has costs partly linked to the lower line and (floor) prices resulting from the upper line.
77
100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Blue-Johnson
78
79
250
200
USD/tonne
100
50
0
06 06 3Q 05 05 04 05 03 03 02 02 02 02 03 03 04 04 04 05 06 4Q 1Q 2Q 2Q 3Q 4Q 1Q 1Q 3Q 2Q 4Q 1Q 3Q 4Q 2Q 3Q 1Q 2Q 4Q 06
* Future cash costs based on Henry Hub forward price for gas as of 29 April Source: Average of international publications (urea), World Bank (Henry Hub gas price), Blue-Johnson
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USA is the swing producer for nitrogen at higher natural gas prices
The remaining nitrogen swing capacity in the US is substantial despite several closures in recent years. Total global ammonia capacity is approximately 160 million tonnes, with the US constituting roughly 9% of the total (14.8 million tonnes). In addition to direct application. ammonia is mostly used to produce urea and UAN in the US: - For urea, the total US capacity in 2004 was 7.3 million tonnes. - UAN is a large product in USA with 10-11 million tonnes of capacity, excluding PCS Geismar.
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50 0
81
200 USD/tonne
150
100
0.6 * Amm + 15
50
0 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05
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500 400 300 200 100 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-02 Jan-02 Jan-03 Jan-04 Jan-05
Urea fob Middle East
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Rice (Thailand)
USD/tonne 350 300 250 200 150
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Low grain inventories keep prices at or above 10-year historical average levels
World stock remain at the second-lowest level in 30 years. USDA estimates show that despite record harvests in 2004, the world grain stocks will last only for 2.3 months. Note that all grain prices actually increased from 2003 to 2004. The decline in grain prices in 2004 may be attributed to favorable weather conditions for crops this year leading to record grain crop yield. Production (2043 million tonnes) is expected to meet slightly increased demand this year (FAO Forecast, December 2004) and no depletion of stocks is foreseen for this year.
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85
300 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
300 250 200 150 100 50 0 1995 1997 1997 1998 1999 2000 2001 2002 2003 2004 2005
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List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Production economics
This section describes the cash costs associated with production of standard nitrogen products which is useful to know in supply-driven situations with pricing determined by the marginal (swing) producers.
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Gas price: x Gas consumption: = + = Gas cost: Other prod. cost: Total cash cost
7 36 252 26 278
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Ammonia price: x = + + = Ammonia use: Ammonia cost Process gas cost* Other prod. cost**: Total cash cost
USD/mt NH3 NH3/mt urea USD/mt urea USD/mt urea USD/mt urea USD/mt urea
Urea (46% N)
* Process gas cost is linked to natural gas price ** Including load-out Source: Blue Johnson & Associates.
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Ammonia (82% N)
P and K
Urea (46% N)
AN (33.5% N)
CAN (27% N)
NPK (15-15-15)*
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Longer term
Fertecon British sulphur (CRU)
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www.yara.com
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