In the latest assessment of the global economy, the International Monetary Fund (IMF) confirms that global growth is still weak, underlying dynamics are changing, and the downside risks remain. The anticipated wind-down of the US Federal Reserve stimulus programme is expected to impose greater and longer- lasting tightening of global financial conditions, as a result the IMF forecast global growth to remain subdued, slightly above 3% a year over the medium term. Advanced economies, are expected to expand by 2% in 2014, helped by a stronger US economy, an appreciable reduction in fiscal tightening (except in Japan), and highly favourable monetary conditions; growth in the Euro area is expected to be constrained by very weak peripheral economies; while emerging and developing economies are projected to expand by 5% in 2014, as fiscal policy is forecast broadly neutral and real interest rates to remain relatively low. The IMF expects unemployment to remain unacceptably high in several advanced and emerging market economies, notably those in the Middle East and North Africa.
FAO BACKS SUSTAINABLE SYSTEMS TO HELP SOLVE FUTURE FOOD CHALLENGES In sharp contrast to last year’s drought-affected crop this year’s abundant global harvest is forecast to boost grain and oilseed supplies, to a record 2.4Bn/t, easing inflationary pressures and food security concerns. The UN’s Food and Agricultural Organization (FAO), confirmed that global food prices fell, for the fifth consecutive month in September, to their lowest level in three years. This was driven by a sharp fall in the international price of cereals, notably corn, and well below the record peak in 2011 when high food prices helped fuel the Arab Spring uprisings
in the Middle East and North Africa. While the global population, which drives the demand for food, is expected to rise to 9Bn by 2050, the global area of arable land, available for food production, continues to shrink. On World Food Day, FAO choose the theme,“Sustainable Food Systems for Food Security and Nutrition” to sharpen the focus on food production and to find better ways of eradicating hunger, malnutrition and waste, while at the same time protecting, the natural environment, ecosystems and biodiversity, that have been degraded by current production systems, yet remain vital to help meet growing food requirements.
FERTILIZER INDUSTRY SHAKEN BY SOFT PRICES AND LOWER SALES The International Fertilizer Association’s (IFA) assessment of the global nutrient sector, earlier in the year, forecast a more positive outlook for 2013/14, compared with last year with overall demand seen rising by 2.4%, to 180mt (million tonnes), assuming that Indian demand for phosphate and potash recovered, and that crop prices remain attractive to stimulate fertilizer applications in key regions. The exception is North America, due to lower crop prices and the residual effect of nutrient applications in 2012. But, as the year unfolded — and with a huge global harvest in prospect — the fundamentals, for nitrogen, phosphate and potash weakened. This weakening was due to soft prices and lower sales volumes in key markets, exacerbated, in the case of potash, by the break-up of the Belarussian Potash Corp (BPC) in July, which accelerated the fall in both price and demand for potash; the spill-over also adversely affected prices and demand for nitrogen and phosphate products. Talk that the US Federal Reserve would begin to “taper” its stimulus programme, as early as September, saw investors withdraw from emerging-market exchange-traded funds, which strengthened the dollar, but made devaluation in other key emerging markets like India, worse. The rupee dropped to an all-time record low, as the cost of imported nutrients became more expensive. The steep fall in nutrient prices and lack of demand through the summer led to renegotiation of contracts as distributors deferred purchases in the expectation of even lower prices. The shake-up has led to some rationalization and key changes in personnel at some of the leading companies in the fertilizer industry.
STEEP PRICE FALL FOR KEY NUTRIENTS ESPECIALLY POTASH MATCHED BY DROP IN SALES PotashCorp cut its forecast for full-year earnings as it revealed a collapse in its potash selling prices in the aftermath of the break- up of BPC, with prices sold to off-shore markets down to $285/t and into North America at $333/t, pointing to competitive pressures in key markets that weakened the pricing environment. While the break-up of BPC, has been blamed for much of the current difficulties, third-quarter results from companies like Agrium, Mosaic,Yara and CF Industries confirm problems facing the potash market are just as relevant to phosphate and nitrogen markets. A reduction in CF Industries earnings in Q3, reflect lower prices in the nitrogen fertilizer
Longer term, despite high volatility resulting in significant year-on-year variations, the IFA forecast the agricultural outlook to stimulate fertilizer demand, expected to increase to 194.9mt by 2017/18; with the highest growth rates found in regions with low average application rates or where cultivated land area is expanding, namely, Eastern Europe, Central Asia, Latin America and Africa; elsewhere demand continues to plateau in East Asia (mainly China), while in South Asia, the outlook continues to depend on the Indian government’s policy towards nutrient- based subsidies.
CORN HARVEST GLUT CUTS US SEED SALES
This year, the unexpected strength of the US corn harvest has wrong-footed Syngenta, which expects to be left with surplus seed, prompting a write-down of inventories and cut in full year profits. With almost 40% of the harvest completed, US corn yields have beaten expectations, with trade analysts leaning toward an average US yield of 160bu/acre, well above the USDA forecast of 155.3bu/acre. R.J. O’Brien & Associates forecast US corn production to rise to 353mt (13.91Bn/bu), almost 80mt more than last year and responsible for corn prices, that tumbled by over 34% to $4.30/bu (Oct 28). Abundant supplies of corn will outpace demand, boosting thin stocks in the US and in other exporting countries with a larger crop and much lower US prices reduces the incentive for farmers to increase fertilizer applications, negatively affecting fertilizer demand and potential prices.
STEEP PRICE FALL FOR KEY NUTRIENTS ESPECIALLY POTASH MATCHED BY DROP IN SALES PotashCorp cut its forecast for full-year earnings as it revealed a collapse in its potash selling prices in the aftermath of the break- up of BPC, with prices sold to off-shore markets down to $285/t and into North America at $333/t, pointing to competitive pressures in key markets that weakened the pricing environment. While the break-up of BPC, has been blamed for much of the current difficulties, third-quarter results from companies like Agrium, Mosaic,Yara and CF Industries confirm problems facing the potash market are just as relevant to phosphate and nitrogen markets. A reduction in CF Industries earnings in Q3, reflect lower prices in the nitrogen fertilizer market, as additional urea supply from China, weakened supply/demand balances; the ammonia market has moved lower over the past months, and UAN demand, so far, is soft, not helped by a late US harvest, its price pressured lower by weakness in urea. Agrium expects their sales of nitrogen and potash to be significantly lower. Agrium’s chief executive Mike Wilson said,“When you compound a 30% drop in volume with a 30% drop in price, it does have an impact.”
GLOBAL WHEAT PLANTINGS TO RISE IN 2014
Global wheat plantings for 2014 were tentatively forecast by the IGC, 2.3% higher at 225.4M/ha driven by firm futures prices. Wheat sowings in the EU are taking place on a larger area forecast up by 3% to 23M/ha under generally favourable conditions, at the expense of other coarse grain and oilseed plantings. In the Russian Federation, early indications point to a similar area of winter cereals as last year. However, wet weather in the middle Volga region and in some regions of Central Russia may limit plantings initially expected to reduce the winter sown planted area by 3M/ha to 13M/ha, although recent reports indicate some recovery has been noted. In the Ukraine, conditions are satisfactory and the winter cereal area may increase; while in Asia, planting, of mainly wheat is underway in China, India and Pakistan.
SOUTH AMERICA TO FAVOUR SOYBEAN PLANTINGS
South America’s planted area for corn may decline, due to exceptionally high corn inventories, dry soils and much lower prices, especially in Brazil, where domestic prices in Mato Grosso, the largest corn producing state have fallen to $1.90/bu, 43% lower than last year, while in Campinas Sao Paulo producers are receiving US$ 4.80/bu, but these represent some of the highest prices, paid to farmers, with the government buying-in corn at less than $2.90/bu, as potential feed-stock for ethanol production. With much of Brazil’s second corn crop expected to be replaced by a double-crop of soybeans, Oil World forecasts Brazil to plant a record 29M/ha to soybeans, up from 27.7M/ha, and expects Argentina to plant 19.7M/ha, some 3% larger than a year earlier. South American soybean production, in early 2014, could potentially surpass last year’s record of 145mt, providing adequate rainfall occurs in dry regions.
INFORMA RAISES US ESTIMATE FOR SOYBEAN PLANTINGS
With much lower prices for corn suggests US farmers are expected to increase wheat and soybeans acreage at the expense of corn; typically a number of US official reports would have been published on the progress of the current harvest and a preliminary update on future crop intentions, however, due to the 16-day partial shutdown of the US federal government in October, as a result of a clash between politicians over raising the US debt-ceiling, several reports were cancelled. Private analyst Informa, raised US soybean plantings to almost 84M/acres well ahead of the 77M/acres this year; US wheat plantings up by 1M/acres to almost 58M/acres, while the corn area is cut to almost 91.7M/acres, representing a drop of 5.7M/acres, although widely acknowledged, given the rain-affected spring planting window, that the official figure for 2013 US corn plantings is overestimated. This latest estimate is broadly in line with market thinking, that US acreage will be shifted from corn to soybeans, reflected in lower corn prices in relation to soybean prices.
YARA/BASF CONSIDER JOINT PROJECT FOR LARGE-SCALE US AMMONIA PLANT For 2013 the IFA project an increase in ammonia capacity by 19% to 242.7mt NH3 in 2017, with large increases expected in China, Africa and West Asia; with global seaborne ammonia to remain at 19.7mt, the same level as last year. While Agrium, is expected to cut-back expansion due to the current environment, lower sales and soft prices, while Yara International revealed plans for a potential joint project with BASF to build a large-scale ammonia plant based in the US Gulf, to respond to pressure on the global nitrogen fertilizer market from surging Chinese urea exports. A number of nitrogen companies including CF Industries and Egypt's Orascom Construction Industries have also confirmed plans to build nitrogen capacity in the US, to take advantage of the boom in shale gas, which provides low-cost natural gas.
AGRIUM PROFITS SLUMP BY 60% IN Q3
Agrium warned of 60% slump in profits in the Q3 of 2013. While operating profits at its stores were holding-up, those at the wholesale level are forecast to fall by about $200m some 60% below the $312m achieved in Q3 of last year, reflecting soft prices and lower sales volumes, for all three nutrients. Agrium expects nitrogen sales to fall by 20% from 1.06mt, with phosphate sales down by 30% compared with last year, while potash volumes are anticipated to be about 30% lower than normal. With the expected retirement of the chief executive Mike Wilson, by the end of the year, Agrium’s Board softened the profit news, by raising the annual dividend by 50%, Agrium’s share price increased (NYSE) U$ 86.46 (16:15:03 ET on 28/10/2013). For the period to 2013-2015 the IFA forecast a relatively balanced situation for nitrogen with much of the increased supply absorbed by improving demand, beyond then, the potential surplus supply is forecast to expand within a range of 6-9% reflecting a slower/faster pace of growth.
Urea prices, which have continued to slide through October, tried to hold a firmer line to reflect typical seasonal trends, with mixed results, Black Sea Urea $268/t, with the Gulf slightly higher at $283.50/t. Supplies out of China appear to be easing after earlier heavy sales, but the current environment is not helped by weak grain prices. According to the USDA, current prices suggest fair value retail prices around $392/t-$397/t, at the low end of the market in Illinois, though prices on the US Plains are higher at $411/t after active seeding of winter wheat.
RISING COSTS CURBYARA’S EARNINGS
With lower prices for its nitrogen fertilizer down by over 30%, Yara shelved a planned expansion of its Belle Plaine plant in Canada to stem rising costs and reduce the surplus of urea; Q3 adjusted earnings will decline 24% to about 3.2Bn Kroner from last year curbing earnings for producers, expected to be weak in 2014 and 2015, because of lower fertilizer prices, higher fixed costs and increased North American gas prices. Yara’s share price fell to a 15-month low in Oslo, before recovering NOK 255.7 (16:15:03 ET on 28/10/2013).
Between 2013–2017, the IFA confirms that 55 new urea units are planned (20 located in China), expected to increase urea capacity to 236mt by 2017; fertilizer demand is expected to rise to over 157mt and industrial use up to 38mt by 2017, notably in East and South Asia, North America and Latin America. In East Asia increased industrial use expected to contribute two-thirds of the demand growth. Given the number of new projects would lead to a 6% surplus of potential supply that would accelerate after 2015; while modest growth from 2013-2016, taking into account the current imbalance, followed by a declining trend towards 2017, would reduce the potential supply to 3%.
POTASH FACING UNCERTAINTY AND COMPETITIVE PRESSURES IN KEY MARKETS Potash prices that have trended lower since 2011 have seen a significant decline this year. Slower economic growth, the Indian government’s bias towards nitrogenous products, strong dollar, coupled with record-breaking global crop prospects and the break-up of BPC in late July, accelerated the fall in both potash price and demand. Typically, potash has been sold mostly through two global marketing groups, the former BPC and Canpotex (PotashCorp, Agrium and Mosaic), that controlled two-thirds of the $22Bn global potash market between them. In the absence of the BPC, global buyers like those in China and India, opted to hold-off on new orders, according to Wayne Brownlee at PotashCorp,“...anybody who has got inventory doesn't want to see a price drop....” Indian Potash Ltd confirmed it had renegotiated contracts at a 12% discount to the original price of $427/t; while Zuari Agro Chemicals Ltd, negotiated to cut the price to c.$375/t for half the contracted quantity still to be delivered. Uralkali reported the price of potash for delivery in China, dropped to $325/t in September from $345/t in July. PotashCorp noted signs, that North America potash buyers have begun purchasing product in advance of fall application is encouraging; the need for Latin America to replenish nutrients in its soil, supports strong demand for all fertilizer products; and while difficulties remain in India, they expect China to make further purchases from Canpotex in the near term. Nevertheless, PotashCorp lowered both gross margins and the quantity of potash shipments to 8–8.4mt in 2013.
SIGNS THAT BPCS MAY BE REVIVED?
Since the break-up of BPC, China, through its sovereign wealth fund-China’s Investment Corporation (CIC), stepped in to acquire a 12.5% stake in Russian-based Uralkali, to become the second largest shareholder by swapping Uralkali debt into shares worth $2bn. But in a late twist to the saga, hopes that the BPC partnership may be revived have been linked to the possible buy- out of Suleyman Kerimov, who owns the controlling stake 22% in Uralkali. Potash prices edged lower at the Gulf losing $2.50/t to $342.50/t (Oct 28). However, fundamentals point lower if the price war sparked by the break-up of the BPC continues. Belarus signed a deal to sell to China, sending a clear signal to Russia on price.
POTASHCORP, BHP AND EUROCHEM REVEAL PLANS TO INCREASE POTASH CAPACITY PotashCorp forecast global potash operational capability 66mt in 2013, the majority of the increase due to the completion of brownfield projects in North America. By 2017 it expects 14mt of new operational capability will be added assuming all current projects are completed, mostly from PotashCorp mines in Saskatchewan and New Brunswick.
Other companies including BHP Billiton Ltd announced a U$2.6bn investment in its Jansen mine southeast of Saskatoon, potentially shipping potash from the Port of Vancouver in Washington, on property set aside for a new export terminal that would be built in time for the company to launch sales in 2020; while Russian based EuroChem expect to develop two future potash projects in the Volgograd and Perm regions planned to come on stream in 2017, with sales on the global market in 2019. “Both can withstand a global potash price of $300/t, and even below $250/t,” according to Andrey Ilyin, EuroChem’s chief financial officer, the company plan to grow output to 8mt a year within a decade, some 60% of the current capacity at Uralkali.
The IFA confirm the largest increase in potassium capacity is expected to occur in North America and the EEC, forecast to rise to 60mt K20, with supply expected to rise to 50mt K20 in 2017. The IFA expect potash demand for all uses to grow at a modest rate to 37.4mt K20 by 2017, with a potential surplus depending on the rate of growth to rise between 21-25%.
PHOSPHORIC ACID CAPACITY TO INCREASE IN CHINA, MOROCCO AND BRAZIL The IFA confirmed a large supply of global rock supply emerging in Africa, China with further additions in Saudi Arabia, Peru and Brazil expected to grow to 260mt by 2017. Phosphate rock prices fell by almost $60/t from last year to $127.50 (Sept 30). Phosphoric acid capacity is expected to increase in China, Morocco and Brazil, with global capacity to grow to 63.7Mt P205 by 2017; global supply is projected at 52mt P205, with demand expected to rise to 46.5mt P205 by 2017. From 2013-2015 supply/demand shows a stable balance in the short term followed by a moderate increase in 2015, due to larger supply growth, should some projects be delayed, a surplus of less than 6% would exist between 2013-2017.
MOSAIC’S PURCHASE OF CF’S FLORIDA ASSETS APPROPRIATE IN CURRENT CLIMATE Indian Potash Ltd, Paradeep Phosphates Ltd and Chambal Fertilizers and Chemicals bought 160,000/t of di-ammonium phosphate (DAP) for $410/t on CFR basis in September, over $110/t lower than the contract price in May. Typically, India buys
large quantities of fertilizer ahead of the peak season Oct-March, but despite the significant price reduction, buyers are reticent to commit as they grapple to dispose of high-priced stocks from earlier purchases, while anticipating further price cuts.
Mosaic cut its third-quarter sales and price outlook for phosphate, citing the effects of the BPC break-up, and lowered its 2013 outlook for global phosphate shipments by 2mt to 63–64mt, mainly due to a decline in shipments to India, the decline of the rupee, making imported products more expensive. For 2014, global phosphate shipments are expected to rise to 64-66mt, and thereafter to increase by 2.8% per year to reach 77.8mt by 2018. In October, Mosaic and PotashCorp disbanded PhosChem, their joint consortium to export North American phosphate products. Phosphate prices posted a modest decline this week, down $4/t at the Gulf to $369/t for DAP, with forward swaps cheaper at $332.50/t. Fundamentals continue to point to lower levels, if international buyers continue to take smaller amounts.
Pending approval by the regulator, Mosaic's purchase of CF Industries Florida phosphate assets is timely when consolidation makes sense for the business. The deal also provides for CF Industries to supply Mosaic with up to 1mt of ammonia from operations in the US and Caribbean and allows Mosaic to forgo plans for its plant in Louisiana, at a time when the industry is already seeing a series of expansion proposals scrapped for fears other new plants will lead to oversupply.
Skewed use of fertilizers hampers India’s efforts to increase foodgrain production
It is common wisdom that land productivity in any climatic zone of the earth depends much on how well nitrogen (N), phosphorous (P) and potash (I) are used. Annual fertilizer consumption in India which, over the decades, has emerged as one of the world’s leading producers of crops like paddy, wheat, pulses, fruits and vegetables and sugarcane, in nutrient terms (that is NPK) has risen from a negligible 0.07mt (million tonnes) in 1951to close to 30mt now.What is, however, not proving good for crop yield is the skewed use of nutrients highly favouring nitrogen. No wonder, then, in a number of crops and most worryingly for the whole range of oilseeds, Indian productivity falls way short of the world average not to speak of the best.
Much to the concern of the government, which in order to ensure ‘nutritional security’ must reverse the declining per capita availability of foodgrains, the current trends in agricultural output are showing falls in marginal productivity of soil in relation to application of fertilizers. But why should this be when the Indian per hectare application of fertilizers has risen from less than a kilogram a hectare in 1951 to at least 135kg a hectare on last count? (Incidentally, China is using over 500kg of fertilizers per hectare of its arable land.) Farm scientists say high application of straight fertilizers, in the Indian case urea and diammonium phosphate, and insufficient use of complex fertilizers, which are capable of improving agronomic properties are not helping the cause of productivity. Moreover, Indian farmers in general are still not aware of the benefits to be derived by using secondary and micronutrients. Besides lack of education, government subsidies made available or progressively denied to various nutrients are proving to be an important factor influencing fertilizer use.
But balanced fertilizer application as also steady expansion of the command area of irrigation will be among the deciding preconditions for the country to achieve a 4% annual average
growth rate in agriculture during the current 12th plan period (2012–17) against the actual 3.6% in the 11th plan. The challenge is the growth has to be achieved in an environment of progressively shrinking of fertilizer subsidy, necessitated by compulsions to rein in fiscal deficit ruling at a high of 4.6% of GDP. At the same time, in an attempt to bring in greater levels of transparency in subsidy disbursement, the government will in phases directly transfer subsidy money to farmers, including the small and marginal ones. A start in this direction has been made with 11 districts in ten states.
In 2008/09, the disbursed fertilizer subsidy amounted to over 1.7% of GDP. Even while fertilizer production and imports had risen since, the subsidy in 2011/12 was down to about 1% of GDP. Lower subsidy means higher prices for plant nutrients.The thinking in the government is, farmers could still be incentivized to use desired quantities of fertilizers in a balanced way by using the lever of minimum support prices of major crops to their advantage. In fact, the liberal approach to minimum prices fixing is much in evidence in the past few years. Intensity of fertilizer use is not uniform in the country. As a result, the pace of agricultural growth in the eastern and north-eastern regions is slower than in the rest of the country. The government will have to think of some special programmes to encourage greater use of fertilizers by farmers to realize farm growth potential of these regions.
Between 2010/11 and 2012/13, the Indian production of urea grew slowly from 21.88mt to an estimated 22.39mt, thanks mainly to restricted and often irregular availability of natural gas. Research and consulting firm ICRA says even while the “government has prioritized the fertilizer sector in the allocation of natural gas, falling production from a major source in Krishna- Godavari basin and lack of material improvement in discoveries of new sources of gas have affected gas supplies to many fertilizer units.” In the belief that gas shortages will be overcome in the medium to long term following intensification of exploration for reserves, the government has introduced a new investment policy for the urea sector for stepping up “indigenous capacities, reduction in import dependence and cut in subsidy due to import substitution at prices below import parity prices (IPP).” The situation as now obtaining, the country is self-reliant in urea to the extent of 80%, while it is largely import dependent for potassic and phosphatic fertilizers. Officials claim that the new policy will encourage reopening of closed ammonia-urea units and investment in expansion of operating units and kicking off greenfield ventures. Not only does the policy provide for long-term availability of gas for urea capacities to result from new investments, but it also has provisions to protect the interest of investors in case of rises in gas prices or fall in IPP.
Armed with the new investor friendly policy backed by commitment to make available gas feedstock, government officials are trying to secure foreign investment in building urea plants besides local initiative. The Indian fertilizer secretary was recently in Moscow to brief officials from the Russian ministry of industry and trade and also fertilizer companies about the new policy. Following the visit, some Russian companies have begun the process of identifying opportunities for investment in urea production in India.
An official of Gujarat Narmada Valley Fertilizers says while his company will be keen to build a gas based brownfield ammonia- urea project at Bharuch in Gujarat taking advantage of some of its existing facilities, the government is likely to give approvals for setting up “four to five large ammonia-urea projects under the new policy.” As it is giving a push to building large new capacities to reduce its import dependence, the government wants Indian companies to explore opportunities in foreign countries where either raw materials for P and K fertilizers or natural gas is available in plenty. The wanderlust for Indian groups could be by way of joint ventures or long-term offtake agreements backed by adequate equity participation. To underline success in such overseas ventures New Delhi is extending full support to participating Indian companies.
In the meantime, governments of India and Ghana have flagged off a natural gas based ammonia-urea joint venture in which the Indian public sector company Rashtriya Chemicals & Fertilizers is the nodal agency for this country to implement a 1mt project. In a separate initiative, inspired by Ghana’s decision to accord priority in allocation of the newly discovered gas to fertilizer plant, the Indian Farmers Fertiliser Cooperative (IFFCO) will be building a urea factory in Ghana.After meeting Ghana’s requirements, the two units will bring the surplus fertilizer to India. Incidentally, Oman India Fertiliser Company is exporting annually nearly 2mt of urea to India at a pre-fixed price. India saves on fertilizer cost and therefore, on subsidy if it is domestically produced or made by Indian joint ventures abroad than straight imports. New Delhi has targeted Russian companies for strategic partnerships in the P and K space on the premise that while Russia with which it has a long-standing close political and economic ties has the raw materials, India has an expanding market for such fertilizers. Russia’s leading fertilizer group Akron will be interested in partnering Indian groups in building plants to make phosphatic and potassic fertilizers.
India has no potassic resources at all and it is, therefore, totally import dependent for muriate of potash. Moreover, nearly 90% of the country’s requirements of phosphoric raw materials and finished phosphatic fertilizers are met by imports. Such high levels of import dependence have subjected India to price manipulations by cartels operating particularly in potash. The cartels have prospered at the cost of importing nations by keeping fertilizer prices well above marginal production costs. The participating cartel members will at no point release stocks that may bring prices down. But a cartel may also collapse in case a member in violation of an informal arrangement would on the sly sell fertilizer outside the partnership scope. It is precisely for this reason that Uralkali of Russia pulled out Belarus Potash Company (BPC) export cartel after accusing its Belarussian partner of violating an agreement and selling independently. An industry official says Urakali’s quitting the cartelislike“SaudiArabiawithdrawingfromOPEC.” Some experts think the collapse of this cartel will lead to some major falls in potash prices. The other cartel Canadian Potash Exporters (Canpotex), a potash exporter and marketing firm is wholly owned by Potash Corporation of Saskatchewan, Mosaic Company and Agrium, remains intact. Canpotex is the world’s largest exporter of potash selling around 10mt a year, which is about one-third of global capacity. In recent times, India leveraging its big importer status has been able to get the better of cartel in operation.
By Kunal Bose
Vale quits giant Colorado potassium mine in Argentina, to the annoyance of many
The decision by Vale to suspend work at the ‘Colorado’ potassium mine in the Andean foothills in Argentina, has greatly upset the Argentine government, as well as annoying officials in Brasilia, writes Patrick Knight.
With costs at Colombia spiralling out of control, at a time when the world price of potassium is falling and with Vale under severe financial pressure, the move makes a lot of sense.
The project would have been the largest single foreign investment in Argentina for many years. Most of the 4.5mt (million tonnes) of potassium Vale planned to be produced at Colorado in a few years time were to go to Brazil, one of the world’s top four importers of fertilizer.
Ninety-three per cent of the 4.3mt of potassium used in Brazil last year was imported, at a cost of about $3.5 billion.
Argentina is Brazil’s second-largest export market for all goods and the Brazilian government was worried that the regime in Buenos Aires might adopt reprisals, as it has done in the past.
The Colorado project was bought by Vale from Rio Tinto for $850 million almost a decade ago. As well as the mine, the project includes a rail link to take the mineral to a new port at Bahia Blanca and pipelines which will bring the gas needed to process the ore.
The cancellation of the Colorado project has come at a time when the Argentine economy is in serious difficulties. Investors are extremely cautious following of the takeover of the assets of the Spanish Repsol oil company, without compensation.
The financial situation of Vale is by no means as favourable as it was when the project was conceived, following the weakening of the market for iron ore. Vale has withdrawn from several ambitious investments both abroad and in Brazil in the past few years.
Building the Colorado mine and the associated workings was originally expected to cost less than $6 billion dollars. However, the estimate has now shot to $11 billion and would almost certainly rise further as time passes.
Potassium forms about a third of all the fertilizer used in Brazil, but less than 10% of the 10mt of the product now used each year is produced locally, most at small high-cost mines, many of them elderly.
Brazil usually pays much more than average for its potassium, the majority of it shipped from Canada and the Ukraine, with some coming from Israel as well. This is because importing is usually concentrated in the second half of the year, on the eve of planting the summer soya and maize crops, when fertilizer prices tend to be at their highest.
The initial decision to go ahead with the Colorado mine was taken in 2008, when due to the world food crisis in that year, the price of all fertilizers rose sharply. That of potassium shot to more than $600 per tonne, three times what it had been five years earlier.
The very high price of fertilizer in that year encouraged many mining companies to start building new potassium mines. It has also caused the cartels which fixed prices far above the cost of production, to crack wide open. One result has been that the price of potassium has fallen by about 25% in the past couple of years, while the price of Vale’s iron ore has also dropped.
The lower price of fertilizer meant that has Brazil paid less than $400 for each tonne of potassium imported in the past three years, compared with close to $600 a tonne in 2008 and 2009. The price of ready blended fertilizer and of phosphates has fallen by just as much, although the price of urea, an oil derivate and used to make nitrates, has not fallen so much.
Brazil now imports about half of the 4.3mt of phosphates it uses each year. However, it is hoped that production of phosphates will have risen to 4mt by 2018, when the amount of phosphates needed will have increased to 5.2mt.
A total of 880,000 tonnes of nitrates were produced last year. It is planned to increase output to 2mt by 2018, by which time the amount of nitrates used will have risen from the 3.5mt of 2012, to 4.2mt.
The real fell by more than 15% against the US$ and other currencies between January and August, a change which has caused the price of most imported goods to rise.
However, price of potassium bucked the trend and fell in the first half, which encouraged farmers to import more. This is because the area planted to soya, as well as maize and sugar cane, other big users of fertilizer, increases each year.
The amount of soya needed to buy a tonne of fertilizer varies from year to year according to the world price of the oilseed. But with soya prices at record levels in the past few years, much less soya is needed to buy fertilizer now than in most recent years, so farmers growing soya are expected to buy up to 10% more this year.
More than 40% of all the fertilizer used in Brazil is bought by soya farmers. Soaring demand for beans in China is one reason, last year’s severe drought which cut production in the United States as well as in Brazil itself, is another.
Soya prices fell slightly earlier this year. But the weather has not been ideal in the United States this year once again, so prices have risen again more recently.
More than 400kg of fertilizer are applied on each hectare of average soya plantation. With the area planted to the crop now close to 30 million hectares and growing by about 4% a year, Brazil will need more fertilizer each year for the foreseeable future.
Fifteen million tonnes more soya was harvested 2012/13 than in the previous year, an increase of 10mt. More than 85mt of soya is expected to be grown 2013/14, and it is anticipated that more than 100mt of soya will be produced in Brazil by 2020. This means 25% more fertilizer will be needed by farmers growing the crop by then.
The amount of maize and sugar, the other leading users of fertilizer, is expected to grow by about the same proportion as that of soya in the next few years as well.
The government is anxious for Brazil to move towards being self-sufficiency in fertilizer, to cut the soaring import bill. Imports cost about $7.5 billion last year, which although less than the record $8.4 billion fertilizer imports cost in 2008, was much greater than the $5.2 billion fertilizer imports cost in 2007, or the $3.6 billions they cost in 2005.
If potassium is in short supply, Brazil has substantial reserves of phosphates and could easily make much more nitrates out of oil and gas as well, if it set its mind to it and was prepared to pay the high cost of opening new mines.
The country has some relatively small reserves of the comparatively rare potassium. But these are in isolated parts of the country, notably Amazonia, so will be costly to develop, as well as being a potential threat to the environment.
There is really no excuse for Brazil having to import urea and nitrates, however, given the importance and size of its oil and gas industry.
Even without Vale’s investment in Argentina, which now seems unlikely to go ahead for many years, the countries fertilizer companies, now led by Vale and Petrobras, but also including Norway’s Yara, plan to invest $20 billions on new production aimed at adding 9mt to output by 2018.
To facilitate this, the industry has asked the government to increase taxes on fertilizer imports, to allow them to make adequate profits. The earnings from the export of soya, maize, sugar, coffee, cotton, orange juice as well as of meat, with chicken and pork fed mainly on maize and soya meal which need fertilizer to grow well, together now generate almost 70% of Brazil’s export earnings.
So the suggestion that imports of fertilizer, which has helped yields to increase much faster than the planted area in the past decades, has provoked howls of protest from farmers and the associations which represent them. The farm lobby can muster many votes in congress, so this proposal is unlikely to prosper.