Unsteady waters for phosphates

The growth in demand has supported both prices and producer margins. Since 2011, it is estimated that the DAP FOB TAMPA benchmark exceeded global weighted average costs by between 25 – 30% on an ex-works basis. Even in 2015, when most hard commodities prices fell by over 10% year-on-year (see results in Figure 1), phosphate prices were slow to adjust. However, since August 2015, underlying fundamentals started to turn, dragging phosphate prices down to their current levels: around lower US$130/t year-on-year. Initial concerns were demand related, stoked by fears over the El Niño weather event and the impact that this could have on Indian fertilizer consumption. Moving into September, the focus shifted to China as the government introduced a 13% VAT on the sales of fertilizers, raising costs and thereby squeezing affordability in the Chinese agricultural market. Through Q4, concerns switched to the supply side of the market, with excess capacity and sales strategies dragging on prices. In China, exporters continued to maximise their international sales of ammoniated phosphates, especially into India. By year end, combined DAP, MAP and TSP sales totalled 4.9 million t of P₂O₅, representing a 40% year-on-year increase. Also in Q4, OCP completed the commissioning of its first integrated phosphate project at Jorf Lasfar – the African Fertilizer Hub – capable of producing around 1 million tpy of DAP/MAP. As such, prices responded downwards as fears rose of a shift towards market penetration and away from margin maximisation.

Figure 1. CRU basket of 36 mining, metals and fertilizer commodities.

More recently, the emphasis has been on the difference between concentrated phosphate fertilizer prices (such as DAP/MAP) and merchant phosphoric acid (MGA) prices. Over the past 18 – 24 months, MGA has been trading at a premium to downstream prices (once adjusted for P2O5 contents) due to a tight supply/demand position. Regular suppliers to the Indian market had been squeezed for different reasons. In Africa, for example, Industries Chimiques du Senegal (ICS), Foskor and Groupe Chimique Tunisien (GCT) had all seen their volumes constrained due to a combination of technical and social forced disruptions, placing a heavier burden on supplies from OCP. As such, prices had responded upward. In recent months, however, not only have merchant supplies from the aforementioned producers improved, new suppliers, such as Jordan India Fertilizer Co. (JIFCO), Tunisia India Fertilizers (TIFERT) and Du Giang in Vietnam, have also entered the fray, easing tight fundamentals and high pricing. As such, the Q1 MGA CFR INDIA price fell by US$95/t to US$715/t, and then further to around US$600/t at the time of writing.

Figure 2. FOB TAMPA DAP price, US$/t, January 2015 – June 2016.

Africa: so much expected but when will it deliver?

As the name suggests from its first new project, OCP has outlined Africa as being a core part of its future growth plans. The continent is vast and populations are expanding rapidly, but it remains reliant on subsistence agriculture. Farming practices remain basic and subsequently fertilizer application rates remain well below global averages. Farmer education, product distribution (both inbound and outbound) and internal corruption will have to be addressed if this is to change. Thus far, there have been some success stories, with Ethiopia being at the forefront.

There is increasing downstream investment into the continent with large producers, such as Yara (Scandinavia), acquiring fertilizer blending and distribution facilities. Much of this investment is being targeted towards the East Coast of Africa in countries such as Kenya, Tanzania and Zambia. CRU will be undertaking primary research in this region in 2016 to better understand the market dynamics, key players and how future growth will develop.

Figure 3. Ag expansions in Brazil and a recovery in India offset declines in China.

Although Africa has a positive longer term outlook, it comes from a very low base and total volumes consumed will not be enough to absorb freshly commissioned global supply. Medium-term fundamentals will be driven by the outlook for more established agricultural markets, namely: Brazil, India, the US and China. Each is set to face its own challenges over the next few years.

Farmers in Brazil continue to expand their cropping area to include more soybeans and corn. Brazil is set to overtake the US as the world’s largest soybean exporter and will continue to supply the world with important agricultural products. This has obvious flow on effects for fertilizer demand, especially considering the opening up of new cropping land means significantly higher nutrient requirements. Annual growth in P2O5 demand is forecast at 3.1%, reaching 5.9 million t by 2020. Fertilizer companies around the world have identified this fantastic opportunity for growth, leading to fierce competition within that market. Mosaic (US) and Yara are both dominant players and both have blending and distribution facilities scattered throughout the country.

India is another market with considerable growth potential, but has an almost opposite structure to the Brazil industry. While Brazil thrives on agricultural exports and large farming operations, India’s agricultural industry is based on small family farms feeding a booming domestic population. India’s demand for phosphate fertilizer is somewhat erratic and dependent on weather conditions and the availability of government subsidies. India’s demand for phosphate fertilizer collapsed in 2013 following reforms to the fertilizer subsidy scheme, which saw prices for phosphate and potash fertilizers deregulated. India will remain a challenging environment as farmers readjust to the new pricing structures, but annual growth of 3.6% is hard to ignore. By 2020, Indian P₂O₅ consumption is forecast to be 8.1 million t.

Figure 4. '000 t P2O5 capacity, 2014, 2015 vs future.

The US sits alongside Brazil as the world’s most important agricultural producer. Farmers are technologically advanced and efficiency drives mean that phosphate fertilizer demand has remained steady despite increased crop production. This underpins CRU’s forecast for limited demand growth in the market at 4.1 million t of P₂O₅ by 2020. The prospects for limited demand have not discouraged investment in the region. Indeed, the drawcard of a mature and reliable market means that fertilizer suppliers around the world have been investing further downstream, exemplified by Eurochem’s (Russia) recent attribution of the distributor Ben-Trei.

By far the largest phosphate fertilizer market is China, where 11.7 million t of P2O5 were consumed in 2015. Chinese farmers, who operate on a small scale, have chronically over applied phosphate and nitrogen fertilizers for many years; and application rates are sometimes double those of global standards. This unsustainable consumption is set to contract modestly over the medium term as the government tries to rein in chemical fertilizer use and reform agricultural support prices. 2020 P₂O₅ consumption is forecast at 11 million t. This comes at a time when Chinese phosphate producers continue to expand their output, meaning more supplies will be available to the global market.

OCP to become largest by capacity

At CRU, the group measures the phosphate industry concentration by looking at the capability to produce phosphoric acid. While in itself, it is an intermediate product, it is the principal feedstock for the production of an array of end-use products – including ammoniated phosphate fertilizers, animal feed phosphates and purified wet phosphoric acid (for industrial/food grade applications). Hence it is, in CRU’s view, the key determinant of market size. The capacities of the top 11 producers are plotted on the chart in Figure 4 as they were in 2015 (in the case of JVs, these have been allocated by financial ownership) and what they are forecast to be in 2020 and beyond.

As a whole, the top 11 accounted for 25.5 million t of capacity in 2015, which is 47% of the global total. OCP is currently the second largest producer on a capacity basis behind Mosaic (although, it should be noted that in 2015, OCP produced 4.7 million t of P₂O₅, which is more than the 4.5 million t of P₂O₅ estimated for Mosaic). As indicated on the chart (Figure 4), this is set to change over the next few years as OCP commissions capacity. In addition to its aforementioned Africa Fertilizer Hub, OCP has continued to make good progress on its other acidulation/granulation projects in Jorf Lasfar. CRU’s understanding is that the first of the three remaining projects will be commissioned during 3Q16, with the remainder targeting start-up in six month intervals during 2017. The other noticeable change is that of the Wa’ad Al-Shamal phosphate fertilizer complex in Saudi Arabia, which is set for commissioning in 2H16. While total capacity here is 3 million t of product (or 1.5 million t of P2O5), it will be split between three companies: Ma’aden (60%), Mosaic (25%) and Sabic (15%), which CRU understands will market product separately.

These, as well as a handful of other expansions by Yuntianhua (YTH), GCT and Kailin, will see the top 11 producers raise their capacity by 5.5 million t of P₂O₅ through 2020 to a total of 31.1 million t of P2O5 (or 53% of the global total), suggesting the industry will become more concentrated. While this should be supportive of stronger pricing power, CRU’s view is that the corresponding growth in demand projected to 2020 will not be such that availability is seriously squeezed. Perhaps more importantly, there are likely to be too many players that are not entirely focused on maximising profits that will prevent a tightening of fundamentals. The key concern being the manner in which the Chinese producers will respond: will they consolidate and close marginal/unprofitable capacity or will they operate at high rates in order to protect their market share and sustain ongoing domestic employment? A recent visit to a selection of Chinese fertilizer producers by CRU’s team uncovered instances where an operation is deemed to be strategic, loss making capacity will be protected as long as variable costs are covered.

Conclusion

In conclusion, the outlook for phosphate fertilizer demand is positive over the next five years as developing countries continue to drive consumption. However, with demand growth set to be outpaced by capacity additions, the industry is in for a tough few years. The manner in which OCP as well as Ma’aden, Mosaic and Sabic operate their new capacity over the next 6 – 18 months and the resultant response from the Chinese exporters will go a long way in determining the state of the industry over the medium term. If the Chinese, for example, bet on a ‘long game’, in which they sustain losses over the short/medium term to knock out marginal capacity elsewhere, considerable price cuts could be seen. Companies, such as OCP and Yara, are trying to avoid this intensification of competition into existing markets by diversifying and developing demand in new regions (i.e. Africa). However, the barriers to entry are high and unlocking demand in these areas will require large amounts of effort and capital.

Written by Juan von Gernet and Chris Lawson, CRU Group.

Read the article online at: https://www.worldfertilizer.com/special-reports/07112016/unsteady-waters-for-phosphates/