BMI View: Africa will remain one of the lowest users of fertilisers in the world, which coincides with its traditional dependency on grain imports. However, we still see potential for growth, particularly in the context of base effects, as high grain prices are likely to improve incomes and allow for greater fertiliser use. Production growth is likely to be concentrated in North Africa over the long term. Greater use of fertiliser will be important given the poor growth in grain yields over recent decades.
Accounting for only around 2.5% of world fertiliser consumption, Africa is and will remain a small player in the global fertiliser market over our forecast period. The fertiliser market is particularly absent in Sub-Saharan Africa (SSA), and the region is characterised by a combination of high fertiliser deficits and very low use owing to failures on the demand and supply sides. On the demand side, poor price incentives; highly seasonal and variable production due to increasing rainfall variability; lack of liquidity, credit or insurance; and lack of knowledge (best agricultural practices) about fertilisers undermine farmers' capacity to adopt fertilisers or reap the benefits of their use. Moreover, with low and dispersed demand, the production and distribution industries remain largely underdeveloped. On the supply side, producers cannot make the economies of scale that would reduce the high costs of transporting, stocking and distributing fertilisers. As a result, fertiliser sold in SSA is some of the most expensive in the world.
North African countries (specifically Egypt and Morocco) along with South Africa are the leading consumers of fertiliser in Africa. However, their consumption levels remain relatively low. North African countries use on average 78kg of nutrients per hectare (ha), just more than half of US consumption. This falls to 41kg/ha in South Africa, less than 30% of US use.
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|Select African Countries - Largest Consumers Of Nitrogen, Phosphate & Potash (tonnes in nutrients) In 2008|
In our last quarterly Africa fertiliser update, we suggested that the spread between ammonia and other key fertiliser prices (including urea and potash) would contract in the coming months after reaching their highest level in five years. This played out over the first few weeks in H113, with ammonia prices collapsing in recent weeks with potash prices in North America have remained stable. Urea prices have fallen as well in line with the significant decline of grain prices over the last six months due to an expected rebound in US corn production for the 2013/14 season. We currently expect grain prices to find a base in Q413 as we expect reduced planting prospects in South America. This should lend some support to fertiliser prices in the coming months.
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Over the short term, we believe that fertiliser consumption will remain subdued, as many key growing areas in SSA disproportionately use nitrogen-based fertilisers, whose prices we expect to increase slowly in the coming months. Regarding countries that show the most consumption potential, we see Zambia, South Africa and Kenya as countries to watch in the coming seasons. This is largely because we are optimistic in terms of grain production growth for these countries (particularly Zambia and South Africa) due to high corn prices and the fact that these countries already have high consumption levels.
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Even though governments have failed to significantly encourage fertiliser consumption, production has picked up steadily in recent decades, making some African countries net exporters of fertilisers. In the coming years, Africa is likely to remain a major exporter of phosphate, followed by nitrogen, but will continue to depend solely on imports for potash. That said, underlying civil tensions in North Africa have persisted following the political upheaval in 2011.
Production potential is a different story in SSA. Fertiliser is only produced in four countries in SSA: Nigeria, Senegal, Mauritius and Zimbabwe. Of these countries, Nigeria has taken the most steps to increase production, with the African Development Bank approving a loan of US$100mn to Indorama Eleme Fertilizer & Chemicals Limited to build and manage a gas-to-urea fertiliser plant in Port Harcourt.
There are concerns that supply from these countries may fall in future owing to declining global phosphate reserves, which would make domestic fertilisers more expensive. For a region where fertiliser use averages 10kg per hectare (ha), compared with 300kg/ha in the US, and where grain yields are some of the lowest in the world, rising prices could see food security concerns increase. For example, among SSA countries, Malawi, Kenya, Zimbabwe and Zambia are the biggest users of fertiliser, at around 30-35kg/ha (South Africa is around 41kg/hectare), while Niger and the Democratic Republic of the Congo are the lowest users, at around 0.5kg/ha of nutrients. We believe these fears are unlikely to be realised in the short term, as Africa is expected to run a net surplus in phosphate production out to 2015.
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More recently, Kenya based Pan African Chemicals established a facility to magnesium sulphate, the first such facility to be used in Central or Eastern Africa. The company, with a market cap of £130mn, is expected to produce up to 800 tonnes of fertiliser monthly, largely aimed at the flower and vegetable markets. Coffee and tea farmers, who normally import fertiliser, would benefit as well. The company also looks to increase fertiliser sales to neighbouring countries such as Uganda, DRC, Rwanda and Tanzania.
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Overall, fertiliser usage will need to increase if Africa (particularly SSA) is to reduce its dependence on grain imports over the long term. Looking at the re-based performance of yields ( see chart ), across various regions for corn, Africa was relatively competitive for several years in the 1960s in terms of improvement. However, the lack of fertiliser use in the region has meant that the performance of African corn yields (a key stable crop) have fallen further behind. Indeed, by 2011, Africa as a whole had the weakest growth in corn yields in the world over the preceding 50-year period. The lack of fertiliser has also resulted in increasing concerns regarding soil erosion, with the UN suggesting that the deterioration in soil productivity could be a key constraint in the rise of Africa's economy over the long term.