BMI View: We believe Asia will remain the world's largest consumer of all three fertiliser types, as we expect the continent's agricultural production to increase in the coming years. The next challenge for farmers will be soaring input costs and fertiliser efficiency. China and India are looking to diversify potash procurement away from the Cantopex 'cartel' in favour of domestic and independent producers. We believe the major fertiliser players, such as Potash Corp and Agrium , will continue to experience volatility in China and India unless they decide to modify their current sales strategies in these markets.
Fertiliser use has soared in recent years in Asia, especially in India, Pakistan and Malaysia, fuelled by growth in demand for food and the support of governments via generous subsidies, especially in South Asian countries. China and India are the world's largest consumers of fertilisers. Overall, we expect the consumption of fertilisers in the region to continue undergoing rapid growth, driven by rising rural incomes, greater availability of farm credit, contract farming and public/private awareness campaigns. Consequently, the region will grow increasingly reliant on imports of these nutrients.
|Select Countries - Use Of Fertilisers By Crop, 2008 (% of total)|
However, the region's dependence on imports of nitrogen may reduce slowly and lead the domestic market into a small surplus by 2016 if plants in the pipeline are commissioned in time according to the UNFAO. In fact, many countries in the region, namely Brunei, Indonesia, Malaysia, Myanmar, the Philippines and Thailand have large proven natural gas resources, which are needed for urea production.
|Strong Demand Growth|
|Select Regions - Fertiliser Demand Growth (% chg 2011-2015)|
High Demand For Fertilisers In 2013/14 On Global Grains Production Rebound
Relative to the period leading up to 2008 (especially during the first global food price spike beginning in 2007), fertiliser prices and especially urea prices have been rather stable since 2009. Looking at 2013, urea prices are expected to remain above historical averages (excluding 2008). This comes as the nitrogen market is likely to remain tight in 2013 due to delays in capacity expansion. Projects planned for 2012 and 2013 completion in Algeria and Egypt remain behind schedule. Production growth outside China is close to historic consumption growth rates, which will leave the market dependent on Chinese nitrogen exports. China is likely to maintain high exports in 2013 owing to new production capacity coming online and relatively low export taxes, preventing a surge in prices over the short term.
|Source: BMI, Bloomberg|
|Urea Prilled (Black Sea)||460||410||450||390||380||385||365|
|Urea Granular (Middle East)||425||460||460||415||410||410||360|
|DAP (US Gulf Export)||600||517||570||570||502||510||475|
|MOP (Granular Potash, Vancouver)||460||520||520||520||520||425||425|
Overall, demand for urea and potash is likely to be strong in 2013, as tightness on the international grain market will keep grain prices elevated in 2013, giving farmers strong incentives to increase planting and application of fertiliser. We now expect all grains to record a global market deficit in 2012/13 with production balance improving only slightly in 2013/14.
Greater Potash Demand In China Than India In 2013/14
China and India will record potash consumption growth in 2013/14, with China outperforming its neighbour. Based on estimates by the United Nations Food and Agriculture Organisation, the International Fertiliser Association and by global giant Potash Corporation, we see Chinese 2014 potash demand coming in around 5.9mn tonnes, up 3.5% year-on-year. Meanwhile, India's demand should remain more subdued and grow by a mild 1.5% y-o-y to 2.7mn tonnes.
|Stronger Growth In China|
|Select Countries - Potash Consumption ('000 tonnes of nutrients)|
China and India restrained purchases of fertilisers in 2012/13, as contracts with traditional suppliers (the two consortia being North America's Canpotex, composed of Potash Corp, Agrium and Mosaic, and Belorussian-Russian BPC, composed of Belaruskali and Uralkali) came to an end in early 2012 and negotiations on new contracts were difficult. Moderate demand growth in 2013 should encourage stock rebuilding in 2013/14. Progress in contract negotiation between India, China and Cantopex (with new contracts being signed at relatively low prices) will also foster a pickup in demand.
India will record more lacklustre consumption growth than China, as demand will be restrained by the sustained drop in potash subsidies. The Indian government reduced overall fertiliser subsidies by 20%, including potash subsidies by 11.2% to INR14,440/tonne) in 2012/13 in an effort to shore up its growing fiscal deficit. According to industry sources, it could cut further subsidies by 15% in 2013/14, again leaving urea out of the loop. However, lower international potash prices will limit drastic demand destruction in India.
|Low Asian Production|
|Select Countries - Potash Production ('000 tonnes nutrients, LHS) & Reserves (Mn tonnes nutrients, RHS)|
Strongest Long Term Demand Growth In China And India
In the longer term, China and India are forecast to record the strongest demand growth for potash and nitrogen according to the International Fertiliser Association (IFA) and the UNFAO. Our view that agricultural production expansion will be robust in these two countries is in line with this optimistic outlook. India will account for the largest share of the world's increase in demand between 2011/12 and 2015/16, of around 30% for the two fertilisers. Then comes China, which is expected to account for 7% and 18% of the increase in demand of nitrogen and potash respectively according to the IFA and UNFAO. Brazil, Indonesia, Russia will also account for large parts of future demand.
|Increasing Need For Fertilisers|
|Global Urea Prices (IDR/kg), Indonesia Fertiliser Subsidies (IDRbn) (LHS) & Indonesia Fertiliser Needs ('000 tonnes) (RHS)|
Diversifying Production And Procurement To Avoid Cantopex
China and India are looking to diversify potash procurement away from the Cantopex 'cartel' in favour of domestic and independent producers, which can offer more flexible terms and better prices. Both countries are increasingly looking to develop the domestic fertiliser industry and to make acquisitions overseas. In China, because the country is the world's largest consumer of potash and produced only 39.2% of annual demand in 2010 (China is self-sufficient in nitrogen), it is still very reliant on imports, especially from North America. Recently, Chinese companies have signed various agreements to source potash from independent producers, namely Prospect Global Resources and Israel Chemicals. Moreover, a Chinese sovereign fund has purchased a 12.5% stake in Russian Uralkali, the world's largest potash producer. Chinese investors are also backing potash projects in the nascent producing country of Laos.
In India, the recent purchase by Gujarat State Fertilizers & Chemicals of a stake in potash prospector Karnalyte Resources is likely to start a trend of tie-ups between junior miners and potash dependent countries. However, we believe the country's plans to boost fertiliser capacity will not be sufficient to significantly reduce the production deficit in nitrogen, and India will remain reliant on imports for the bulk of its consumption.