Asia Fertiliser Outlook

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.

Fertiliser use in Asia has soared in recent years, especially in India, Pakistan and Malaysia, fuelled by growth in food consumption and governmental support 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 grow rapidly, driven by rising rural incomes, greater availability of farm credit, contract farming and public/private awareness campaigns. Consequently, the region will remain reliant on imports of these nutrients.

However, the region's dependence on imports of nitrogen might slowly decline and if planned facilities are commissioned in time, according to the UN Food and Agriculture Organization (FAO). 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.

Mainly Grains
Select Countries - Use Of Fertilisers By Crop, 2008 (% of total)

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.

Fertiliser use in Asia has soared in recent years, especially in India, Pakistan and Malaysia, fuelled by growth in food consumption and governmental support 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 grow rapidly, driven by rising rural incomes, greater availability of farm credit, contract farming and public/private awareness campaigns. Consequently, the region will remain reliant on imports of these nutrients.

Mainly Grains
Select Countries - Use Of Fertilisers By Crop, 2008 (% of total)

However, the region's dependence on imports of nitrogen might slowly decline and if planned facilities are commissioned in time, according to the UN Food and Agriculture Organization (FAO). 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)

Further Fertiliser Demand Growth In Asia In 2014/15

After a disappointing year for global and Asian fertiliser demand in 2012/13, consumption is expected to rebound in 2013/14, mainly driven by the recovery in demand in Asia. Although agricultural commodity prices are currently at relatively low levels, they will remain attractive and stimulate fertiliser application, as fertiliser prices are at multi-year lows. The International Fertilizer Industry Association (IFA) forecasts global demand to rise by 2.0% year-on-year (y-o-y) to 179.5mn tonnes nutrients, with potash recording the largest increase (2.6% y-o-y increase, to 28.7mn tonnes nutrients). Global demand for nitrogen and phosphate is expected to grow by 1.8% y-o-y to 109.6mn and 41.1mn tonnes respectively in 2013/14.

Asia-Driven Demand
Global - Fertiliser Demand Variation (in mn tonnes nutrients per year)

Asia is leading the rebound in demand this season, and India is likely to outperform the other major consumers of fertilisers in 2013/14 owing to a favourable monsoon, growth in crop production and elevated domestic commodities prices. The rebound in fertiliser demand will be mainly led by nitrogen consumption, as demand for phosphate and potash will be held back by the sustained reduction in subsidies for those nutrients. In particular, India's government reduced fertiliser subsidies by 20% in 2012/13 and 18% in 2013/14 in an effort to shore up its growing fiscal deficit. Given the projected headwinds for India's economy in the coming years, the government is unlikely to re-establish the subsidies. A new change or reduction in the subsidy policy is unlikely to occur before upcoming parliamentary elections in April-May 2014.

Low Fertiliser Prices Favour Application
LHC: Urea Prilled Black Sea/India Basmati Rice In Delhi Price Ratio; RHC: Urea Prilled Black Sea/China Rice Price Ratio

China is expected to maintain its fairly strong fertiliser demand growth in 2013/14. We expect strong production growth in 2013/14 across various major crops in the country, which will encourage fertiliser consumption. Domestic grains and oilseeds prices are resilient despite the sharp drop in international quotes, which will push farmers to optimise plantings and application density in order to reap the maximum benefits from those prices.

Global Benchmark Fertiliser Prices (US$/tonne FOB, reported prices at the end of quarter)
Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Ytd
Urea Prilled (Black Sea) 460 410 450 390 380 385 320 310 310 360
Urea Granular (Middle East) 425 460 460 415 410 410 330 320 375 410
DAP (US Gulf Export) 600 517 570 570 502 510 481 380 370 475
MOP (Granular Potash, Vancouver) 460 520 520 520 520 425 425 425 425 295
Source: Bloomberg

Looking at the 2014/15 season, the IFA forecasts global fertiliser demand to grow for a second consecutive year, by 2.7% y-o-y to 184.3mn tonnes, with potash consumption recording the strongest growth again. Asia is likely to remain a key driver of demand growth. In India and China, fertiliser prices relative to grains prices remain attractive (see chart above). China's demand will continue to be favoured by the sustained increase in fertiliser subsidies and grains procurement prices.

Growing Imports
Select Countries - Fertiliser Production Balance ('000 tonnes nutrients)

Strongest Long-Term Demand Growth In China And India

Over the longer term, China and India are forecast to record the strongest demand growth for potash and nitrogen, according to the IFA and FAO. 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 consumption increase between 2011/12 and 2015/16: around 30% for the two fertilisers. China is expected to account for 7% and 18% respectively of the increase in demand for nitrogen and potash respectively, according to the IFA and FAO. Brazil, Indonesia and Russia will also account for a large amount of future demand.

Low Asian Production
Select Countries - Potash Production ('000 tonnes nutrients, LHS) & Reserves (mn tonnes nutrients, RHS)

India's Pesticide Boom Past Its Peak

The July 2013 fatal poisoning of 23 children in Bihar, India - the result of contaminated school lunches - has highlighted the significant safety concerns linked to pesticide use in the country. High usage rates mean the marginal benefit of increased pesticide and fertislier use in India is falling, and the profit boom for the pesticide industry is likely to be behind us. Most companies operating in the sector also have a strong presence in the fertiliser market, and we expect fertiliser sales growth to pick up at the expense of pesticides, which will help to keep margins in the sector stable in the coming years. Operating margins for the two largest fertiliser and pesticide companies ( Godrej Industries and Deepak) have been trending lower in recent years ( see 'Pesticide Boom Largely Behind Us', August 12 2013).

Diversifying Production And Procurement To Avoid Cantopex

China and India are looking to diversify potash procurement away from the Cantopex group in favour of domestic and independent producers that can offer more flexible terms and better prices. Both countries are increasingly looking to develop their domestic fertiliser industries 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. Chinese investors are also backing potash projects in the nascent producing country of Laos.

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Related sectors of this article: Agribusiness, Agriculture Inputs
Geography: Asia, China, Indonesia, India, Philippines
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