Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
31 May 2005
1
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
This handbook describes the fertilizer industry and in particular the nitrogen part which
is the most relevant for Yara International.
The document does not describe Yara or its strategy. For information on Yara specific
issues please see the Capital Markets Day presentations.
Fertilizers are essential plant nutrients that are applied to a crop to achieve optimal yield
and quality.
The following slides describe the value and characteristics of fertilizers in modern food
production.
2
Plants need three main nutrients:
Nitrogen, Phosphorus and Potassium
P
N K
YIELD AND
QUALITY
Nitrogen (N), the main constituent of protein, is essential for growth and development
in plants. As nitrogen is one of the single most common nutrient that limits agricultural
productivity, its value in modern food production is unquestionable. Supply of nitrogen
determines a plants growth, vigour, colour and yield.
Phosphorus (P) is vital for adequate root development and helps the plant resist
drought. Phosphorus is also important for plant growth and development, such as the
ripening of seed and fruit.
Potassium (K) is central to the translocation of photosynthates within plants, and for
high yielding crops. Potassium helps improve crop resistance to lodging, disease and
drought.
In addition to the three primary nutrients, the secondary nutrients sulphur, magnesium
and calcium are required for optimum crop growth. Calcium is particularly essential for
yield, quality and storage capacity of high value crops such as fruit and vegetables.
3
Plants need nutrients to grow
Oxygen
Sodiu
Boron
Soil conditions
z Nutrient behaviour & other growth
m
factors
Calcium
th
Potassium
Phosphorus
and lack of any one nutrient limits crop
Warm
Light
Nitrogen
Water
growth
The law of minimum is often illustrated with a water barrel, with staves of different
lengths. Such a barrel for illustration purposes could be thought of as a plant. The barrel`s
capacity to hold water (or the plants capacity to reach maximum yield) is determined by
the shortest stave. The yield of plants is frequently limited by shortage of nutrients or
water. Once the limiting factor (constraint) has been corrected, yield will increase until
the next limiting factor is encountered.
Nutrients are classified into three sub-groups based on plant growth needs. These are:
Macro or primary nutrients: nitrogen (N), phosphorus (P), potassium (K)
Major or secondary nutrients: calcium (Ca), magnesium (Mg) and sulfur (S)
Micro nutrients or trace elements: chlorine (Cl), iron (Fe), manganese (Mn),
boron (B), selenium (Se), zinc (Zn), copper (Cu), molybdenum (Mo) etc.
Yield responses to nitrogen are frequently observed, as nitrogen is often a limiting factor
to crop production, but not the only factor. Balanced nutrition is used to obtain maximum
yield and avoid shortages of nutrients.
4
Major impacts on global agriculture
from quantity to quality
Source: McInerney, J (2002) The production of food: From quantity to quality. Quoted in Farming for Health: The
future for agriculture by Welch, R. 30th IFA Enlarged Council Meeting, Santiago, Chile 1-3 December 2004
5
Healthy food for plants
The quality of the food is a natural concern for consumers. Mineral fertilizers are based on
natural nutrients that plants need to realize their growth potential. Balanced nutrition, i.e.,
supplying the right nutrients in the right amounts, is essential for plants to give higher
yields and better quality. Balanced nutrition is also essential for human beings. For this
reason balanced fertilization of the crop plays an important role in supplying a healthy
human diet.
World food production depends upon supplementing plant nutrients obtained from the soil
with mineral fertilizers. Fertilizers are now indispensable for ensuring sufficient food
production and preventing decline in soil productivity through nutrient depletion. The rapid
increase in the worlds population and the corresponding rise in consumption have rendered
fertilizers an integral part of the food chain.
6
and economic gains via low cost production
Mineral
fertilizer 9.3 1042 885** 157 95
192 kg N/ha
* Assuming grain market price: 112 EUR/tonne (EU intervention price = 101 EUR/tonne)
** Cost increase due to intensive production inclusive purchase of N fertilizer
Source: Winter wheat, long term trial, Broadbalk, Rothamsted (since 1856). Production cost: data from KTBL Germany
Lower production costs for grain in turn translates into lower food prices for end
consumers.
7
Profitability of investment in mineral fertilizers
Yield response (monetary value) to N fertilizer rate
1200
The investment in nitrogen
fertilizer is highly profitable for 1000
growers
Income /ha
800
600
=> Fertilizer investment: 96 /ha
=> Net return: 714 /ha 400
200
Net return is 7x the investment
0
0 50 100 150 200 250 300
Fertilizer application, kg N/ha
Source: Winter wheat yield data: Long term trial, Broadbalk, Rothamsted (since 1856).
The difference in revenues is 810 /ha resulting from an input cost of 96 /ha,
i.e., a return on investment of more than 700%.
8
Breakdown grain production costs
Example: Breakdown of winter wheat production costs for a 100-200
hectare arable farm
Particularly in the developed world, the fertilizer cost is quite small compared to
the total production cost of grain. This, in addition to the high return on
investment of using fertilizer, explain why fertilizer is relatively price inelastic
and less dependent on farm economy than other farm inputs.
9
Energy creation and fixation of carbon dioxide
by the use of mineral fertilizer
Yield response (monetary value) to N fertilizer rate
100 20
ton CO2/ha
80 15
GJ/ha grain
60
10
40
5
20
0 0
-20
-5
-40 Without nitrogen With nitrogen fertilizer
Without nitrogen With nitrogen fertilizer
10
Nitrogen the most important nutrient
Nutrient characteristics
Primary
benefit Application Industry structure
Potassium 17% z Improve z Annual z Fewer suppliers,
(K) crop quality application production
Phosphorus not always discipline
(P) 24%
done
11
Nitrates vs. urea
Nitrate is the most important fertilizer in Europe
Hydrolysis Nitrification
Ammonia (NH3) is the basis for all nitrogen fertilizers and it contains the highest amount of
nitrogen (82%). Ammonia can be applied directly to the soil, but for several reasons,
including environmental, it is common to further process ammonia into, e.g., urea or
nitrates before application. If ammonia is applied directly to the soil, it will be converted to
ammonium (NH4) and nitrate before plants can use it as a source of nitrogen.
While ammonium and nitrate are readily available to plants, urea first needs to be
transformed to ammonium and then to nitrate.
The transformation process is dependent upon many environmental and biological factors.
E.g., under low temperatures and low pH (as seen in Europe), urea transformation is slow
and difficult to predict with resulting nitrogen and efficiency losses. Nitrates, in
comparison, are readily absorbed by the plants with minimum losses. Therefore, nitrates are
widely regarded as a quality nitrogen fertilizer for European agricultural conditions, which
is reflected by their large market share.
12
Fertilizer characteristics:
Organic compared to Mineral fertilizer
Crops can be fed with mineral or organic fertilizers (manure), and in both cases the crop
will utilize the same inorganic molecules. A complete nutrient program must take into
account soil reserves, use of manure or fertilizers, and an accurate supplement of mineral
fertilizers.
Manures build up the organic content of soil and at the same time support beneficial micro
flora (e.g., bacteria) to grow on plant roots. The efficiency of organic fertilizer is
dependent on an appropriate bacteria content in the soil. The right bacteria break down the
organic content in manures and supply them as nutrients for plant growth. But the quality
and quantity of nutrient supplied to plants via this process is inconsistent and is very much
dependent upon the vagaries of soil and climatic factors. Plant productivity achieved by
supplying organic matter is low compared with mineral nutrients supplied in the form of
fertilizers.
Organic fertilizers or manures are often bulky making them difficult to handle.
Transporting manures is expensive and therefore, their use is mostly limited to locations
where they are produced. In contrast, mineral fertilizers offer concentrated, immediately
available nutrients, with a consistent nutrient content. They can also be handled safely and
transported relatively cheaply to any part of the world.
13
The basis for mineral fertilizer:
Energy, ammonia and natural minerals
Natural minerals:
Phosphorus (P)
Potassium (K)
The basis for producing nitrogen fertilizers such as urea, nitrates and NPK is
ammonia. Ammonia is produced in industrial scale by combining nitrogen in the
air with hydrogen in natural gas, under high temperature and pressure and in the
presence of catalysts. This process for producing ammonia is called the Haber-
Bosch process.
Phosphorus is produced from phosphate rock by digesting the latter with a strong
acid. It is then combined with ammonia to form Di-ammonium phosphate (DAP)
or Mono-ammonium phosphate (MAP) through a process called ammonization.
Potassium is mined from salt deposits. Large deposits of potash is found in Canada
and Russia, which are also the worlds major producers of this nutrient.
Phosphate and potash are sold separately or combined with, e.g., nitrogen, to form
NPK fertilizers.
The side streams of the main production process (e.g. gases, nitrogen chemicals)
are fully utilized by Yaras specialty fertilizer and industrial products businesses.
14
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Due to the transportability of fertilizers, the industry is highly global meaning that the
price of a standard fertilizer like urea is nearly the same everywhere when correcting for
transportation costs. Consequently, it becomes important to focus on global issues and
supply-demand balances rather than regional ones.
15
The fertilizer market in comparison
Fertilizers 70
Ethylene 60
Agrochemicals
40
and seeds
Paper
14
chemicals
USD billion
The fertilizer market is a large, global market worth around USD 70 billion in
terms of sales, in which Yara holds the leading position. This is almost twice as
large as the global agrochemicals market.
The fertilizer market is not only a significant market in terms of size, but is also an
essential industry serving global food production.
Grains are the largest end-market for fertilizers (~60%), followed by cash crops
(~20-25%), such as vegetables, fruits, vines and flowers. In order to understand
the fertilizer market, it is therefore necessary to understand both the grain market
and the market for cash crops.
In addition, fertilizer products are used in other industrial applications. Ammonia
is used in the production of caprolactam, a key ingredient for the synthesis of
nylon. Urea has several technical applications, the latest being its application for
reduction of NOx gases from diesel trucks. Nitrate-based products are used in
several environmental applications and technical grade ammonium nitrate is used
as a civil explosive in the mining activities of coal and metal industries.
16
Consumption per nutrient
100
90
N 1.7% per year
80
Million Tonnes Nutrient
70
60
50 2.7% per year
40 P
30
20 K 2.7% per year
10
0
2004E
2006E
2008E
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
Source: IFA
The fertilizer markets will continue to grow, due to higher population and
improved diet. In addition, industrial use will increase. Examples are bio energy
and reduction of NOX emissions.
The International Fertilizer Association (IFA) forecasts the fertilizer demand
growth for nitrogen at 1.7% per year up until 2008. A higher growth rate of 2.7%
a year is estimated for phosphate and potassium. The difference is mainly due to
the fact that nitrogen historically has grown more than the other nutrients due to
the immediate and significant benefits of this nutrient. It is expected that the
others will catch up going forward.
Note that the expected consumption growth of each finished nitrogen fertilizer
product is different from the general nitrogen growth as some products are
expected to grow more than others, e.g., for urea a higher growth rate is expected
as this product is taking market share from other nitrogen products.
17
Nitrogen consumption per continent
60
50
Million Tonnes Nutrient
30
20 Europe
(EU 25) 0.6% per year
Source: IFA
Asia is the largest fertilizer market, but Latin America has the
highest growth rate
18
Key global fertilizer product categories
Nitrogen N
NPK
9%
Other
Urea
30 %
51 %
AN/CAN
Potash K2O 10 %
Phosphate P2O5
Other
8% 85 million tonnes Other
34 % DAP/MAP
43 %
NPK
28 %
MOP
64 %
NPK
23 %
23 million tonnes 33 million tonnes
Key products for pricing of the nutrients nitrogen, phosphate and potash
are urea, DAP and MOP
In order to follow price developments for nitrogen, phosphorus and potassium products,
urea, DAP and MOP should be used. They have a large market share and are widely traded
around the globe.
Urea contains 46% nitrogen, and its market share is increasing. The majority of new
nitrogen capacity in the world is in urea.
DAP contains 46% phosphate, measured in P2O5 units, as well as 18% nitrogen. MAP is a
similar product, the main difference being that the nitrogen content is only 11%
MOP is potassium chloride containing 60% potash, measured in K2O units.
19
Nitrogen fertilizer demand 5 key countries
France China
USA Other Urea Other
Other 7% 10% 5%
Urea
10%
20%
ABC
Nitrates UAN 25%
UAN
(CAN/AN) 27%
26%
4%
Nitrates Urea
NPK (CAN/AN) 60%
43% NPK
13%
NPK 8%
Nitrates
13%
(CAN/AN)
Ammonia
Brazil India 2%
27%
Other
DAP/MAP 11%
NPK
14%
8%
AS Urea
16% 47%
NPK
5%
Urea
81%
Nitrates
(CAN/AN)
18%
20
Fertilizer market by application
Wheat
18%
Other
32%
Rice
17%
Cotton
3%
Fruit&Vegetables
6% Other cereals Corn
7% 17%
Source: FAO
The three large grain crops, wheat, rice and maize (corn) consume
about half of all fertilizer used in agriculture
The fertilizer market is not only a significant market in terms of size, but also an
essential industry serving global food production. Grain production is the most
important agricultural activity in the world, with the global output exceeding two
billion tonnes in 2004.
To achieve this scale of production would not be possible without intensive
agriculture and use of mineral fertilizers. Therefore, grains are naturally the largest
end-market for fertilizers (~60%) this is followed by cash crops (~20-25%), such
as vegetables, fruits, flowers and vines. However, in order to get a good
understanding of the fertilizer market, it is necessary to understand both the grain
market and the market for cash crops.
21
Fertilizer company comparison
2004 revenues*
Yara 6.4
Mosaic** 4.5
Potash 3.2
K+S 3.2
Agrium 3.0
ICL 2.7
Terra 1.9
0 1 2 3 4 5 6 7 8 9 10
USD billion
* For companies reporting in EUR, revenues are based on average USD/EUR rate for the year 2004: 1.25
** Mosaic pro forma figures for year ending 31 May 2004.
22
Return on capital for chemical companies
Gross return on assets*
2002 2003 2004
Air Products 17.3 Yara** 17.4 BASF 21.7
Yara** 16.4 Agrium 17.4 Yara** 21.4
BASF 15.2 BASF 16.2 Agrium 20.2
0 10 20 30 0 10 20 30 0 10 20 30
* Gross return on assets defined as EBITDA (excluding non recurring items) divided by Total assets (book value)
** Yara pro forma numbers
*** Mosaic from 01 June 2003 to 31 May 2004, pro forma
Source: Company reports
Yaras primary financial goal is to deliver a good return on capital to its shareholders.
Since year 2000 Yara has benchmarked its Gross return on assets against a defined group
of chemical peers, including both leading fertilizer companies and other chemical
companies. From the comparisons one can see that there is no systematic difference
between fertilizer and other chemical companies, and there is also no systematic difference
between nitrogen fertilizer companies and potash/phosphate fertilizer companies, although
both nitrogen-focused Yara and Agrium have performed well during the period.
Position within the industry is more important than the characteristics of the industry per
se.
23
Yara the leader in nitrogen fertilizers
Global no 1 in NPK
Global no 1 in ammonia Global no 1 in nitrates1 complex fertilizer
Production capacity* (mill t) Production capacity (mill t) Production capacity (mill t)
6
6
5.1 4 3.7
4.7
4.6
4.1 4.1
4 4
3.0 2.3
2.0
2 1.7
2.1 1.5
2 2 1.5 1.4 1.4
0 0 0
ra
ra
*
n
ir a
GP
M
r ra
ch
n
ir a
m
e
y
ra
ro
ro
ss
Ya
l ic
PC
DS
Ya
r iu
Ko
Ya
Te
m
Ac
Ac
ka
Po
Ke
Ag
Ke
er
Ch
Yaras position gives it unique opportunities to reap economies of scale and spread
best practices across a large network of similar plants, and forms part of the
explanation for Yaras competitive returns.
24
Diversification of fertilizer companies
nitrogen product portfolios
In 2004, Yara sold 19.8 million tonnes of N-based fertilizer products and 2.05
million tonnes of other non-nitrogen products. Yaras product portfolio is well-
balanced with NPKs accounting for 36% of sales volumes, nitrates 31% of sales
volumes and urea 18% of sales volumes.
Nitrates and NPK are more differentiated products than ammonia, urea and UAN.
On average, nitrates and NPK command higher margins as they provide superior
customer benefits. NPK can be tailored according to the needs of every climate,
crop and soil making it the ideal fertilizer for demanding cash crops where the
fertilizer quality makes a large difference.
In addition, Yara provides fertilizers for all four types of application:
1. Dry fertilization
2. Fertigation (dissolvable fertilizer)
3. Liquid fertilizer
4. Foliar fertilization (absorption through leaves)
25
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
As Yara has approximately 50% of its fertilizer sales in Europe, this is a market of
particular interest for Yara. However, the European market is still heavily influenced by
the global supply-demand balance which is more important than regional issues.
26
European (EU 25) nitrogen fertilizer market
Other
20%
Other Europe
Nitrates 58%
(CAN/AN)
43%
Europe (EU25) consumes about 11.3 million tonnes of nitrogen, out of which
42% is in the form of nitrates (like CAN or AN). NPK fertilizers as a product
category, occupies second place and urea, the third.
Yara is the leading fertilizer company in Europe, with approximately 20% of the
market.
Yara is mainly active in West Europe, with a 24% market share. In West Europe
the total market is 9.2 million tonnes.
27
Nitrate capacity and nitrate fertilizer
consumption in West Europe
7,000
6,000
Capacity
5,000
kt nitrogen
4,000
Consumption
3,000
2,000
1,000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: EFMA
The restructuring of the West European (EU 15) nitrate industry in the late 1990s has
resulted in a significant reduction in excess nitrate capacity. The decline in capacity is
stronger than the decline in consumption, leading to additional need for imports.
As there is only a small number of fertilizer companies with a long-term focus in the
European market, several plants owned by non-fertilizer firms that are poorly
maintained could be candidates for closure in the years to come.
28
Net nitrogen imports to West Europe
2,500
2,000
kt nitrogen
1,500
1,000
500
0
94
95
96
97
98
99
00
01
02
03
04
19
19
19
19
19
19
20
20
20
20
20
Source: EFMA
Imports to West Europe have shown an increasing trend over the last decade, as
capacity closures in West Europe have exceeded the decline in consumption.
During last season (2003/04), imports increased due to a rebound in demand.
Demand increased due to low grain stocks following the small 2002/03 crop, and
subsequently higher grain prices. As the West European industry was already
running at high utilization rates, the added volumes had to be imported.
The 2004/05 season (not shown in graph) consumption shows the opposite
development, as grain prices are lower due to last year's record harvest. The
introduction of the CAP reform is also contributing to somewhat lower demand.
Imports will be less, whereas the domestic industry will continue to run at a high
utilization rate and gain market share from imports.
As the fertilizer market is global, exporters will rather sell their product
elsewhere than to undercut prices in West Europe.
29
Yara the European low cost leader
Production cost index: 100 = European EFMA average excl. Yara
40 40 40
20 20 20
0 0 0
2000 2001 2002 2003 2000 2001 2002 2003 2000 2001 2002 2003
* Nitrate cost increase due to ammonia price increase, and Yaras larger share of non-integrated plants
Source: EFMA
Ammonia. Yara has established a stable cost position 5-10 percent below
European competitors. The relative position is negatively influenced in 2003 by
improvement in average other EFMA due to closure of least productive plants (IFI
Cork). Yara had lower production in Sluiskil in 2003 due to turnaround and
unscheduled stops. As Yaras gas costs are heavily linked to LSFO, the relatively
high LSFO prices in 2003 compared to other oil products, had a negative effect.
Nitrates. Also nitrate costs were affected by the fire in Sluiskil in 2003. The
ammonia price increase affected the relative position as Yara has a relatively high
share of non-integrated nitrate plants. This effect was strengthened by the
productivity increase in competitors non-integrated plants.
NPK. Increasing ammonia prices in 2003 made the own production of ammonia in
Porsgrunn more valuable, and improved the relative cost position compared to
non-integrated NPK plants. Contribution also came from productivity
improvements.
30
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
This section describes in more detail the competive forces and product flows of the main
nitrogen products.
31
Nitrogen fertilizer industry fundamentals
Porters Five Forces Analysis
Substitutes: Low
z Organic fertilizers only relevant where land
or wealth surplus
Basic technology for nitrogen fertilizer production is widely available and the
industry is quite fragmented. This means that barriers to entry are low. However,
to generate sufficient cash flows and remain profitable in the fertilizer business,
the following are critical:
Access to cheaper sources of natural gas (stranded gas locations)
Proximity of production locations to ports for efficient logistics
Ability to ship, distribute and sell products to customers globally
Economies of scale in operations (production and distribution)
Yara is the worlds biggest producer of fertilizer and has infrastructure points in
160 locations around the world. With sales to more than 120 countries, Yara also
has a unique global distribution that is unmatched in the industry.
32
Potential industry concerns
and associated mitigants
Weaknesses and risks Mitigating factors
z Spread between gas prices in z US gas prices could remain higher due
the US and Europe to lack of pipeline capacity from Caribbean
region and higher LNG costs
In the past, the fertilizer industry has been affected by state funds driving
investments from a food security point of view rather than from a business point
of view and by weak fertilizer companies that existed as part of government-
owned enterprises or conglomerates. As the state involvement is going down and
conglomerates are cleaning up their portfolio, there is a trend towards
consolidation and more profit orientation across the whole industry.
This development is strengthened by WTO and EU enlargement which secures
more and more equal terms for all industry players.
Since 1999 there has been a significant spread between US and European gas
prices due to little new US gas supply. Due to the lack of pipeline capacity into
the US and new supply from the US Gulf, the forward market expects this trend
to continue. Although European gas prices are expected to increase, there are
more gas and pipelines coming into Europe, leading the forward markets to
believe that a gap will be sustained.
33
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Ammonia
Ammonia is the key intermediate product in the production of all nitrogen fertilizers. A
strong ammonia position and understanding of the ammonia market is key for a leading
nitrogen fertilizer company.
34
Ammonia production
120 35
30
100
25
80
20
60
15
40
10
20
5
0 0
Ukraine
Canada
Pakistan
China
Germany
Russia
Indonesia
Trinidad
India
USA
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Ammonia is the key intermediate for all nitrogen fertilizer products and large
nitrogen-consuming countries are also large producers of ammonia.
Ammonia is predominantly upgraded to other nitrogen products at its production
site. Only 13% of the ammonia produced globally is traded.
In 2003, ammonia production reached 132.7 million tonnes, an increase of 1.3%
compared to the previous year. The trend from 1994 to 2003 shows a growth rate
of 1.2% per year.
Of total nitrogen produced, 78% is used as fertilizer, and 22% as non-fertilizer
(CRU estimate). Of all the ammonia produced, 17% is consumed for non-
fertilizer use directly (Fertecon estimate).
35
Ammonia trade
18
16
Total world trade
14
Million tonnes ammonia
12
10
6
Yaras trade
4
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
36
Positions in global ammonia trade and shipping
Trade (cfr sales)*
5
Tap strategic and higher value
4.5
4 markets
Million mt
3 2.3
2
1.8 1.6 1.4 Capture arbitrage
1.1
1 opportunities through flexibility
0 in transport and timing
Nitrochem
Yara
Trammo
Koch
Mitsui
PCS
1000 mt
400 332
1000 mt
200
150 106 102 300 191
96 80 180 151
100 200
50 100
0 0
Yara
Nitrochem
Trammo
PCS
Mitsui
Yara
Agrium
Pemex
Koch
Terra
* Total Yara deep sea trade 2004. When incl. cfr purchases, Yara has 5 million tonnes.
Source: Fertecon. For shipping capacity: various brokers; For maritime storage: IFA
Yara is the clear global no. 1 not only in ammonia trade, but also in
shipping capacity and storage.
This is important because it enables Yara to do trades and enter long-term agreements
requiring access to an extensive global distribution network. Yaras ammonia shipping
needs are covered with a balanced combination of 15 ships split on fully-owned ships, JV-
owned ships and long-term bare boat and time charters. Due to Yaras size in the ammonia
market, the limited number of suppliers of ammonia shipping capacity and the special
nature of ammonia relative to other gas liquids, Yara is able to have a high capacity
utilization and extract significant cost synergies.
37
Global ammonia trade
6 6
M illio n to n n e s a m m o n ia
M illio n to n n e s a m m o n ia
5 5
4 4
3 3
2 2
1 1
0 0
N e th e rla n d s
T rin id a d
S a u d i-A ra b ia
U k ra in e
In d o n e s ia
A lg e ria
USA
Canada
Q a ta r
R u s s ia
B e lg iu m
T u rk e y
G e rm a n y
USA
In d ia
T a iw a n
S p a in
F ra n c e
M o ro c c o
K o re a
Source: IFA 2003
The large ammonia exporters in the world have access to cheap natural gas, the
key raw material for its production. Trinidad has large natural gas reserves and
also lies in close proximity to the worlds largest importer of ammonia, the US.
Trinidad has large stand-alone ammonia plants and excellent maritime facilities
that cater to its export market. Yara owns two large ammonia production facilities
in Trinidad.
The countries in the Middle East also have some of the worlds largest reserves of
natural gas. The Qafco fertilizer company in Qatar, also produces significant
amounts (approximately 2 million tonnes) of ammonia, but Qafco owns the
worlds largest ammonia-urea integrated fertilizer manufacturing sites (four
plants in total) and hence, most of the ammonia produced in Qafco is upgraded
into urea. Therefore, Qafco is a major exporter of urea and there is a relatively
small surplus of ammonia left for exports.
In USA, imported ammonia is used for both DAP/MAP production, for various
industrial applications and directly as a nitrogen fertilizer.
India uses its imported ammonia mostly to produce DAP.
38
Main ammonia flows
Million tonnes
1.3
0.8
1.8 0.5
0.7
0.5 0.6 1.0
3.7
1.9
0.4
The key centre for ammonia trade is Yuzhnyy in the Black Sea. This is the most
liquid location, and where most spot trades take place. Russian and Ukrainian
ammonia is sold wherever netbacks are the highest, and since they are key
suppliers to USA, Europe and Mediterranean, relative pricing for the various
locations West of Suez is very stable.
Asia is almost in a balanced situation. If there is a deficit, imports from the Black
Sea are necessary, and fob prices in Asia increase. If there is a surplus, Asian
exporters have to compete West of Suez, and Asian fob price levels suffer.
39
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Urea
Urea is the largest finished nitrogen fertilizer product and is traded globally. Even
though many markets prefer other nitrogen fertilizers for better agronomic properties,
urea is the commodity reference product with an important influence on most other
nitrogen fertilizer prices.
40
Urea production
100 30
25
80
20
60
15
40
10
20 5
0 0
Bangladesh
Saudi-Arabia
Indonesia
Ukraine
USA
China
India
Pakistan
Canada
Russia
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Urea production is estimated at 115.3 million tonnes in 2003. During the years
1994-2003, urea production grew at 3.5% per year. The largest producers are also
the largest consumers, namely China and India. Both countries are basically self-
sufficient on nitrogen fertilizer.
Most of the new nitrogen capacity in the world is urea, so it is natural that the
production/consumption growth rates are higher for urea than for ammonia/total
nitrogen. Lately, the difference has been quite large, since urea has taken market
share, particularly from ammonium bicarbonate in China. In addition, a major
share of the capacity shutdowns in high energy cost regions have been stand-
alone ammonia plants.
As urea has a high nitrogen content (46%), transport is relatively cheap. In
addition, demand growth is to a large extent taking place in climates where urea
is suitable.
90% of all urea is consumed as fertilizer, whereas the remaining 10% is used for
technical applications (CRU estimate).
41
Urea trade
30
25
Million tonnes urea
20
15
10
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
Urea trade increased by 10% in 2003 to 28.3 million tonnes, which is 25% of all
urea produced. Trade has increased, as regions without a lot of urea capacity, like
Latin America and South-East Asia, have increased demand.
42
Urea trade
6 10 largest importers
6 10 largest exporters
5 5
M illio n to n n e s u re a
M illio n to n n e s u re a
4 4
3 3
2 2
1
1
0
0
S a u d i-A ra b ia
Egypt
U k ra in e
In d o n e s ia
R o m a n ia
USA
C h in a
Canada
Q a ta r
R u s s ia
P h ilip p in e s
T h a ila n d
B ra z il
T u rk e y
A u s tra lia
V ie tn a m
M e x ic o
USA
Ita ly
K o re a
Source: IFA 2003
The main urea exporters are gas rich countries/regions with small domestic
markets. There are some exceptions though.
China has a huge domestic capacity. Although the main purpose is to supply the
domestic market, smaller deviations in the domestic balance creates large waves
in the global market when the domestic surplus is exported and deficit is made up
by imports.
Other key exporters, that also have a substantial domestic market, tend to reduce
their export over time. Indonesia is a good example.
North America, Latin America and South-East Asia are the main importing
regions
43
Main urea flows
Million tonnes
1.3
1.4
0.9 1.0
2.2 0.5
2.2 0.6
0.9
4.4 3.3
0.9 1.8
There are two main hubs to follow in the urea trade market, Black Sea and Arab
Gulf. These flows determine the global prices. Black Sea supplies Europe and
Latin America, while Arab Gulf supplies North America and Asia/Oceania. All
the other flows, of more regional nature, like Venezuela to USA, Indonesia to
other Asian countries etc, are only interesting to the extent they affect the need
for Black Sea/Arab Gulf material. As an example, if China reduces its export, the
Arab Gulf is not able to supply Asia on its own. Black Sea urea will flow to Asia,
and an upward price movement will take place. The relative pricing between
Black Sea and Arab Gulf depends on where they compete on the marginal
volume. If the main drive is from Latin America/Europe/Africa, Black Sea will
lead. If it is Asia/North America, Arab Gulf will lead. It is wise to follow price
quotations for both locations.
44
10 largest urea producers
7,000
6,000
5,000
Million tons urea
4,000
3,000
2,000
1,000
0
Agrium
Kaltim
Sinopec
NFC
Pusri
IFFCO
CF
RCF
Yara
JV ownership included for Agrium, Yara and CF Qafco Source: CRU(2004) capacities
The largest urea producers in the world are found in China and
India
Both China and India are large producers and consumers of urea as this fertilizer
is considered highly suitable to its agricultural conditions. Both countries are
basically self-sufficient on nitrogen fertilizer, with China exporting
approximately 4 million tonnes of urea in 2004.
45
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
This section describes how the economic mechanisms of the fertilizer industry work and
what determines fertilizer prices and company profits.
46
Nitrogen fertilizer revenue drivers
Drivers Effect on
Main revenue drivers are the raw material costs for swing
producers and grain inventories/prices
Since 1999 the US gas price has established a floor price for the ammonia price due
to US producers going in and out of the market. In general, when energy prices are
relatively high and/or demand relatively low, there tends to be a supply economy
where there is a price floor established that indirectly determine fertilizer prices.
On the other hand, when fertilizer demand is high and/or energy prices are low,
there is typically a demand economy driving fertilizer prices well above the
minimum prices determined by energy costs. During such times, fertilizer prices
can be very high as the customer benefits from fertilizer generally are much higher
than production costs.
What finally determines the urea price, which again drives other nitrogen fertilizer
prices, is the fertilizer market balance where capacity utilization is the key factor.
Both Yaras Downstream and Industrial segments offer (differentiated) products
and services to different market segments. These segments are largely unaffected
by energy prices and fertilizer prices and have margins driven by the ability to offer
a superior product to targeted customer segments.
47
Nitrogen fertilizer cost drivers
Drivers Effect on
48
49
US gas price Henry Hub (USD/MMBtu) Oil Brent blend spot (USD/bbl) NOK/USD exchange rate
7 45 10 8.8 9.0
5.9 40 38.2 9 8.0
6 5.5
8 7.5 7.8
35 7.1 7.1 6.7
5 4.3 28.4 28.4 7 6.3 6.5
4.0 30 24.4 24.8
4 6
3.3 25 20.7 19.1
2.8 17.8 5
3 2.5 2.3 20 17.0 4
2.1 12.6
1.7 15 3
2
10 2
1 5 1
0 0 0
95 96 97 98 99 00 01 02 03 04 95 96 97 98 99 00 01 02 03 04 95 96 97 98 99 00 01 02 03 04
Fertilizer prices are cyclical just like any other commodity. The cyclicality is
primarily caused by the lumpiness in supply additions resulting in periods of
overcapacity and undercapacity.
Comparing the 10 year price history of nitrogen fertilizer products in the top row
with oil in the bottom row, one can see that the cyclicality is similar and to some
extent correlated. This is not surprising as the main cost involved in producing
ammonia and nitrogen fertilizer is feedstock in the form of oil and gas.
49
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Drivers of demand
The main driver of demand for fertilizer is peoples demand for food which translates
into demand for grain and other farm products.
50
Drivers for increased nitrogen consumption
z Fertilizer consumption
Population growth
Economic growth
More meat consumption in developing countries
Focus on diets rich in proteins
More fruit and vegetables
Reduce hunger
Biofuels
z Industrial consumption
Economic growth
Environmental limits (e.g. reduction of NOx emissions)
Population growth and economic growth are the main drivers for increased
fertilizer consumption. Industrial consumption of nitrogen is mainly driven by
economic growth and environmental legislation.
51
Increasing population and reduced land
available for food production per capita
y Almost no increase in
farmable land is possible
0.5 10
0.4 8
living leads to growing
0.3 6
protein consumption per
0.2 4 person, requiring more
grain for animal feed
0.1 2
0.0 0
1960 1970 1980 1990 2000 2010E 2020E
The only solution is to
Hectares/person Population increase agricultural
productivity
The Food and Agriculture Organization of the United Nations (FAO) confirms
that a key challenge for agriculture is to increase the productivity. Key ways of
doing this is replacing nutrients removed with the harvest, improving resource
management, breeding new crop varieties and by expanding agricultural
knowledge.
52
World cereal production
Land saved through improved technology
1,800
1,000
800
600
Land used
400
200
0
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Source: FAO
Since 1960, the use of land for cereal production has been quite stable,
while total grain production has increased by 150%
The increase is due to improved technologies, such as better farm practices, superior
seeds, use of pesticides, and increased use of fertilizers.
The roughly 1 billion hectares land saved through the improved yield would not have
been available for food production, and global starvation would have been the
consequence.
53
Mineral fertilizer essential
to sustain future yield increases
4
3.5
Increased production of
3
mineral fertilizers necessary
2.5 Mineral fertilizer
to meet future nutrient demand
2
1.5 Limited potential of recycling
Organic fertilizers
organic material
1
0.5 Existing soil nutrients
Nutrient reserves in the soil
0 do not increase
1960 1970 1980 1990 2000 2010E 2020E
54
To increase productivity is only
possible with full nutrient replacement
Production without
plant nutrition is
mining the soil
Fertilizer increases
yield by 3-4 times
No nutrient Nutrient
replacement replacement with
fertilizers
Trials conducted without replacing nutrients show that the productivity of the
land is dramatically reduced. This not only leads to low farmer income and food
shortages, but also contributes to erosion and destruction of agricultural land.
55
56
Million tonnes
2,100
2,050
2,000
Consumption
1,950
1,900
1,850
Production
1,800
1,750
1,700
1995 1997 1999 2001 2003 2005E
Grain production exceeded grain consumption in 2004 for the first time
since 1999
FAOs estimates global grain production to go down in 2005-2006 after the record crop in
2004. If consumption increases or stays flat, this will lead to a reduction in global grain
inventories in 2006 which normally supports a healthy demand for fertilizers.
56
Grain inventory relative to maize (corn) price
800 4
700
Million tonnes
3
Maize (corn) price
USD/bu
600
2
500
Grain inventory
1
400
300 0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
57
Total calorie consumption
135 135
Index (1990=100)
120 120
115 115
110 110
No change in diet
105 No change in diet 105
100 100
95 95
90 90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: FAO
Total calorie consumption in 2002 was 22% higher than in 1990 ( 1.7% yearly growth ),
of which 80% explained by population growth.
Calorie consumption from animal products in 2002 was 33% higher than in 1990 ( 2.4%
yearly growth ), of which only 56% explained by population. Diet change is nearly as
important a driver for demand growth for animal products as population growth.
58
Calorie consumption per capita per day
3,400
3,200
Developed countries
3,000
Calories
2,800
2,600
Developing countries
2,400
2,200
2,000
1990 1992 1994 1996 1998 2000 2002
Source: FAO
Improved standard of living following economic growth increases demand for food and
fertilizer, mainly in the "developing countries.
The category "developed countries" covers 1.3 billion people, while the remaining 5
billion people are in the category "developing countries". Consequently, changes in
eating habits in the "developing countries" have substantially larger effects then for the
"developed countries.
59
Animal products consumption per capita per day
130 150
125
140
120
Index (1990=100)
Index (1990=100)
130
115
110 120
105
110
100
100
95
90 90
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Source: FAO
The diet in the developed countries has not changed significantly since 1990.
In the developing countries, the calorie intake has increased, with the contribution
coming from more meat being included in the diet. This means that the per capita
consumption of animal food increased particularly strongly. Per capita consumption of
meat has increased by 40% since 1990. As the growth rate for animal products has been
higher than for the total per capita consumption, there has been a shift from vegetarian
products to meat products as well.
As a consequence, grain production now has to meet the growing demand for feed in
those countries. Since the availability of new arable land is limited, higher grain
production has to come from higher productivity (yield per unit area). To achieve higher
productivity, increased use of fertilizers will be necessary.
60
Meat consumption per capita per day
45
Total
40
35
30
kg/cap/year
25
20
Pig
15
Poultry
10 Bovine
5 Other
0
2004E
2005F
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Source: FAO
Pig meat and poultry is gaining popularity on a global basis. Meat consumption requires
feed. To produce 1 tonne of poultry meat, feed corresponding to 2 tonnes of grain is
needed. The multipliers are 4 for pig meat and 7 for bovine meat (beef). FAO estimates
that meat consumption is increasing by 3% (1.2kg/person) this year, equally split on
poultry, pig and bovine.
The added nitrogen needed to support this change in diet is in the range of 400-800kt
nitrogen, depending on the recycling efficiency of the manure, roughly corresponding to
one new world scale nitrogen plant. It represents 0.5-1.0% consumption growth for
nitrogen, or 1-2% for urea, if assuming only urea is used.
Nitrogen required for meat production is in the range of 20-30% of total nitrogen
fertilizer consumption
61
Chinas grain balance
Million tonnes
200
5
150 0
2005F
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
100 -5
50 -10
-15
0 2005F
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
-20
Source: FAO
China has been drawing on their grain stocks since 2000. At the same time, China has
been a net exporter of grain, so the decline in stocks has probably been welcome. The
stock level is now so low that this is not likely to continue. FAO expects China to be a
net grain importer in 2005.
62
Chinas production and consumption of grain
and soybeans
Grain Soybeans
450 45
400
Consumption 40
350 35
Consumption
300 Production 30
Million tonnes
Million tonnes
250 25
200 20
150 15
100 10
Production
50 5
0 0
03/04E
04/05F
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
03/04E
04/05F
90/91
91/92
92/93
93/94
94/95
95/96
96/97
97/98
98/99
99/00
00/01
01/02
02/03
Source: USDA
Grain consumption in China has grown only modestly over the last decade, while
production has decreased. Behind the numbers are an increase in maize (for animal
feed), while rice and wheat consumption have lost popularity. Grain production
rebounded last year.
In addition to increased maize consumption, consumption of soybeans has increased
dramatically, driven by demand for animal feed.
Soybean production has been relatively stable during the last years. China has chosen to
import their requirement instead.
63
China Fruits and Vegetables (area harvested)
25 000 ha
Watermelons
Vegetables
20 Cabbages
Cucumbers
Tomatoes
15
Asparagus
1991
Eggplant
2004
10 Onions
Spinach
Fruits
Garlic
5
Chillies&Pepper
Lettuce
Carrots
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: FAO
China has previously not given priority to increasing the production of grain or
oilseeds, although there is definitely increased attention to the grain/oilseed
situation at the moment.
However, China has chosen to use more and more land for higher value crops.
Given limitations of land and abundance of labor, this is of great economic value
to China, and a logical development. It also means increased demand for
fertilizer, and creates a strong market for higher value fertilizer products like
NPK in which Yara is the global leader.
64
Maize use and US ethanol production
600
500
Million tonnes
400
300
200
100
0
Food Industrial Feed
The use of agricultural produce to obtain biofuels is showing an increasing trend. The
International Grain Council (IGC) estimates that industrial use of coarse grains (mainly
maize) reached 128 million tons in 2004/05, 13% of total coarse grain consumption.
Growth has been particularly strong in Brazil and USA. In the US, FAO estimates that
17% of total maize production is used for ethanol production. Assuming average
nitrogen application, this amounts to 0.75 million tonnes of nitrogen, or almost 1% of
global nitrogen fertilizer consumption.
In Brazil, sugarcane is used for ethanol production, and around 50% of the crop is used
for this purpose.
65
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Drivers of supply
The main driver of supply is the cost of natural gas which is the main raw material in the
production of nitrogen fertilizer.
66
Nitrogen value chain
At current gas prices in the US, natural gas constitutes about 85% of ammonia
production costs in the US. Ammonia is an intermediate product for all nitrogen
fertilizer, while nitric acid is a second intermediate product for the production of, e.g.,
nitrates. Finished fertilizer products are urea, nitrates (CAN, AN), NPK and others.
Industrial products range from high purity carbon dioxide, basic nitrogen chemicals to
industrial applications of upgraded fertilizer products.
67
World gas prices
USD/MMbtu, 2004 estimate
Alaska
1.5
1.5 Russia
Netherlands 0.9
4.4 Ukraine
1.6
US Henry Hub
Middle East
5.9
Trinidad 0.5-1.0
1.6
Indonesia
1.7
Favorable locations for new ammonia capacity are pockets of stranded gas mostly
located around the equator.
68
Cost structure for ammonia
300
250
USD / tonne
200
150
100
50
0
3 4 5 6 7 8
USD / MMBtu
* Ammonia price: fob US Gulf barge, Cost structure: Production cash cost fob US Gulf barge
Source: Blue Johnson & Associates.
Due to the upward shift in natural gas prices in the USA in recent years, domestic
producers have become the swing producers of ammonia. Therefore, the US gas price is
one of the key factors determining ammonia prices as long as prices are supply-driven
rather than demand-driven.
69
Cost structure for urea
Ammonia cost Process gas costs
Other cash production cost 2004 Urea price*
300
250
USD / tonne
200
150
100
50
0
3 4 5 6 7 8
USD / MMBtu
* Urea price: US Gulf granular fob. Cost structure: Production cash cost fob US Gulf barge
Ammonia prices also create a floor for the urea prices in a supply-driven market
balance. Urea prices normally never go below this floor as a sufficiently large number of
producers would then rather sell the ammonia at ammonia market prices.
70
Ammonia prices
when US Gulf is swing producer
Example assumptions:
US gas price: 7.0/MMBtu
US cash cost: 36 * 7.0 + 28 = 280/metric tonne
US terminal cost for import: 12/metric tonne
cfr US Gulf: 268/metric tonne 258
Fr.+duty: 40
218
Freight: 50
268
Freight: 30
238
71
Urea prices when US Gulf is swing producer
Example assumptions:
US gas price: 7.0/mmbtu
US cash cost: 26 * 7.0 + 35 = 217/mt
US terminal cost for import: 2/mt
cfr US Gulf: 215/mt 180
Freight: 30
150
Diff: ~20
215
170
Freight: 45
As there are anti-dumping duties on Russian and Ukrainian urea in the US,
the main source of offshore imports is the Arab Gulf. The freight rate used
is higher than the historic average, given today's tight freight market. Black
Sea is normally priced lower than Arab Gulf, as they compete in Asia,
where Black Sea has a freight disadvantage. Russia is the largest exporter
to the European market.
Instead of regarding US producers as swing producers on urea, it is more
appropriate to regard the ammonia price plus the upgrading cash costs to
urea as the urea floor price. Nevertheless, the result is about the same.
Note that changing freight costs can change the geographical differences
considerably over time.
72
Ammonia production in
selected high energy cost regions
West Europe, USA, Mexico, Japan and Korea
45,000
40,000
35,000
30,000
kt ammonia
25,000
20,000
15,000
10,000
5,000
0
1997
1998
1999
2000
2001
2002
2003
Source: CRU
The higher price level of natural gas, particularly in North America, but also in regions
where the gas price is mainly oil-linked, has led to shutdown of nitrogen capacity.
In 2003, the countries included in the graph produced 10 million tonnes ammonia less
than in 1997. 10 million tonnes represented 7.5% of global production in 2003.
The highest cost producers are often referred to as swing producers. This is true, but it
does not mean that when a plant is closed, it can be restarted at any time. Almost none
of the closed plants have been restarted.
So when demand outpaces new capacity, price effects tend to be felt fairly quickly.
73
Expected urea capacity growth estimates
Egypt: 31%
2007 3.1% (3.5%)
China: 31%
Oman: 29%
2008 2.0% (new)
China: 23%
Global urea production capacity in 2003 was approximately 135 million tonnes.
In the period 2004 to 2008 the expected addition of new urea capacity varies
between 2.0 and 5.4% according to Fertecon. With the exception of China, all
new capacity is expected in the Middle East or in other areas with low-cost gas.
The expected production growth (ignoring possible closures) seems to match
reasonably well with the expected annual consumption growth of 2.5-3.5% with
the exception of 2006.
Note that in 2006, 53% of the capacity additions are in China. If you believe that
the Chinese need the urea themselves (no new export), the 2006 supply additions
may be not so important for the global supply-demand balance.
74
Global nitrogen capacity utilization
92%
90% CRU (British Sulphur)
88%
86%
Fertecon
84%
82%
80%
78%
76%
74%
72%
70%
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E
75
List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Price relations
Based on the demand and supply drivers this section explores how prices in the end are
determined.
76
Natural gas prices USA and Europe
Yearly average gas prices
USD/MMBtu
7
6 US gas price
(Henry Hub)
5
3
European gas price
2 (Zeebrugge Hub)
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank, Platts (average import price into EU from World Bank used up to 1999 )
The high gas price differential between US and Europe from 2003 continues in
2004. This supports good margins for Yara as Yara has costs partly linked to the
lower line and (floor) prices resulting from the upper line.
77
Ammonia price and US production cost
350
300
Ammonia fob US Gulf
250
USD/tonne
200
150
US Gulf cash cost
100
50
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Blue-Johnson
Over the last six years, US natural gas prices have been the most important factor
establishing the prices of ammonia.
Since mid-2003 strong demand has raised ammonia prices above the floor, but margins
above US cash costs have not reached the same level as in 1995-1996.
78
79
250
Urea fob US Gulf
(granular)
200
Cash cost
USD/tonne
US Gulf*
150
100
50
0
02
02
02
02
03
03
03
03
04
04
04
04
05
05
05
05
06
06
06
06
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
* Future cash costs based on Henry Hub forward price for gas as of 29 April
Source: Average of international publications (urea), World Bank (Henry Hub gas price), Blue-Johnson
The urea floor price mechanism is also valid for ammonia. For the first time since
1997 the urea market became demand-driven in mid 2003. The long supply-
driven period is one reason why little new urea capacity was built in the early
years of this decade.
Even if the demand-supply balance should deteriorate, the high forward price for
US natural gas and corresponding consequences for US cash costs indicate that
urea prices could stay at a high level throughout 2006.
79
Potential nitrogen swing capacity in USA
20
18 US total
ammonia capacity
16
Million tonnes ammonia
14
12
10
8
US non-captive
6 ammonia capacity
4
2
0
1999 2000 2001 2002 2003 2004
Source: IFA
80
Fertilizer and grain prices
USD/bushel corn USD/tonne urea
6 300
5 250
4 200
3 150
2 100
0 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: Blue-Johnson
Variations in grain price (corn or wheat) explain approximately 50% of the variations in
the urea price, making grain prices one of the most important factors driving fertilizer
prices. Some of the correlation may of course be spurious, like GDP growth, Chinese
imports, strength of the USD etc.
In 2004, fertilizer prices increased more than most grain prices. The demand
development for fertilizer has recently been more linked to the grain inventories,
particularly in the main consuming regions like China and India.
81
Ammonia and urea price
250
150
100
0.6 * Amm + 15
50
0
jan-95
jan-96
jan-97
jan-98
jan-99
jan-00
jan-01
jan-02
jan-03
jan-04
jan-05
Source: Average of international publications
While energy costs for the ammonia swing producers sets a price floor for
ammonia, the ammonia price sets a floor for the urea price. If the urea price drops
below this floor, more ammonia will be offered for sale, less urea will be sold,
and the relationship will be restored.
In a tight supply/demand scenario for nitrogen, the correlation is less, as urea
plants run flat out. The supply/demand balance for excess ammonia (industrial,
DAP/NPK and nitrates mainly) will determine the ammonia price, as it did during
the mid 1990s.
82
Nitrate price in Europe and global urea price
800
700
USD per tonne nitrogen
600
CAN cfr Germany
500
400
300
200
Urea fob Middle East
100
0
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-02
Jan-02
Jan-03
Jan-04
Jan-05
Source: Average of international publications
There is a strong correlation between urea and nitrate prices, as they to some extent are
substitutes. For agronomic reasons, farmers are willing to pay a higher price per unit
nitrogen from nitrates than from urea. The correlation is stronger in the medium to long
term than within a season. The nitrate margin above urea is to some extent also
influenced by the market balance in the nitrate industry.
83
84
220 350
200
300
180
160 250
140
200
120
100 150
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
World stock remain at the second-lowest level in 30 years. USDA estimates show
that despite record harvests in 2004, the world grain stocks will last only for 2.3
months. Note that all grain prices actually increased from 2003 to 2004.
The decline in grain prices in 2004 may be attributed to favorable weather
conditions for crops this year leading to record grain crop yield. Production (2043
million tonnes) is expected to meet slightly increased demand this year (FAO
Forecast, December 2004) and no depletion of stocks is foreseen for this year.
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85
100
Urea prilled fob Black Sea
50
USD/tonne
300 0
250 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
200
150
100
50
0 Average prices 1995 - 2004
1995 1997 1997 1998 1999 2000 2001 2002 2003 2004 2005
Spring 2005 nitrogen fertilizer prices are high within a 10-year perspective.
However, input costs are also high due to record oil and gas prices. Therefore,
current margins do not match the levels seen in 1995-1996.
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List of contents
z Fertilizer industry overview
What is fertilizer?
The global industry
The European industry
Production economics
This section describes the cash costs associated with production of standard nitrogen
products which is useful to know in supply-driven situations with pricing determined by
the marginal (swing) producers.
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Ammonia cash cost build-up example
36 MMBtu natural
Gas price: 7 USD/MMBtu gas/tonne ammonia
With a natural gas price of USD 7/MMBtu gas cost represents around 90% of the ammonia
production cash costs. In this example, one dollar increase in gas cost gives USD 36 higher
gas costs.
Most of the other production costs are fixed costs and therefore subject to scale
advantages.
mt = metric tonne
All cost estimates are fob plant cash costs excluding load-out, depreciation, corporate
overhead and debt service for a US proxy plant located in Louisiana ( 1,300 metric tonnes
per day capacity). In this example load-out barge is excluded.
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Urea cash cost build up example
36 MMBtu natural
Ammonia price: 278 USD/mt NH3 gas/tonne ammonia
CO2
0.58 mt ammonia per
tonne urea
Urea
(46% N)
* Process gas cost is linked to natural gas price
** Including load-out
Source: Blue Johnson & Associates.
Typically, it takes 0.58 tonne ammonia for each tonne urea. If we add the gas cost in
ammonia (USD 146) and the additional process gas costs needed for the production of
urea (5.2 MMBtu x USD 7/MMBtu = USD 36), natural gas represents around 83% of
the total production cash cost.
All cost estimates are fob plant cash costs excluding depreciation, corporate overhead
and debt service for a US proxy plant located in Louisiana (1400 mt per day capacity).
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Theoretical consumption factors
Ammonia P and K
(82% N)
As shown in the costing example for urea, the real ammonia consumption factor is
above the theoretical consumption factor, which is based on N content. The difference
varies between plants according to their energy efficiency. Using the theoretical
consumption factors is easier when making calculations. If the N content for a product is
known (46% N in urea), the ammonia consumption factor can easily be calculated by
dividing the figure with the N content in ammonia (0.46/0.82 = 0.56).
Based on this illustration, it is possible to follow relative variation in the various
nitrogen prices. As an example, if ammonia becomes USD10/mt more expensive, the
production cost of urea increases by 10 * 0.56 (0.46/0.82) = 5.6USD/mt. Similarly, if the
urea price increases by USD10/mt, a price increase of 10 * (0.27/0.46) = USD5.9/mt of
CAN would keep the relative pricing at the same level.
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Useful sources of market information
z News, price references and short term developments (1-2 months)
The Market www.decyfer.com
Profercy http://lists.altohiway.com (subscription needed)
Fertilizer Week www.britishsulphur.com
Fertecon www.fertecon.com
FMB www.fmb-group.co.uk
Green Markets (USA) http://greenmarkets.pf.com
Beijing Orient Business (China) www.boabc.com
z Medium term (1 year) supply/demand and price analysis
Outlook, from The Market. Monthly publications for ammonia, urea and DAP
Profercy medium term forecast
z Longer term
Fertecon
British sulphur (CRU)
z Grain supply/demand and price
Food and Agriculture Organization of the UN www.fao.org
International Grain Council www.igc.org.uk
Chicago Board of Trade www.cbot.com
z Fertilizer industry associations
International Fertilizer Industry Association (IFA) www.fertilizer.org
European Fertilizers Manufacturers Association (EFMA) www.efma.org
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More information can be found at
www.yara.com
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