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2. Current Fertilizers – Challenges and Opportunities With the increasing scarcity of land, water and energy, intensive farming using agricultural best practices (including the proper use of synthetic fertilizers) will have to deliver the projected 90 percent increase in production to meet rising food demand in developing regions. Commercial smallholder farmers must continue to play a strong role in future food supply chains. However, today’s nitrogen- and phosphorusbased fertilizers fail to serve the special needs of smallholder farmers and have inherent flaws (N) and management issues (P) that lead to substantial economic waste and adverse environmental impact. The industry’s response has focused on optimizing production and application methods used for current fertilizers, which remain largely unchanged since the 1980s.

Introduction Expanded use of intensive farming practices with an increase in the use of synthetic fertilizers will be essential to deliver the food supply required by 2050 in developing regions. A continued emphasis on, and adoption of, balanced nutrient programs, integrated soil fertility management (ISFM) and other best agricultural practices must be encouraged. Realistically, however, the magnitude of crop yield increases required over the next 40 years in developing regions will depend heavily on the increased and proper use of synthetic fertilizers.

Global Industry (See additional information at chapter end.) A key feature of the fertilizer industry is the global supplydemand balancing that occurs – over 40 percent of global fertilizer tonnage is traded (imported/exported). This

global trading is inherent given the sourcing method necessary for each of these nutrients under current technology; while specifics differ, each nutrient requires capital-intensive production facilities located close to advantageous feedstock sources. Given the global inter-connectedness in the supply and demand of fertilizers, fertilizer pricing has to be global. The price level for fertilizers must follow the same microeconomic principles that govern the pricing of any similar commodity. In particular, in the short term, the market price of a commodity is invariably set near a level which is just below the operating cash cost of the next producer that could most efficiently meet a demand that exceeds the capacity of existing (more efficient) suppliers. Two important aspects of this principle in practice are: •

In industry sectors which have spare capacity, producers themselves are motivated to keep prices as low as needed to discourage more inefficient unused capacity from entering the supply chain.

While still following fundamental micro-economic principles, price levels can be influenced by government actions. In essence, governments influence either the industry’s cost structure or the capacity available to serve a market demand by regulating the price and/or availability of key feedstocks or end products that are sourced from their jurisdictions.

In developing regions, food security is a primary priority for governments. The global characteristics of the fertilizer industry clearly influence the ongoing policy interventions that national leaders deploy to ensure a secure supply and/ or price stability of key nutrients for their food supply chain while balancing their nation’s other priorities and interests.

Fertilizer Consumption Of the 17 nutrients required by plants, nitrogen (N), phosphorus (P) and potassium (K) are the most critical and are needed in the largest quantities. Global annual consumption of fertilizers delivering these three major

Figure Figure 1010 Global Nutrient Consumption 2009

΄000 mt

FOB Value $B

% Global

Source: FAOSTAT

Nutrient

IFDC Est.* Developing Developed

Nitrogen (N total nutrients)

105,022

144,406

76,517

28,505

73%

27%

Phosphate (P2O5 total nutrients)

37,898

61,584

29,061

8,837

77%

23%

Potash (K2O total nutrients)

21,498

17,915

14,420

7,078

67%

33%

164,418

223,905

119,998

44,420

73%

27%

Total Nutrients

* at 2010 prices

8

΄000 mt

Developing Developed


nutrients approached 165 million metric tons (mmt) in 2009, with a free on board (FOB) value of about $225 billion (at 2010 prices) (Figure 10). Developing regions already account for nearly 75 percent of current global NPK consumption (albeit less than their near 80 percent share of global food consumption), with one-half of this consumption driven by China (31 percent of global consumption), India (13 percent) and Brazil (six percent). Of note, the population of Africa is similar to that of China and India (each at around one billion people); however, Africa consumes only around three percent of the world’s fertilizer due to its historical practice of extensive farming. As added perspective, the United States, as one of the top-three global consumers (after China and India), accounts for 11 percent of total NPK consumption.

Smallholder Farmers Commercial smallholder farmers in developing regions will remain major consumers of these fertilizers in order to play their role efficiently and fully in future food supply chains. Smallholder farmers have their own specific needs, which must be addressed to enable their successful contribution to these future food supply chains. Importantly, smallholder farmers require support in two ways: •

Reduced risk of crop failure – fertilizers that perform (with seeds) in the event of drought/heavy rains and/ or high humidity/temperature.

More assured yield in commonly encountered conditions – fertilizers that can handle varying soil conditions (e.g. high P-fixation, spatial and temporal variability), improve the yield of desired crops (adoption of high-yield varieties, reduced weed growth), facilitate the use of locally available reactive phosphate rock and improve yield in soils exposed to alternate wet-dry (AWD) cycles.

However, smallholder farmers are cautious about 'investing' in current fertilizer products, based on their life experiences, including concerns related to the possibility of crop failure due to climatic events, limited access to other improved inputs (seeds, crop protection products), varying levels of soil fertility and crop response, etc. These concerns are most often not addressed by sanctioned fertilizer recommendations that may have been developed 30-50 years ago. In addition to their aversion to risk, smallholder farmers are also hampered by a lack of information on best management practices such as timing of fertilizer application, efficient fertilizer formulations and fertilizer placement.

Specific Shortcomings of N and P Fertilizers N, P and K fertilizers are the most widely used fertilizers, primarily because virtually all crops require significant amounts of these nutrients for optimum growth. The only exceptions are legume crops that have symbiotic bacterial colonies associated with their roots, and therefore have the

ability to meet plant N needs through biological N fixation. However, legumes do require large amounts of P and K. Of the primary nutrients, N and P fertilizers are subjected to more chemically and energy-intensive production processes, are available in a number of formulations and forms (solid blends and liquids) and often 'carry' much smaller (often minute) amounts of secondary and micronutrients that are essential for maximum economic yields and improved nutritional value. These N and P fertilizers, however, are largely unchanged from the formulations and forms that were manufactured in the 1970s and 1980s and, as such, have characteristics that in the absence of best management practices result in significant loss of nutrients to the ecosystem. These losses produce negative economic and environmental impacts. Both N and P fertilizers also require complex production processes that lock in high economic cost and exaggerate the supply and pricing uncertainties of being a globally traded commodity. N and P in Use – Economically and Environmentally Unsustainable The availability of fertilizer N to plants is largely controlled by soil microbial processes. The N cycle in soils is complex, and under certain conditions large amounts of plantavailable N can be lost from the soil to the atmosphere or in drainage water. The N lost to the atmosphere is in various forms of nitrous oxide gases (collectively referred to as NOx gases), whereas the N entering water bodies via run-off or leaching is in the form of nitrates. The majority of nitrates found in sub-surface and surface waters results from crop production. The other primary nutrients (P and K) are not readily lost from soils, although runoffs containing P nutrients from crop production and animal waste can be significant pollutants in some bodies of water (Figure 11). Figure 11

Source of runoffs % * N

P

20

40

60

80

100

Crops Pasture, range Atmospheric deposits Urban areas Natural land

* Gulf of Mexico Sources: U.S. Dept. of Interior, U.S. Geological Survey

9


Figure 12

ANNUAL UREA CONSUMPTION = 125 mmt

Used by plant

60 mmt

40%

NOx emissions 360 mmt ˜ of CO2 equivalent GHG = $9 billion imputed tax 50% lost urea market value $40 billion ˜ $6 billion (including natural gas for NH3 synthesis)

Assume 50% lost

65 mmt

If remediation of 3% of runoffs, cost $6 billion

˜

10% IFDC est.

less mobile, easily recycled (K) or have residual nutrient benefits for subsequent crops. For P fertilizers, the NUE can reach 90 percent under best management practices in which applied P is made slowly available for a number of crops over a number of years. However, in most developing countries the NUE of P and K will be much lower, particularly if soil erosion is a problem or if sandy soils are being cropped. Using conservative assumptions for lost nutrients due to low NUE, IFDC estimates that the total economic cost of NPK nutrients lost/unused is as much as $91 billion per year. (Figure 13). There are also additional economic losses due to sub-optimal yields and topsoil erosion.

Importantly, the amount of applied nutrient that is taken up by plants (referred to as 'nutrient use efficiency' or NUE) is a function of how well a farmer is able to match the placement, timing and quantity of applied nutrients to the plant’s needs throughout its growing cycle. In well-managed intensive farming systems in developed countries, the NUE of N can be as high as 55-60 percent, whereas in the developing regions where the majority of fertilizer use occurs, farmers (especially smallholder farmers) struggle to achieve an N NUE of 25-30 percent. The economic impact of low NUE is significant. For example, assuming an annual urea consumption of 125 mmt and an N NUE of 50 percent, up to $40 billion of the total price paid by farmers is lost annually. In addition, consideration of imputed environmental costs associated with the losses could be as high as $15 billion per year if GHG taxes and water remediation costs were assessed (Figure 12).

Any recovery of these losses would significantly benefit farmers in the developing regions where the majority of the increase in food demand is expected to occur. For example, a 50 percent improvement in the average NUE (25-30 percent) of N fertilizers in developing regions would capture some $10 billion per year of the current loss and improve yield as well.

The other major fertilizers (P and K) typically have higher NUE efficiencies, because they are considerably

Figure 13 Figure 14

Lost purchase price/year

Fert mmt

Nitrogen (N total nutrients)

262,555

550

Phosphate (P2O5 total nutrients)

94,745

Potash (K2O total nutrients)

35,830

FOB $/mmt* Mkt Value $B

Est Loss %

Loss $B

144,406

50%

72,203

650

61,584

25%

15,396

500

17,915

20%

3,583

223,905

41%

91,182

Total nutrients * at 2010 prices

10


Figure 14

4 barrels energy

1-ton urea

25 MM BTU if

˜natural gas = energy in 4 barrels of oil

N Fertilizer Production: An Increasingly Problematic HaberBosch Dependency The contribution of the Haber-Bosch process to the survival of the human population is undeniable – an estimated 35-40 percent of the world’s population would not have any food without the Haber-Bosch process of ammonia synthesis that 'fixes' nitrogen from the air to make it usable as a nutrient for crops. Unfortunately, the process has two attributes that are increasingly problematic in light of the marked shift in future food demand towards developing regions and the continuing concerns about energy sufficiency and environmental sustainability: •

The process uses a fossil fuel-based source of hydrogen as feedstock (Figure 14). Ironically, the essential nutrient that is the focus of the 'fixation' process – nitrogen – is free and widely available. However, the process to

"fix" the nitrogen uses hydrogen which is currently most economically sourced from natural gas. Thus N fertilizer production is dependent on a feedstock that is location-centric (natural gas sources) and subject to global pricing and supply-driven by its alternative use (as an energy source). •

The process is operationally complex and requires robust production facilities that can withstand high process temperatures and pressures. As a result, individual production sites are capital-intensive, which also makes them location-centric and requires largescale markets to justify their cost.

Scientific and technical developments have been underway for some time to find alternatives to the current commercial process across several dimensions – alternative hydrogen sources, lower operating parameters and even

Burrup Fertilisers ammonia plant in Australia.

11


Figure 15

Figure 16 UNRECOVERED P2O5 P2O5 MMT

Conceptual world environmental footprint from phosphoric acid-based fertilizers - 2009

Mined

13 mmt P2O5 other sources 25 mmt P2O5

Sulfuric acid 560 mmt ore

76 mmt P2O5 ore

53 mmt P2O5

37 mmt P2O5

Mining

Beneficiation

Concentrate

Phos Acid

Ore content 30% P2O5 ~ 15% P O not recovered 2 5 ~ 8% mmt P O 2 5 loss (in mining) ~ 23 P2O5 loss Move ~ 5601,700 mmt overburden

Other uses 10 mmt

Fertilizer

10-15% P2O5 Other uses not recovered 12 mmt

185 mmt gypsum ~ 4-9 mmt P O loss 2 5 ~

Fine waste Waste piles

To Beneficiation

Use 38 mmt

Unlike N, P fertilizers are produced from a finite resource – phosphate rock. Of note, P is a vital ingredient for the survival of all plants and animals. While the known sources (P 'resources') are vast, the economically accessible supply (P 'reserves') accounts for approximately 25 percent of the resources. The higher-grade, lower-cost reserves are the primary targets of mining operations. As demand for P fertilizers grows and mining and processing become more costly, the cost of phosphate rock and P fertilizers will increase. Converting high-grade mined phosphate rock ore to phosphoric acid is the prevalent method for the

Figure 17

46.0

38.0

84

4.4

3.6

8

41.7

34.3

76

12.6

10.4

23

Concentrate

29.1

23.9

53

Other use Conc for Conversion

Soil erosion, runoffs

10.0

10

29.1

13.9

43

4.1

1.9

6

25.0

12.0

37

Unrecovered Phosphoric acid Other use

12.0

Fertilizer use

25.0

Non phos acid source

12.9

Tot P2O5 fertilizer

37.9

Unrecovered

P Fertilizer Production: A Wasteful Nutrient Capture Process

Total

Unrecovered

IFDC est.

new methods to synthesize NH3 (electro-chemical). If successful, these could result in future manufacturing facilities that would be 'lighter' and more easily distributed throughout the developing regions (closer to future markets), thereby reducing capital and logistics costs and decoupling the feedstock sourcing from the global markets.

Other

Unrecovered

Stacks Ocean disposal

Surrounding production facilities

Fertilizer

Value

Locked up

MMT

$/MMT

$ Billion

21.0

1,100

manufacture of P fertilizer (around 72 percent of total P nutrient) and requires a two-step process, starting with beneficiation to remove unwanted materials followed by chemical conversion using primarily sulfuric acid. The process, however, creates large amounts of waste, which includes substantial amounts of unrecovered P2O5 and sulfur in the form of phosphogypsum. IFDC estimates that between 30 and 50 percent of the P2O5 equivalents in the mined ore is unrecovered and is contained in waste ponds and piles (Figure 15). At current P consumption levels and prices, the P2O5 equivalents unrecovered globally could supply nearly $25 billion of P fertilizer each year (Figure 16). In addition, these waste ponds, piles and stacks require large areas of land and resultant run-off poses an environmental risk.

Missing Micronutrients Long-term studies in India have shown that, while crop yields have increased with increased fertilizer usage (specifically N but also P and K), efficiency per unit of fertilizer applied has fallen (Figures 17 and 18). In other soil studies in India, there is evidence of the gradual reduction

90

1,600

800

80

Total Fertilizer Use 400

40

0

0

1966/67

1971/72

1976/77

1981/82

1986/87

1991/92

1996/97

2001/02

2006/07

N Fertilizer Use in Cereals (Million tons per year)

1,200

Cereal Production

80 8

N Use

70

6

60 50

4

N Efficiency

2

40 30

0 1970

1975

1980

1985

1990

1995

2000

2005

20 2010

Partial Fertilizer Productivity (kg grain per kg N applied)

120

Cereal Production (million mt)

Fertilizer Use (million mt N+P2O5+K2O)

10

12

23

Figure 18

160

1961/62

12 25


Figure 19 Figure 19

Elements deficient

Foodgrain production (mt)

400 350

N 1950

Fe N 1960

K P Zn Fe N 1970

Mn S K P Zn Fe N 1980

B Mn S K P Zn Fe N 1990

B Mn S K P Zn Fe N 2000

Mb B Mn S K P Zn Fe N

Mb B Mn S K P Zn Fe N 2010

2025

300 250 200 150 100 50 0

Emerging deficiencies of plant nutrients in relation to increased foodgrain production

of essential secondary and micronutrients required by plants (Figure 19), suggesting that these essential elements may now be limiting yields and reducing the efficiency of generally applied primary fertilizers. An additional concern is that the lack of sufficient secondary and micronutrients results in crops with reduced nutritional value which contributes to poorer diets and health in plants and humans. In IFDC’s view, these unintended nutrient deficiencies are a result of imbalanced fertilization programs, often caused by a misapplication of well-intended policies. An

example is India’s past policy of heavily subsidizing urea compared with other fertilizers. This policy, combined with farmers’ financial constraints, led to a gradual reduction in the use of P, K and other nutrients and an overuse of the cheaper urea. A companion program supporting the use of compound fertilizers with at least minimum levels of other nutrients failed to fill the gap due to higher prices and generally poor availability of these products. India has recently moved to a nutrient-based subsidy program to rectify this situation.

Workers inspecting a large-scale fertilizer drum granulator before beginning operation.

13


Figure Figure 2020 NUTRIENTS: Technology Focus Over Time Nutrient Delivery

In-Use Optimization

Problem Mitigation

R&D <0.1% of sales

SEEDS: Technology Focus Over Time Yield Enhancement

Environmental Resistance

Genetic Optimization

Industry Response

product (e.g. diammonium phosphate [DAP]) or physical addition and/or mixing (micronutrients sprayed on major nutrient granules, blended fertilizers with multiple nutrients of equal-sized granules bagged together). Most of this evolution occurred by the 1980s. As a result, current research and development spending by the fertilizer industry is negligible (less than 0.1 percent of sales).

The fertilizer industry has addressed these concerns with both educational support and improvements in production processes and application methods (seeking essentially to improve sub-optimal yield from, and mitigate problems associated with, current fertilizers). Factors shaping the industry response include: •

Significant economic and environmental issues attributed to current fertilizer use became much more pressing beginning in the 1990s when several factors took on greater prominence concurrently. These included: global environmental and land and water scarcity concerns; persistent and large cost increases of commodities; and the economic development surge in major developing countries (such as China, India and Brazil).

With large up-front capital costs for mining and production and the need to meet sharply rising fertilizer demand in the developing regions, the industry’s response has been understandable – manage for tonnage throughput to meet demand, and subsequently follow up with in-plant and in-field yield optimization and problem mitigation.

In IFDC’s view, the magnitude of the demand for fertilizers in the future now requires a more fundamental response – technology needs to be applied again to the industry to develop a new generation of intelligent fertilizers that minimize the economic and environmental drawbacks of current fertilizers and ensure maximum crop production to meet future food demand.

A comparison to the fertilizer industry’s 'companion' industry (seeds) shows an informative difference in the development paths followed by the two industries (Figure 20): •

14

R&D 9% of sales

Technically, today’s fertilizers are essentially unchanged from those introduced at the advent of the Green Revolution in the 1960s and 1970s. The evolution from those fertilizers focused on the development of compound fertilizers that simultaneously deliver several nutrients in one

In contrast, the seed industry – with fundamentally different economics and environmental considerations – has followed a path of technical innovation: continued development of higher-yielding varieties; the addition of new features such as resistance to pests and adverse climatic conditions; and most recently the use of genetic optimization to further yield and 'hardiness.' Companies in the seed industry spend about nine percent of sales on research and development.

Fertilizers – A Global Industry A key feature of the fertilizer industry is the global supplydemand balancing that occurs – over 40 percent of global fertilizer tonnage is traded (imported/exported) (Figure 21). The traded proportion and supply points differ markedly by nutrient, most notably for K (traded in the form of potash). While about one-third of N and P tonnage is traded, virtually all potash is traded; and the proportion


Figure 21 Figure 21

N

P

K

NPK

16%

100%

95%

42%

37%

100%

88%

65%

% OF GLOBAL NPK CONSUMPTION (100%=170 mmt in 2010 by Nutrient) 61%

23%

% OF GLOBAL NPK CONSUMPTION IMPORTED/EXPORTED 30% 35% % of Global NPK imported/exported 44% 19% TOP 5 EXPORTING COUNTRIES - % OF GLOBAL EXPORTS 43%

72% Largest reserves, lowest cost natural gas (or coal gas) 20

Russia China Ukraine Saudi Arabia US

Largest deposits, most efficient mines

40

20

15 12

US

7

Russia Morocco Tunisia

40

20

22 19

China

5 5

17

Belarus

8 6

Germany Israel

15 10 7

Accordingly, decisions for new plant investment ($1$1.5 billion, two to three years of construction) and location usually involve a combination of feedstock and logistics costs to meet market demand most economically. However, once plants are in operation, producers with the lowest feedstock and energy costs (gas-rich countries) can become competitive in off-shore markets when their gas cost advantage overcomes market-delivery costs (causing home market producers to mothball their operations). •

Nitrogen is most widely produced by the HaberBosch process using natural gas as both feedstock and energy needed for the process (although China also uses coal gas because of abundant coal reserves).

N

35 20

Russia

This global trading is inherent given the sourcing method necessary for each of these primary nutrients under current technology; while specifics differ, each nutrient requires capital-intensive production facilities located close to advantageous feedstock sources (Figure 22).

Figure 22

40

Canada

of exported tonnage handled by the top five exporting countries increases from 40 to 45 percent for N to nearly 75 percent for P and 90 percent for K. Notably, while only 30 percent of urea – the most widely used N fertilizer in most developing regions – is traded, that trade represents nearly 45 percent of total traded nutrient tonnage and value.

Largest deposits, most efficient mines

Phosphate rock for P is more widely distributed than K and is mostly found/mined in shallow marine fossil beds. Mines and production facilities are expensive (also $1-$1.5 billion, three to four years commissioning time). Phosphate rock characteristics vary widely and can result in significant yield losses during mining and

P

K

INVESTMENT 2500 TPD plant: US $1-1.5 billion Time: 3 years

New mine: US $1-1.5 billion Time: 3-4 years

New mine: US $6-10 billion Time: 5-7 years

Mine/ore characteristics Energy, water, labor costs Sulfur cost, NH3 cost (DAP) Environmental costs

Mine/ore characteristics Energy, water, labor costs Environmental costs

PRODUCTION COST DRIVERS Natural gas cost : 85-90% of operating cash cost of NH3

PRICE DRIVERS Base price set by production costs + post-plant FOB costs + transportation and tariffs/fees + profit margin ' Spot' price floor set by operating cash cost of next most efficient supply source, plus: Change in natural gas price

Change in NH3 , sulfur prices

(Plants often mothballed if lower gas cost producers enter)

View of future supply-demand balance

View of future supply-demand balance

15


entering the supply chain. Conversely, in industry sectors where capacity is tight, customers are motivated to go at least to, and often above, this next most-efficient producer’s cash cost in order to encourage more suppliers into the supply chain or to get more favorable supply arrangements from existing suppliers.

beneficiation. The economics of mining and postmining logistics costs determine the viability of supply sources, both for long-term investment decisions and for determining which operating mines will enter or leave the supply chain as demand fluctuates. •

Potassium ore for potash is located in deep ancient sea beds in a few countries and mines are extremely expensive ($6-$10 billion, five to seven years commissioning time). Five countries account for nearly 90 percent of the world’s potassium supply, with Canada accounting for 35 percent of the total. Economic decisions are similar to those of P, although because of the highly concentrated nature of the K resource base, these decisions are often elevated to national policy levels.

Given the global inter-connectedness in the supply and demand of fertilizers, fertilizer pricing has to be global. The price level for fertilizers must follow the same microeconomic principles that govern the pricing of any similar commodity (longer-term price levels reflect basic cost structure, the industry’s competitive and capacity situation and the demand profile of the industry’s customers [the value various customers/customer segments put on the commodity]). In the short term, a commodity's market price is set at a level which is just below the operating cash cost of the next producer who could most efficiently meet a demand that exceeds the capacity of existing (more efficient) suppliers. Two important aspects of this principle in practice are: •

In industry sectors which have spare capacity, producers are motivated to keep prices as low as needed to discourage more inefficient unused capacity from

N, P and K fertilizer products.

16

While still following fundamental micro-economic principles, price levels can be influenced by governments. Governments influence either the industry’s cost structure or the capacity available to serve a market demand by regulating the price and/or availability of key feedstocks or end products that are sourced from their jurisdictions. This influence can be applied to both global and local markets, and is usually reflected in policies that involve export/import tariffs, royalty fees, subsidies, quotas, etc. This influence, when exercised, must be in concert with the multiplicity of trade agreements that govern today’s world economy.

In developing regions, food security is a priority for governments. The global characteristics of the fertilizer industry influence the ongoing policy interventions deployed to ensure secure supply and/or price stability of key nutrients for their food supply chain, while balancing their other national priorities and interests. For example: •

India, which has a supply-home demand deficit in N (and other nutrients), regulates domestic urea prices depending on whether it can afford to allow the use of scarce imported natural gas for the domestic production of ammonia for urea versus its value as an energy source for other development. If not, India will import urea at lower-than-regulated domestic price.


Figure 23 12

$/MMBtu

Global climate upheavals Recession uncertainties Speculation?

$700

Nymex

10

$600

8

$500

6

$400

4

$300

TTF

2005

2006

2007

2008

Concerns about cost implications for future capacity additions

Sulfur formed fob Iran

$200 $100

Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct

2 0

Concerns about inflationary pressures on operating costs

Sulfur (formed) $/mt spot fob Iran

15

2009

$0

2010 Source: ICIS Heren

2000 2001 2002

2003 2004 2005 2006 2007 2008

2009 2010 2011

1400

China shuts down its export tonnage

1200

Sulfur price rises DAP, U.S. Gulf

US $/mt

1000

MOP, Vancouver 2

Major pressure on government fertilizer price supports

800

Demand restarts

1

Russia starts price cuts as demand drops

New concern about staple food price inflation and public reaction

600 400 200

Urea, Arab Gulf, prilled 2 0 Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

China negotiates longterm K supply contract at favorable price

World fertilizer prices doubled in 2007 and reached all-time highs in April 2008. But prices began dropping dramatically in October and November, 2008. FOB = free on board (average price, with buyer paying freight and insurance, to destination). DAP = diammonium phosphate. MOP = muriate of potash. Graph by IFDC

Source: 1. Derived from Green Markets. 2. Derived from FMB Weekly.

In contrast, China has deliberately built supply surfeit to export N using its coal reserves, yet China opportunistically imports N for some of its southeastern coastal regions if delivered costs from off-shore supply sources have lower delivered costs compared with domestic supply points.

During and following the fertilizer price hikes in 2008, several actions were observed, precipitated initially by the sharp rise in natural gas and sulfur prices that followed a series of climatic disasters as the worldwide economic situation was worsening; these actions reflected the inherent global dynamics of the industry (Figure 23). For example: •

In late 2007, natural gas and other energy prices (especially oil) rose in the wake of speculation about supply shortages following climatic disasters and uncertainties about the growing global economic slowdown.

In 2008, producers raised urea prices in direct correlation to natural gas price increases; muriate of potash (MOP) and DAP prices rose as suppliers and consumers entertained concerns about potential implications for future capacity addition costs. Notably, the price for DAP rose more than MOP because DAP had to absorb the additional impact of the natural gas price increase on ammonia production and an excessive price increase in sulfur.

The price spikes in fertilizers added to an already occurring price inflation of basic foods (which sparked widespread public protest) and increased pressure on developing countries’ budgets in those situations in which a fertilizer price-support subsidy program

was in place. That is why the Bangladesh government embraces IFDC’s urea deep placement (UDP) initiative as an effective method to decrease fertilizer imports. •

As economic concerns abated in early 2009, prices for energy and fertilizers returned to pre-spike levels, with potash lagging behind urea and DAP until Russian producers forced a global price reduction in response to falling demand.

In early 2010, natural gas prices rose again (driven by oil price increases) and re-introduced a 'milder' version of the 2008 speculative concerns about fertilizer supply; notably, DAP prices rose more than urea and MOP prices, but this time because China (an important supplier) stopped its exports, sulfur prices increased, and demand recovered (particularly in North and South America) from the demand destruction caused by the high prices in 2007/2008.

Concurrently, China attempted to negotiate long-term supply contracts for MOP (which it 'has' to import for its growing food demand).

In 2011, China publicly expressed concerns about the concentration of potash suppliers (and therefore control of prices), especially in Canada; concurrently, a major Australian mining company launched an acquisition bid for the world’s largest potash company but was rejected by the Canadian government on the grounds of "no net benefit to Canada."

In 2011, China also extended periods of DAP and urea export tariffs, reducing the global supply of both products in the international market.

17


VFRC Blueprint Chapter 2