INSIGHT: Demand growth attracts overcapacity in urea

01 August 2013 15:54  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Megatrends can make certain companies, sectors, or entire industries look attractive. Food, for instance, is one business – from the basic agricultural inputs to fancy plastics food packaging – that is attracting a great deal of interest from chemical companies.

Earlier this year, consultants Accenture said that chemicals and plastics used in the food industry in its broadest sense are worth anything between $250bn/year and $350bn/year. Chemicals use in the sector, taking the US as an example, has been growing at between 1.4 and 1.7 times the growth of food production.

But the food industry is changing, from the types of crops grown, and in which part of the world, to the types of food that are actually consumed. The eating habits of large parts of the global population are changing as consumers become more affluent and their aspirations change.

Starting with basic chemical inputs for agriculture, one might expect that demand patterns, based on changing farming practices and on the agricultural cycle, might be fairly easy to predict. The seasons see to that, of course. But there are also other forces at work that mean that demand growth for basic chemical fertilizers and other inputs might not necessarily follow an easily-predictable path.

While demand might be growing, the market's attractiveness means that production capacity could overshoot, driving prices, and profitability, down.

Take nitrogen, the most basic of chemical inputs, as an example.

Norway’s Yara, the world’s largest nitrogen producer, said on 19 July that its second quarter 2013 earnings before interest, taxes, depreciation and amortisation (EBITDA) before exceptional charges and gains were 22% lower year on year. The company reported a 33% fall in net profit for the quarter year on year.

Yara produced more fertilizer in the reporting period, and sold a great deal more than the year before, but nitrogen fertilizer prices were down sharply. The average prilled urea price in the quarter, FOB (free on board) the Black Sea was down 27% from the year, it said. The average urea price in the first half was down 14%.

The company said it made record fertilizer deliveries with urea sales up 42% and increased in the major markets.

Solid farm economics are supporting fertilizer demand, it added. Better weather in North America and eastern Europe is expected to help lift global grain production in 2013/14 by 8% year and year, according to the US Department of Agriculture, it noted. The UN Food and Agriculture Organization (FAO) food price index was 8% higher in the second quarter than the five year average.

But strong demand has prompted large increases in fertilizer output, notably from Chinese producers.

“Global urea demand was strong during the second quarter, although many markets were well ahead on supply compared with second quarter last year, due to the large increase in imports from China earlier in the season,” Yara said.

“For July through May, China has this season exported 7.9m tons, up from 3.0m tons in the same period last season," it added.

China's export prices were considerably lower than the year before because of increased urea capacity, lower coal prices and the ready availability of coal and natural gas, as well as lower export taxes.

Some analysts see China exporters wrecking urea prices, possibly for an extended period, and driving the nitrogen business into a downturn.

Yara is a strong company and has the resources to ride the downcycle but it might not be a particularly pleasant experience.

The International fertilizer Association (IFA), earlier this year forecast that global urea supply could grow at 4% a year between 2012 and 2017 with demand growing at 3.8% a year. The annual urea surplus would be likely to remain at around 6% of global supply, or 10m tonnes/year plus, it suggested.

But it warned of the uncertainty of the potential for China’s supply of exportable urea, which it said would range between 2m and 5m tonnes/year, “on the basis of its structural overcapacity and sustained capacity growth.

IFA forecasts significant increases in urea demand in East Asia, South Asia, North America and Latin America which together would account for 90% of the world’s urea demand growth over the forecast period. “Massive exportable supply is seen as emerging in Africa, West Asia and EECA (eastern Europe, central Asia)," it said.

Read Paul Hodges’ Chemicals and the Economy blog

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By: Nigel Davis
+44 20 8652 3214

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