The fertilizer industry is poised to benefit from increased consumption in coming years, with the global population being forecast to reach 9.7-billion in 2064, according to the London-based advisory firm Fox-Davies Capital. The firm’s market analysis expects potash and phosphate markets remain under-priced on a long-term basis and warrant investor attention. It suggests that both potash and phosphates are approaching production constraints, followed what had been a decade of overcapacity and poor utilisation in the fertilizer industry. Fox-Davies says decreasing arable land implies increasingly higher fertilizer consumption, while a global transition away from wheat and rice and towards more fruit and vegetables bodes well for fertilizer demand. Unlike other commodities, Fox-Davies says the demand drivers for phosphate and potash are related to long-run improvements in human habitation and, as economies develop, hard commodity requirements lessen while consumption of proteins, fruit and vegetables increase. The firm believes fertilizers are an opportunity to invest in global growth and development without the risk of strong price fluctuations as seen in other commodities, which are more leveraged to the ongoing business cycle.
POTASH — Potash demand has been growing globally at an average compound annual growth rate (CAGR) of 3.1% for the last six years. Seaborne consumption of potash globally has been growing at a CAGR of about 2.4% over the last 26 years, implying the demand doubles roughly every 30 years. The key consideration is that, although global potash resources are significant, their distribution is inequitable and, importantly, not yet developed in many countries where large national population and economic requirements underlie increasing demand. The largest markets for potash currently are China, comprising 20% of the market, Brazil at 16%, the US at 15% and India at 14%. Fox-Davies says the potash market is best described as being relatively oligopolistic or collusive, with suppliers curtailing production when perceived demand has diminished. The largest marketing collectives that supply potash are based in Canada and Russia. Fox-Davies explains that the top ten potash producers globally control 85% of global capacity.
Fox-Davies finds in its analysis of the fertilizer industry that the global potash market is relatively small at about 61-million tonnes of muriate of potash, with about 95% of supply being used in agriculture. The remaining 5% is consumed in industrial applications. Only 12 countries produce potash, but it is consumed by more than 180 countries. Although there are more than three-dozen proposed potash mines or capacity expansions that have been announced publicly, Fox-Davies notes that, for a variety of reasons, including a lack of finance or technical issues, these will not be developed in the near future. To highlight how capital intensive a potash project typically is, the firm refers to BHP’s Jansen Stage 1 project, which had an expected capex cost of $5.7-billion to bring eight-million tonnes a year of production online. Moreover, Fox-Davies’ analysis predicts that global consumption of potash doubles about every 23 years and growth in demand, at the moment, is being driven by Africa, as well as South and West Asia. BHP has indicated its conviction that the potash market could double to about a $50-billion by the 2040s.
PHOSPHATES — Looking at phosphate, more than three-quarters of known global reserves are located in North Africa. Fox-Davies estimates that about 200-million tonnes of phosphate rock is extracted every year, with only 30-million tonnes being traded every year. Europe, for one, is almost entirely dependent on imports of phosphate rock, with France, Germany, Italy, Spain and the UK accounting for more than three-quarters of phosphoric imports in the continent. Historically, supplies have been through Tunisia, Jordan and Syria; however, with political instability rising in those areas, long-term supplies are no longer guaranteed. Fox-Davies says phosphate, unlike potash, has a plethora of smaller producers, with the bulk of production being strongly influenced by localized consumption and supply factors. In recent years, prices were adversely affected by increased productive investment out of China, which moved from being a net importer to a net exporter, as well as Morocco, Saudi Arabia and Russia. These countries collectively account for 75% of global diammonium phosphate and monoammonium phosphate exports. By contrast, Brazil, India and the US are the three largest net consuming markets, accounting for over 40% of phosphate demand. At present, both Brazil and India are the two key markets for phosphate imports, setting prevailing prices, with contracts typically traded on a spot pricing basis, with phosphate rock and phosphoric acid sold on a longer-term contractual basis.
