Agri Fertilizer Industry Handbook

Transcription

Agri
Fertilizer Industry
Handbook
Agri Capital Markets Day
December 3-5, 2003
1
List of contents
ò Introduction to Agri
ò Fertilizer industry overview
ò Industry value drivers
and trends
46477 11 2003 Hydro Media
The Agri Fertilizer Industry Handbook
To position Agri for further value creation, Norsk Hydro decided June 19, 2003 to
establish Agri as a separate listed company. As the world leading supplier of plant
nutrients, Agri will become an exciting investment opportunity. The purpose of this
document is to give financial analysts, investors and other stakeholders a better
insight into the fertilizer industry and in Agri’s view the most important value drivers.
The goal is to provide a better platform to assess the attractiveness of the fertilizer
industry and Agri. Agri’s intention is to update and publish this document annually.
This handbook is divided into three main sections. The first section gives a
snapshot of Agri. The second section gives a short introduction to what fertilizer is
and what the global industry structure looks like. The third part describes the most
import drivers of demand and supply of fertilizer products.
Industrial products are not dealt with in this fact pack.
2
Agri at a glance (1)
ò Global
ò Balanced
ò Added value
The global leader in plant nutrition
With sales in more than 120 countries Agri is the most global player in the fertilizer
industry. The core business of Agri is production and marketing of nitrogen fertilizer
such as urea and nitrates. Agri also produces and sells ammonia, the key raw
material for all nitrogen fertilizers.
To complement its nitrogen-based product offerings, Agri also markets third-party
sourced phosphate and potash fertilizers containing the other two primary plant
nutrients, phosphorus (P) and potassium (K). This enables Agri, through its global
downstream network, to offer customers a balanced nutrient portfolio.
In addition, Agri markets value-added specialty fertilizers, as well as certain
industrial gases, nitrogen chemicals and technical nitrates that, in general, are coproducts of its fertilizer operations.
3
Agri at a glance (2)
ò Low-cost
ò Profitable
ò Growth
Upper quartile profitability with a strong platform for growth
In response to the stiff competition within the fertilizer industry and other market
forces, Agri has steadily strengthened its results by cutting costs and improving
productivity, principally through completion of a three-year turnaround program from
1999-2001. The turnaround program enabled Agri to position itself as the lowestcost fertilizer producer in Europe. Since 2001, Agri has been within the top 25
percent of industry peers in terms of gross return on assets (defined as EBITDA,
excluding non-recurring items, divided by total assets).
Since 1999 Agri has also grown organically and through well-timed acquisitions in
key growth markets. The combination of a strong financial position and a global
network is expected to give Agri the opportunity to take an active part in the further
development of the fertilizer industry.
4
Agri key facts
Carve-out figures 2002
ò Operating revenues
NOK 33 477 million
ò EBITDA
NOK 3 878 million
ò Operating income
NOK 2 143 million
ò Net income
NOK 1 715 million
ò Employees
7 606
ò Sales volume
22.5 million tonnes
Solid performance in 2002
With good results and new market positions, Agri gained strength in 2002. The
marketing network, with approximately 50 sales offices worldwide, sold more than
20 million tonnes of fertilizer in more than 120 countries. For the first time, Agri sold
more plant nutrients overseas than in Europe.
Our measure for return on capital, CROGI (Cash Return On Gross Investment),
defined as EBITDA – tax divided by Gross Investment ended at a solid 8.6%
despite historically high energy prices.
5
Agri’s history and growth
1905:
1973:
1996:
World's first
production of
fertilizer at
Notodden, Norway
Joint venture in Qatar –
QAFCO
Acquisition of
Nutrite in Canada
and Italian fertilizer
operations
19791979-86:
Porsgrunn Plant,
Norway
Acquisitions in Netherlands,
Sweden, Denmark, U.K.,
Germany and France.
Terminal in China
1946:
1991:
Market operations in
North America
Acquisition of ammonia
plants in Trinidad, and nitrate
plant in Rostock, Germany
1928:
1972:
19991999-2001
Agri Turnaround
2003
Decision to list Agri
as separate
company
Market operations in
Thailand
An exciting history creating a platform for further value creation
In 1905, Norsk Hydro was established to utilize Norway’s large hydroelectric energy
resources for the industrial production of mineral fertilizer. Through organic growth
and acquisitions Agri has become the largest and most global fertilizer company.
To position Agri for further value creation, Norsk Hydro announced June 19, 2003
the decision to establish Agri as a separate, listed company. The successful
turnaround in 1999-2001 has put Agri in a favorable position for further profitable
growth. Increasing Agri’s financial flexibility through direct access to the capital
markets provides attractive opportunities.
6
Agri’s global network
Major plant
Office
“On the ground” in ~50 countries,
sales to more than 120 countries
A global network
Agri is well-positioned in key growth markets with a presence in nearly 30 countries
outside Europe. The distribution network consists of sales offices, chartered dry
bulk ships, bulk blending plants, terminals and bagging operations. Through
acquisitions and joint ventures Agri has access to cheap energy, like in Trinidad
and Qatar.
The global presence reduces the exposure to any particular region that may be
characterized by adverse market conditions from time to time. It also mitigates the
seasonality inherent in the fertilizer business and enables Agri to take advantage of
arbitrage opportunities by shifting volumes from one region to another.
7
Agri’s European network
Major plant
Office
A leading European low-cost producer
Agri is the leading fertilizer company in Europe in terms of profitability, sales
volumes and cost position. After the listing, Agri will also be the only European
listed company with nitrogen fertilizer as its core business.
8
Agri production capacity
Annual production capacity*
Million tonnes
NPK complex fertilizer
Nitrates (CAN, AN)
Urea
Calcium Nitrate solids (CN)
Total
Ammonia
European production
Trinidad production
Tringen (JV, 49%)
Qafco, (JV, 25%)
Total ammonia capacity
4.0
4.6
2.2
0.9
11.7
4.0
0.3
0.5
0.4
5.2
* Excluding UAN, CN liquids and bulk blends.
Including Agri’s ownership of Joint Venture Companies
Production capacity to serve customer needs
The total production capacity for fertilizers is approximately 12 million tonnes, with
NPK and nitrates as main products. NPK is a combination of the most important
nutrients; nitrogen (N), phosphorus (P) and potassium (K). Nitrate is the most
important type of fertilizer in Europe as it typically gives better yields in a European
climate. Urea is the most important nitrogen fertilizer globally with its high nitrogen
content and good properties in warm climates. Calcium nitrate is a specialty
fertilizer improving the quality of both grain and cash crops.
The bulk of Agri’s ammonia production is in Europe, but there is also significant
capacity in Trinidad and Qatar.
9
Agri production and sales 2002
Operating revenues
NOK 33.5 billion
Production source for sold products
16.7 million tonnes*
JV
Norway
Other
Europe
North
America
Other
Africa
South
America
UK
Latin
America
Netherlands
Sweden
Italy
Asia*
Germany
Italy
France
Germany
France
Africa
* Including bulk blends. Including total
volumes bought from JV companies
Leading European producer with global presence
Most of the production is located in Europe and most of our own produced products
are sold in the European market. However, the largest plants export a significant
share to overseas markets. Agri also has production capacity in emerging markets
and in areas with access to cheap energy. Where Agri does not have production
assets, products are sourced through third parties. Agri today sells more than half
of its fertilizer outside Europe.
10
Three business segments
2002 carve-out financials
Agri
Upstream
Sales: NOK 11.1 bn
EBITDA: NOK 1.3 bn
ò Global ammonia
production, trade
& shipping
ò Urea production
ò Nitrate and NPK
production with
global reach
Downstream
Industrial
Sales: NOK 26.7 bn
EBITDA: NOK 2.0 bn
Sales: NOK 4.4 bn
EBITDA: NOK 0.8 bn
ò Sales and
marketing units
ò Nitrate and NPK
production for local
markets
ò Specialty fertilizers
ò Production and
marketing of
industrial gases
and CO2
ò Nitrogen chemicals
for industrial
applications
Customer-focused organization
The new organization of Agri reflects the way Agri operates its business, with major
ammonia-integrated production facilities and the ammonia trade and shipping in
Upstream, all fertilizer sales and marketing and local plants in Downstream and all
industrial sales and marketing and dedicated industrial plants in Industrial.
While the Upstream segment is comparable to a typical nitrogen fertilizer company
exposed to cyclical swings, the Downstream and Industrial segments are
essentially margin businesses with relatively stable cashflows across the cycle.
11
Agri Value Chain
2002 volumes in million tonnes
Production
source*
Agri Production
Europe
Agri Production
Outside Europe
Global
optimization
Marketing and sales
12.3
2.3
●
●
Purchased from
JV companies
2.1
Purchased from
Third Parties
5.8
●
Sourcing
Allocation
Logistics
22.5
Business
Units
&
Front Offices
Key
Accounts
Smaller
customers
* Including bulk blends
Asset light production structure to meet global demand
Including bulk blends Agri had production of 14.6 million tonnes at 100% owned
facilities in 2002. The rest of the total 22.5 million tonnes of sales originated from
part-owned joint venture companies and other producers in order to optimize capital
tied up in production facilities.
All volumes are allocated to the market organizations through a global optimization
performed by the Downstream segment. Sales and marketing is done through
business units and front offices working with a mix of large key account customers
providing a stable product off-take and smaller customers providing flexibility and
arbitrage opportunities.
12
List of contents
¢
What is fertilizer?
¢
The global industry
¢
The European industry
ò Industry value drivers and trends
What is fertilizer?
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.
13
Healthy food for plants…
... yields healthy
food for people
The value of fertilizers in modern food production is clear
The quality of the food we eat is a natural concern for consumers. Mineral
fertilizers are based on natural nutrients that plants need to realize their growth
potential. Balanced nutrition, supplying the right nutrients in the right amounts, is
essential for plants. 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 world population and the corresponding rise in
consumption have rendered fertilizers an integral part of the food chain.
14
Plants need three main nutrients:
Nitrogen, Phosphorus and Potassium
N
P
K
YIELD AND
QUALITY
Nitrogen the main driver of yield
Three main nutrients: Nitrogen, Phosphorus and Potassium
Nitrogen (N), the main constituent of protein is essential for growth and
development in plants. As nitrogen is one of the single most common nutrients that
limits agricultural productivity, its value in modern food production is
unquestionable. Supply of nitrogen determines a plant’s growth, vigour, colour and
yield.
Phosphorus (P) is vital for adequate root development and helps the plant resist
drought. Phosphorus is also important 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.
15
Plants need nutrients to grow
Boron
Oxygen
m
Sodiu
Soil conditions
and other
growth factors
Calcium
Potassium
Phosphorus
Warmth
Light
Water
Nitrogen
YIELD
The law of minimum
The ‘law of minimum’ is often illustrated with a water barrel, with staves of different
lengths. 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.
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.
16
Nitrates vs. urea
ò Nitrogen in ammonium and
nitrates forms is readily
available to plants, while urea
needs to be transformed
Urea
Ammonium
Hydrolysis
Plant
uptake
Nitrate
Nitrification
Nitrate is the most important fertilizer in Europe
Nitrate is a fertilizer particularly suited for European climate
Ammonia is the basis for all nitrogen fertilizer. Ammonia can be applied directly to
the soil, but for several reasons, including environmental, it’s more common to
further process ammonia into, e.g., urea or nitrates.
While ammonium and nitrate are readily available to plants, urea first needs to be
transformed to ammonium (not the same as ammonia) and then to nitrate.
The transformation process is dependent on many environmental and biological
factors. E.g., with low temperatures and low pH the transformation is slow and
difficult to predict with resulting nitrogen and efficiency losses. As a consequence,
nitrate is in general a higher quality nitrogen fertilizer with a particularly large market
share in Europe.
17
Fertilizer characteristics
Organic compared to Mineral fertilizer
Characteristics
Organic fertilizer
Mineral fertilizer
ò Nutrient
source
ò Crop residues and
animal manures
ò Nitrogen from the
air and minerals
from the soil
ò Low
ò Nutrient
concentration
concentration
ò High
concentration
ò Nutrient
availability
ò Variable
ò Immediately
available for the
crop
ò Quality
control
ò Often
inconsistent
ò Traceable and
consistent
Organic fertilizer contains the same inorganic molecules as
mineral fertilizer
Crops can be fed with mineral or organic fertilizers, and in both cases the crop will
utilize the same inorganic molecules. A complete nutrient program must take into
account soil reserves, use of organic manure or fertilizers, and accurately
supplement with mineral fertilizers.
Organic manures or fertilizers are often bulky making them difficult to handle, they
have an unpredictable release pattern of nutrients, and are often inconsistent in
their nutrient content. In contrast, mineral fertilizers offer concentrated, immediately
available nutrients, with a consistent nutrient content.
18
The basis for mineral fertilizer:
Energy, ammonia and natural minerals
Nitrogen (N) from air
Finished products:
■
Ammonia
■
■
Natural
gas
■
■
Urea
Nitrates
NPK
Specialty fertilizers
Industrial products
Natural minerals:
■
■
Phosphorus (P)
Potassium (K)
Utilizing the Earth’s natural ingredients
The basis for the production of nitrogen fertilizer is “fixing” nitrogen from the air by
combining it with hydrogen from natural gas to form ammonia.
Phosphorus and potassium are extracted from mines and sometimes combined
with ammonia or nitric acid to form fertilizers with different ratios of each nutrient.
Side streams of the main fertilizer production are upgraded and sold as specialty
fertilizer or industrial products.
19
List of contents
¢
What is fertilizer?
¢
The global industry
¢
and trends
The global industry
This section focuses on the fertilizer industry structure and the difference in
characteristics between the nitrogen and the phosphorus and potassium industry.
The most important challenges and opportunities are also presented.
20
Global fertilizer consumption of
Nitrogen, Phosphorus and Potassium
138.7 mill. tonnes*
Potassium (K)
16%
Phosphorus(P)
24%
Nitrogen (N)
60%
* Nutrient tonnes
Source: IFA statistics season 2001/2002
Nitrogen is the most important plant nutrient
The global market for the three nutrients N, P and K was approximately 140 million
metric tonnes in the 2001/2002 season.
Nitrogen dominates the consumption with a share of 60% measured in nutrient
tonnes as this is the most important of the three primary nutrients.
According to industry convention, when measuring concentrations of the primary
nutrients, nitrogen is measured as such, while phosphorus content is measured as
P2O5 equivalents and potassium as K2O equivalents. When fertilizer is measured in
nutrient tonnes, it is the weight of these equivalents which is given. Nutrient weight
for a fertilizer is always less than product weight as a product typically contains
additional substances like calcium, oxygen, hydrogen etc.
21
Global nitrogen fertilizer
consumption by product
82 million tonnes
NPK
10%
Other
29%
49% Urea
12%
Nitrates
(AN/CAN)
* Nutrient tonnes
Source: IFA statistics season 2000/2001
Urea the largest nitrogen product in global volumes
Urea is the main nitrogen product and is also the driver of the price for nitrogen. Prices of other nitrogen products correlate with the movement in the urea price. Nitrates is a particularly popular nitrogen source in Europe and to some extent in
North America.
NPK is primarily bought due to the additional requirement for P and K.
22
Fertilizer market by application
Wheat
18%
Other
32%
Rice
17%
Cotton
3%
Fruit&Vegetable
6%
Other cereals
7%
Corn
17%
Source: FAO
The three large grain crops consume about half of all fertilizer
Wheat, rice and corn are the largest fertilizer-consuming crops. This is not
surprising as these crops constitute the staple foods of the world’s population.
However, there are several other crops like fruits and vegetables, cotton and others
with high value per kilo that are important for global fertilizer consumption.
Typically, different crops prefer different combinations of the three primary nutrients
and other trace elements leading to demand for numerous differentiated fertilizer
products.
23
Nutrient and industry characteristics
Phosphorus (P)/
Potassium (K)
Characteristic
Nitrogen (N)
Application
Must be applied
every year resulting
in stable volumes
Annual application
not necessary as
nutrients can be
stored in soil
Industry structure
Industry not
consolidated, input
cost swings
Few suppliers
Production
classification
Chemical process
industry
Mining industry
Nitrogen industry has different characteristics compared to
phosphate and potash
Due to different nutrient and industry characteristics, nitrogen fertilizer companies
are not always directly comparable to fertilizer companies focused on phosphate or
potash. Nitrogen volumes are typically more stable as nitrogen must be applied
every year. However, the price of nitrogen (ammonia and urea) tends to fluctuate
more than, in particular, potash as the nitrogen industry is less consolidated and
more affected by energy costs. This represents both a challenge and an opportunity
for the nitrogen industry.
Finally, the nitrogen industry is classified as chemical process industry while
phosphate and potash are mining industries. However, the production processes
for phosphoric acid and DAP are also classified as chemical production. As a
consequence, different capabilities are required for top performance in the different
parts of the fertilizer industry.
24
Nitrogen fertilizer industry dynamics:
Challenges and opportunities
Substitutes: Low
ò Organic fertilizers only relevant
where land or wealth surplus
Buyer power: Moderate
ò National/regional
distributors/coop’s
ò Need security of supply
Supplier power: Low
ò Raw materials readily
available
Attractive cashflow
through
the cycle for
industry leaders
Competition: Moderate
to high
ò Regional fragmentation
(consolidation in progress)
ò Limited differentiation
ò Separate regional dynamics
Entry barriers: Moderate to
Low
ò Capital intensive
ò Economies of scale
ò Low cost energy only in some
regions
ò Transportation costs
ò Basic technology availabl
The key forces in the nitrogen fertilizer market
Substitutes: the risk from substitution through organic fertilizers is considered low
for the global fertilizer industry. This is only relevant in areas where there is a
surplus of land or purchasing power.
Competition: the global fertilizer market is generally fragmented, with limited
product differentiation. Strong regional presence and closeness to customers in the
different markets are key success factors, requiring an extensive distribution and
sales network.
The entry barriers are considered moderate to low. The production technology for
commodity nitrogen fertilizers is readily available, but the production process is
highly capital intensive. There has a trend away from government financing of
fertilizer capacity which has moved the industry to be more market driven than in
the past. Economies of scale are important in reducing fixed costs per tonne and
achieving general cost competitiveness. Another key element is access to low cost
gas, which is only available in certain regions of the world.
In terms of purchasing strength of the customer, this is considered moderate. The
national/regional cooperatives have critical mass and can exercise a certain price
pressure as nitrogen fertilizers are readily available, but they are also dependent on
security of supply.
25
List of contents
¢
What is fertilizer?
¢
The global industry
¢
and trends
This section describes the European industry structure, challenges and
opportunities.
26
Nitrogen fertilizer consumption
in West Europe 2001/02
9.4 million tonnes N
Urea
NPK
23%
Other
21%
15%
41%
Nitrates
(AN/CAN)
Source: EFMA
Nitrate is the most important nitrogen fertilizer in Europe
For agronomic reasons, nitrate is the preferred nitrogen source in West Europe,
and hence commands a price premium above urea.
NPK is the second most popular nitrogen fertilizer as it makes balanced fertilization
easy.
Urea is used to a lesser extent and primarily in the southern parts of Europe.
27
West European market
shares for N fertilizer 2001/02
Hydro
Agri
24%
Imports
26%
Other
WE
Agri is the largest fertilizer company in Europe
Agri has approximately 25% market share for fertilizers in Europe. Imports have
approximately the same market share, and could be regarded as the main
competitive supply. Other important European suppliers are Fertiva (K+S), Kemira,
Grande Paroisse (Atofina/Total), Fertiberia, Terra, DSM and smaller players. None
of Agri’s competitors have European market shares above 15%.
28
European market developments
ò EU enlarg
enlargeme
ement
ò EU Comm
Common Agricu
ricultural Policy
Policy (CA
(CAP)
ò Russian
Russian WT
WTO entry
entry
ò Positiv
mand outlook
sitive supply/de
supply/dem
outlook for grain
European market development poses some challenges, but also
opportunities
Lower labor costs and probable increased agricultural subventions in new EU
member states are likely to lead to a moderate shift in agricultural products towards
the eastern parts of EU.
A change can also occur due to subsidies moving away from production volumes
and towards quality and other factors (CAP).
In the short term, EU anti-dumping measures and other import restrictions on all
products except AN, are expected to have little effect as market prices currently are
above the defined Minimum Import Price. If market prices go down, the
implemented anti-dumping measures will have a positive effect for EU producers.
Recently global and European grain production have been below consumption
reducing stocks and leading to a limited overall downside. In general, European
competitiveness relative to imports has been more important than European overall
consumption level.
29
Net import to Western Europe
2500
kt nitrogen
2000
1500
1000
500
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
Source: EFMA
European imports stabilized
The restructuring of the West European nitrogen industry has opened up for
increased imports, even in the slightly declining market. However, since 2000
imports have been reduced and seem to have stabilized. The long term success of
the European industry is mainly dependent on competitiveness versus imports, and
less on the supply/demand balance in Europe itself.
30
Nitrate capacity and nitrate fertilizer
consumption in West Europe
7000
6000
Capacity
kt nitrogen
5000
4000
Consumption
3000
2000
1000
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
0
Source: EFMA
Improved market balance in Europe
The recent restructuring in the European nitrate industry has resulted in a
significant reduction in 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 on
the European market, there are several plants of other players which are poorly
maintained and could be closure candidates in the years to come. This could create
interesting opportunities for dedicated companies to increase their market share in
a market with a potentially attractive supply-demand balance.
31
List of contents
and trends
¢
Drivers of demand
¢
Drivers of supply
¢
Price relations
¢
Production economics
Industry value drivers and trends
This part describes what Agri believes are the most important value drivers in the
fertilizer industry.
32
Industry value drivers – Revenue drivers
Drivers
Effect on
Grain prices
➨
Urea price
Gas price USA
➨
Ammonia price
Ammonia price
➨
Urea price
European market balance
➨
Nitrate margin
Market segmentation
➨
Value added margins
Industry value drivers determine potential for cash generation
Grain price is one of the main drivers for fertilizer demand. There is approximately
50% common variation between global grain prices and the urea price.
The production costs of the marginal or so called ”swing” producers, which over the
last 4 years have been the US producers, establish the floor price for ammonia, and
also indirectly for urea. The main driver of the US producers’ costs is the US gas
price.
Nitrate prices in Europe are based on the urea price plus a margin where the latter
is determined by the European supply/demand balance.
Finally, a company’s innovation and marketing skills determines its opportunities to
fetch margins beyond industry average.
33
List of contents
¢
Drivers of demand
¢
Drivers of supply
¢
Price relations
¢
Drivers of demand
This section describes what Agri belives are the most important drivers of demand
of fertilizer products.
34
Population and arable land
drives grain consumption
Hectares/person
0.5
Population(billion)
10
2
0.0
0
Hectares/person
2020E
0.1
2010E
4
2000
0.2
1990
6
1980
0.3
1970
8
1960
0.4
Population
Source: IFA,Worldmarkets.com, Hydro
Fundamental forces drive growth
Land per person is decreasing as a result of population growth and reduced land
availability. In order to produce enough food, productivity or yield per hectare has to
be improved.
The main challenges are
• Increasing the area of productive land
• Increasing the yield per unit area of land
• Maintaining soil productivity and reversing the nutrient mining of soil
• Improving agriculture sustainability through better resource management (e.g.
erosion control, improved water-use efficiency)
• Breeding new crop varieties with higher yield potential and improved tolerance
to pests, diseases, drought and other stress factors
• Promoting and expanding agriculture research and advisory services to help
improve farmers’ practices
35
Nutrient sources of productivity boost
Nutrient source
Tonnes of wheat per hectare
3.0
2.5
2.0
1.5
Mineral fertilizer
1.0
Manure
0.5
Soil fertility
2020E
2010E
2000
1990
1980
1970
1960
0.0
2.4% average annual fertilizer volume growth 1970-2000
Source: IFA,Worldmarkets.com, Hydro
Mineral fertilizer is the only sustainable large scale nutrient source
In a world with declining arable land, and an increasing population with a
requirement for improved diet, history has shown that increased food production is
dependent upon increased fertilizer application. Improved crop varieties have
strengthened the plants’ ability to extract nutrients from the soil, but has not by far
been as important as mineral fertilizer.
The 30 years historical annual growth rate has been 2.4%. Future long-term
average growth rate is expected to be less although external estimates vary.
36
Grain consumption and production
2000
Consumption
million tonnes
1950
1900
1850
Production
1800
1750
1700
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003E
Source: FAO
Grain consumption higher than production last four years
For the last four years grain consumption has exceeded grain production which is
clearly an unsustainable situation in the long-term. Sooner or later grain production
has to be increased as stocks are being depleted.
An increase in grain production typically leads to an increase in fertilizer
consumption.
37
Grain inventory relative to corn price
USD/bu
800
4
750
Grain inventory
Million tonnes
700
650
3
600
550
500
2
450
Corn price
400
350
300
1994
1
1996
1998
2000
2002
Source: FAO
Record low inventory
Grain stocks are historically low, and forecast to decline further in the short term.
The situation is particularly tight outside China, where stocks are only 13% of yearly
consumption. China has almost 50% of the global stocks, and can probably
continue to draw down stocks for a while yet.
Grain production will have to start closing the gap to consumption, which would
normally lead to increased fertilizer consumption.
38
Calorie consumption per capita per day
3400
3200
Developed countries
Calories
3000
2800
2600
Developing countries
2400
2200
2000
1985
1987 1989
1991 1993 1995
1997 1999
2001
Source: FAO
Improved standard of living following economic growth increases
demand for food and fertilizer
Economic growth improves the diet in developing countries. More calories will be
consumed, and also more proteins in the form of meat. Meat production is
intensive, as it requires a lot of grain and (hence also fertilizer) to produce meat.
39
Meat consumption per capita
Kilograms meat
per capita per year
90
80
Developed countries
70
60
50
40
30
Developing countries
20
10
0
1992
1994
1996
1998
2000
Source: UNFAO, Roma
Fertilizer consumption is linked to change in diet towards more
protein
Especially in developing countries the increased proportion of meat in the diet
drives increased fertilizer demand. This represents a significant growth potential in
the years to come.
Typically, the production of one kilo of meat requires between 2 and 7 kilograms of
grain:
- 1 kg of poultry requires 2 kg of grain
- 1 kg of pork requires
4 kg of grain
- 1 kg of beef requires
7 kg of grain
Total food consumption is expected to increase in the developing world based on
increased population and improved diet.
40
Consumption per nutrient
100
90
N
million tonnes nutrient
80
1.9%/year
70
60
50
P
40
2.7%/year
30
K
20
2.0%/year
10
0
1970
1975
1980
1985
1990
1995
2000
2005E
Source: IFA
IFA forecasts nitrogen consumption to grow by approximately 2%
per year for the next five years
Most external sources estimate medium term growth rates close to 2%/year,
although FAO, in their long term forecast(20 years), believes growth rates will be
around 1%/year. A tight, and tightening, supply/demand balance for grain supports
the argument that medium term consumption growth could exceed the long term
average.
41
Nitrogen consumption by continent
60
2.8%/year
million tons nutrient
50
Asia
40
30
20
Europe
0.2%/year
0.2%/year
North America
Latin America
10
2.3%/year
2007E
2006E
2005E
2004E
2003E
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
Source: IFA
Stable consumption expected in mature markets while significant
growth in Asia and Latin America
Measured in tonnes of product, growth will continue to be highest by far in Asia, but
consumption is also forecast to grow strongly in Latin America.
Mature markets like Europe and North America are not expected to experience
significant growth.
42
List of contents
¢
Drivers of demand
¢
Drivers of supply
¢
Price relations
¢
Drivers of supply
This section describes what Agri belives are the most important drivers of supply of
fertilizer products.
43
Nitrogen value chain
Raw
Raw
Material
Material
Intermediate
Intermediate
product
product
Finished
Finished
products
products
✔ Natural
Natural
✔Ammonia
Ammonia
✔Fertilizer
Fertilizer
✔Industrial
Industrial
gas
gas
products
products
Natural gas major nitrogen cost driver
At current gas prices in the US, natural gas constitutes about 85% of ammonia
production costs. 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.
44
World gas prices
USD/mmbtu, 2003 estimate
Alaska
Russia
1.5
1.5
0.7
Netherlands
3.7
US – Henry Hub
5.4
Trinidad
1.6
1.5
Ukraine
Middle East
0.5
Algeria
0.5-0.75
Indonesia
1.7
Source: Fertecon.
For US gas price: CERA
New ammonia capacity will be focused in areas with cheap gas
Favorable locations for new ammonia capacity are pockets of stranded gas mostly
located around the equator with the main exceptions being Russia, Ukraine and
Alaska.
45
Cost structure for ammonia
Gas costs
Other
2003E price*
350
300
USD / mt
250
200
150
100
50
0
3
4
5
6
7
8
USD / mmbtu
* Ammonia price: NOLA barge fob
Source: Blue Johnson & Associates.
Natural gas cost creates ammonia “price floor”
Due to the upward shift in natural gas prices in the USA in recent years’, US
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.
46
Cost structure for urea
Ammonia cost
Process gas costs
Other cash production cost
2003E Urea price*
300
USD / mt
250
200
150
100
50
0
3
4
* Urea price: NOLA granular fob
5
6
7
8
USD / mmbtu
Ammonia cost creates urea ”price floor”
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.
47
Global nitrogen capacity utilization
Urea capacity utilization
CRU (British Sulphur)
2006F
2005F
2004F
2003E
2002
2001
2000
1999
1998
1997
1996
Fertecon
1995
92%
90%
88%
86%
84%
82%
80%
78%
76%
74%
72%
70%
External industry analysts range from neutral to positive regarding
capacity utilization in the next three years
Source: CRU, Fertecon
Capacity utilization - neutral to positive expectations among
industry analysts
Industry analysts range from neutral to positive regarding the capacity utilization in
the next three years. While Fertecon is on the conservative side, CRU (British
Sulphur) is quite positive predicting a return to the cyclical highs of 1995 and 1996.
While most analysts agree about the amount of new capacity expected in places
like China, Iran, Oman, Saudi-Arabia, Qatar, Egypt, Trinidad and Australia, the
uncertainty is related to the magnitude of closures and general consumption
growth.
48
List of contents
¢
Drivers of demand
¢
Drivers of supply
¢
Price relations
¢
Price relations
This section describes the price relations in the fertilizer industry
49
Fertilizer and grain prices
USD/tonne urea
USD/bushel corn
6
300
5
250
4
200
3
150
2
100
Corn Chicago cash
Urea fob ME
1
0
50
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002
Source: Blue-Johnson
Correlation between long-term grain and fertilizer prices
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.
The price increase for urea in 2003 is to a great extent caused by the increased US
gas price, although consumption growth has been strong as well.
50
Ammonia price and US production cost
300
250
Ammonia fob US Gulf
USD/tonne
200
150
US Gulf cash cost
100
50
2003E
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
Source: Blue-Johnson
High US gas prices set ammonia price floor at attractive level
Over the last four years, US natural gas prices have established the prices of
ammonia. Using the forward market for natural gas at Nymex on September 29
2003, forward US natural gas prices were at 4.9, 4.7 and 4.5 for 2004, 2005 and
2006 respectively. This makes it likely that there will be a high ammonia price floor
set by the natural gas price during the next few years.
51
Ammonia prices
when US Gulf is swing producer
Example assumptions:
US gas price: 4.0/mmbtu
US cash cost: 36 * 4.0 + 26 = 170/mt
US terminal cost for import: 12/mt
cfr US Gulf: 158/mt
Rounding: 160/mt
155
Fr.+duty: 40
115
Freight: 45
160
Freight: 30
130
The marginal producers determine global ammonia price floor
In a supply driven pricing environment, the region with the marginal producers
determines the global ammonia prices. During the last four years the marginal or
“swing” producers have been the producers in the US Gulf. Freight and duty costs
between net import and export regions then determine prices in other geographies.
52
Ammonia and urea price
250
Urea (fob Black Sea)
USD/tonne
200
150
100
0.6 * Amm + 15
50
jan-03
jan-02
jan-01
jan-00
jan-99
jan-98
jan-97
jan-96
jan-95
jan-94
jan-93
0
Source: Average of international publications
Ammonia prices determine the urea price floor
While energy costs for the ammonia swing producers set 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, like during the mid
1990s.
Calculation in graph is a rough approximation, see also production economics
chapter.
53
Nitrate price
in Europe and global urea price
700
500
CAN cfr Germany
400
300
200
03-Jul
03-Jan
02-Jul
02-Jan
01-Jul
Jul-00
01-Jan
Jul-99
Jan-00
Jan-99
Jan-97
Juil./97
Jan-96
Juil./96
Jan-95
Juil./95
Jan-94
Juil./94
Juil./93
Jan-93
0
Juil./98
Urea fob Middle East
100
Jan-98
USD per tonne nitrogen
600
Source: Average of international publications
Urea prices determine the price range for nitrates
There is a strong correlation between urea and nitrate prices, as they to some
extent are substitutes for the farmers. For agronomic reasons, farmers are willing to
pay a higher price per unit nitrogen for nitrates than for 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 European nitrate
industry.
54
10 years fertilizer prices
Ammonia Fob Trinidad
CAN Germany Bulk delivered
warehouse
USD/tonnes
250
USD/tonnes
250
200
200
150
150
100
100
50
50
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
0
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Urea Bulk fob Middle East
DAP Bulk fob US Gulf
USD/tonnes
USD/tonnes
300
250
200
150
100
50
0
19931994199519971997199819992000200120022003
300
250
200
150
100
50
0
19931994199519961997199819992000200120022003
Average prices 1993 - 2002
Source: Fertilizer Week, The Market for CAN
Nitrogen fertilizer prices are currently higher than average
While urea and CAN prices are still only slightly above the historical average,
ammonia prices are at historically high levels. This is partly linked to the high
prices of oil and gas, but also related to strong demand. Taking into account
the high energy prices, nitrogen fertilizer margins are close to a mid-cycle
average.
55
Potential global industry concerns
ò Increased exports from China
ò Lower US gas prices
ò Over-investment in capacity following today’s
higher than average fertilizer prices
Potential concerns should always be kept in mind
As in many industries, China represents a factor of uncertainty. China has
demonstrated an ability to grow production in many industries and with WTO
membership there are opportunities for increased exports. However, there are now
also opportunities for increased imports to China.
Lower gas prices in the US could lead to plant restarts of idled capacity. As US
producers are the marginal producers today, this could lower the ”price floor” when
demand is weak.
The global nitrogen industry (ammonia and urea) is cyclical. The most important
long-term threat to an attractive price level is over-investment in capacity when
prices are high. However, the construction of new capacity has become more
market-driven in recent years. One could therefore expect current fertilizer
investors to require a higher return than some of the historical state investors.
56
Global fertilizer industry trends
ò Low grain stocks leading to increased fertilizer
demand
ò Improved global economic growth
ò Limited new production capacity until 2005
ò US natural gas prices expected to stay quite high
ò Further plant closures expected
Positive medium term outlook
The outlook for the supply/demand balance looks promising in the short to medium
term. Fertilizer demand should benefit from historically low grain stocks and
improved global economic growth. In addition, there is limited new capacity
expected on-stream until 2005.
With US gas prices expected to stay high next few years, the downside ammonia
price risk is limited. Another potential upside is future plant closures due to limited
investments in upgrading and new capacity during the last years.
57
List of contents
¢
Drivers of demand
¢
Drivers of supply
¢
Price relations
¢
This section shows examples of the cost structure for ammonia, urea and CAN.
The costs are not Agri figures, but typical industry costs.
58
Ammonia cash cost build-up – example
Gas price:
x Gas consumption:
= Gas cost:
+ Other prod. costs:
= Total cash cost
4 USD/mmbtu
36 mmbtu/mt NH3
144 USD/mt NH3
26
170 USD/mt NH3
36 mill. BTU natural
gas/tonne ammonia
Ammonia (NH3)
(82% N)
Natural gas costs the most important cost component
With a natural gas price of USD 4/mmbtu gas cost represents around 85% of the
ammonia production cash costs. In this example, one dollar increase in gas cost
gives USD 36 higher gas costs. With the consulting firm CERA’s US gas price
estimate of USD 5.4/mmbtu for 2003 (Henry Hub), the gas cost increases by USD
50 , to USD 220 per tonne ammonia.
Most of the “other production costs” are fixed costs and therefore subject to scale
advantages.
All cost estimates are fob plant cash costs excluding depreciation, corporate
overhead and debt service for a US proxy plant located in Louisiana (≈ 1,300 metric
tonnes per day capacity).
59
Urea cash cost build up – example
Ammonia use:
0.58 USD/mt urea
x Ammonia price:
170 USD/mt NH3
= Ammonia cost
99 USD/mt urea
+ Process gas costs
21
+ Other prod. costs:
20 (incl. loading)
140 USD/mt urea
Ammonia (NH3)
(82% N)
0.58 ammonia per
tonne Urea
CO2
= Total cash cost
36 mill. BTU natural
gas/tonne ammonia
Urea
(46% N)
Ammonia the main input in urea
Typically, it takes 0,58 tonne ammonia for each tonne urea. If we add the gas cost
in ammonia (USD 144) and the additional process gas costs needed for the
production of urea (5.2 mmbtu x USD 4 = USD 21) , natural gas represents around
75% 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).
60
Theoretical consumption factors
Ammonia
(82% N)
0.56
Urea
(46% N)
0.41
AN
(33.5% N)
0.33
P and K
0.18
CAN
(27% N)
NPK
(15-15-15)*
* There are several NPK formulas. 15-15-15 is just an example
Consumption factors to compare price movements
As shown in the costing examples for urea and CAN, the real ammonia
consumption factors are above the theoretical consumption factors, which are
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.
61
Useful sources of market information
ò News, price references and short term developments
( 1 - 2 months )
¢
The Market
Fertilizer Week
¢ Fertecon
¢ FMB
¢ Green Markets (USA)
¢
www.decyfer.com
www.britishsulphur.com
www.fertecon.com
www.fmb-group.co.uk
http://greenmarkets.pf.com
ò Medium term ( 1 year ) supply/demand and price analysis
¢
Outlook, from The Market. Monthly publications for ammonia, urea and DAP
ò Longer term
¢
¢
Fertecon
British sulphur
ò Grain supply/demand and price
¢
¢
International Grain Council
Chicago Board of Trade
www.igc.org.uk
www.cbot.com
62
Forward-Looking Statements/
Use of Non-GAAP Financial Measures
In order to utilize the “safe harbour" provisions of the United States Private Securities
Litigation Reform Act of 1995, Hydro is providing the following cautionary statement: This
presentation contains certain forward-looking statements with respect to the financial
condition, results of operations and business of the Company and certain of the plans and
objectives of the Company with respect to these items. By their nature, forward-looking
statements involve risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. The actual results and developments may
differ materially from those expressed or implied in the forward-looking statements due to
any number of different factors. These factors include, but are not limited to, changes in
costs and prices, changes in economic conditions, and changes in demand for the
Company's products. Additional information, including information on factors which may
affect Hydro's business, is contained in the Company's 2002 Annual Report on Form 20-F
filed with the U.S. Securities and Exchange Commission.
With respect to each non-GAAP financial measure Hydro uses in connection with its
financial reporting and other public communications, Hydro provides a presentation of
what Hydro believes to be the most directly comparable GAAP financial measure and a
reconciliation between the non-GAAP and GAAP measures. This information can be
found in Hydro’s earnings press releases, quarterly reports and other written
communications, all of which have been posted to Hydro’s website (www.hydro.com).
63

Agri Fertilizer Industry Handbook

Transcription

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