Fertilizers in China At the Fork in the Road · 1 Spur Ventures Inc. Fertilizers in China At the...

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Spur Ventures Inc.

Fertilizers in ChinaAt the Fork in the Road

Dr. Robert J. Rennie & Zhai Jidong (Spur Ventures)Patrick Heffer & Michel Prud’homme (IFA)

2007 Fertilizer Outlook and Technology ConferenceArlington, VA USA

November 6-8, 2006

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Presentation Outline

China Todayo Key Trendso China’s Orderly Market-The Right Balance?

Fertilizers in China & Key Trendso Phosphateo Nitrogeno Potash

|- Spur Ventures 2006 -|

3

China Today

Key Trends


4

Rapid Economic Growth

Source: National Bureau of Statistics of China (NBSC) |- Spur Ventures 2006 -|

5

Increased UrbanizationLoss of Arable Land

Source: NBSC

中国城镇和乡村人口变化趋势

% o

f pop

ulat

ion

6

Improved Balance Between Economic Growth and Quality of Life

Today Tomorrow环保要求将会越来越高

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Still a Planned Economy11th 5-Year Plan

Secure supply for farmers. Set up rules and regulations to keep fertilizer industry value chain stable and reliable - an orderly market

Promote industry centralization and competitiveness. Encourage private & foreign investors as well as international cooperation for China’s fertilizer industrial structure and consolidation

Open fertilizers market. Encourage services for agriculture and farmers and pay subsidies directly to farmers

Control market access and fertilizer projects. Projects under US$100million should be approved by provincial DRC. Projects over US$100million must get the approval from SDRC; Ammonia projects must be above 200,000 tons annual capacity; Phosphoric acid projects must be above 100,000 tons P2O5 per annum

Improve standards of environmental protection, energy conservation, production technology and environmental quality


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-10 0 10 20 30 40 50 60

North-east Asia

Africa

Oceania

Central Europe

East Europe & Central Asia

West Asia & North-east Asia

South-east Asia

West Europe

Latin America & Caribbean

North America

South Asia

East Asia

Demand in 2005/06Variation in 2010/11

World’s Largest & Fastest Growing Fertilizer Market

~53% of the total increase isexpected to occur in East Asia

and South Asia together


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Supply Exceeding Demand

Source: NBSC, SPUR |- Spur Ventures 2006 -|

10

-4

0

4

8

12

16

Coarse Grains Rice Wheat

2002/032006/072010/11

Expected to BecomeRegular Net Cereal Importer…

Source: USDA


Chi

na’s

Net

Tra

de (M

t)

11

0

5

10

15

20

25

30

1963 1968 1973 1978 1983 1988 1993 1998 2003

Area

(Mha

)

Vegetable and Fruit Harvested Area in China

Source: USDA0

5

10

15

20

25

30

1962 1967 1972 1977 1982 1987 1992 1997 2002

Prod

uctio

n (M

t)

PoultryAquaculture

Source: USDA

Aquaculture and Poultry Production in China

…As Agriculture Continuesto Diversify


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China’s Orderly MarketThe Right Balance?

National Development and Reform Commission (NDRC)

Responsible for planning the entire Chinese economyo What would Adam Smith say?o China sees a strong role for all levels of government in planning the

economy

With 500M farmers and a rural population of 800M in a country of diverse ecology and agriculture is this role possible or even desirable?


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Observations of a Guest in China

China seeks order through direct control rather than order through the ultimate balance of market forces

China does not like short term volatility and “tweaks” long-term economic strategies

o Housing market in Beijing & Shanghaio Value of the RMB o Export tax on urea

Political stability is a key driving force in China as it liberalizes its economyo Wants to avoid FSU experienceo Concern about the rising gap between rural and urban average income

• Growth of cash crops, meat and fish production vs. cereals• Shift from taxing to subsidizing agriculture• Need to keep jobs in rural areas (e.g. ABC and SSP plants)



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China Will Progress Conservatively and Wisely

China will first study other countries

Preference will be socialist countries where the role of government is stronger than in the USAo Canada, EUo eg.1 Drafting of mining lawso eg.2 Drafting of M&A regulations for foreign investors

Decide what fits best for China



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Forced consolidation of the industry by shutting down smaller players who are environment and safety violatorso e.g. coal industry

Forced integration of mining companies and fertilizer producers

Restrict export of P rock

Strict control of investment to shape the industry

State-owned enterprises (SOE’s) favoured over private Chinese companies, with foreigners a distant thirdo but improved administration and regulation of SOE’s (e.g. to pay

taxes & dividends)

Proactive Steps by the Central Government


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Consolidate SOE’sCNOOC and CNCCC to strengthen fertilizer focus

Encourage spin offs of SOE’s and listing as public companieso e.g. Sinochem/Sinoferto e.g. CNOOC/China Blue Chemical

Encourage minority investment by foreignerso e.g. PCS in Sinoferto e.g. Yara in China Blue Chemical

Proactive Steps by the Central Government cont’d


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Proactive Steps by the Central Government cont’d

Chinese fertilizer internationals will invest abroado e.g. CNOOC’s attempt to purchase Unocalo e.g. CNPC investment in Alberta oilsandso e.g. Lenovo buying IBM

Central control over rogue provinces and cities for uniform strategies and policies

eg. Shanghai Party Secretary Chen Liangyu in jail

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Fertilizers in China

Overview


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Main Characteristics of China’s Fertilizer Consumption

Strong and steady growth of consumptionStill a supply-driven marketLow nutrient use efficiencyo Little or no soil testing

• Unbalanced N:K ratio• Recent launch of a national soil testing programme

o Low and still declining nitrogen use efficiencyo Low-analysis fertilizers still common

• FMP (19-20%)• SSP (16-20%)• ABC (15-17%)

Little bulk blending, but a lot of complex fertilizerso NPK’s a developing trendo A step in the right direction


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Main Characteristics of China’s Fertilizer Supply

Miningo Still limited, but increasing environmental pressureso Mining mostly high-grade oreso Non-sustainable practices

Fertilizer Productiono Little natural gaso Still large number of small ABC, SSP and FMP plantso 60% of ammonia is produced using coal as feedstock

Tradeo Imports of P and K: a necessity


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China’s Production of Fertilizer Materials on a Global Scale

M mt nutrient 2005 dataNutrient Global China % of Global

N 90 29.2 32P2O5 37 11.5 31K2O 27 1.5 5Total 154 42.2 27

Source: IFA, 2006; 10th Ferti China Guiyang Symposium 2005


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Chinese Consumption of Fertilizerson a Global Scale

M mt of nutrient, 2005 dataNutrient Global China % of Global

N 91 27.8 31P2O5 37 11.1 30K2O 26 5.6 21Total 154 44.5 29

Source: IFA, 2006; 10th Ferti China Guiyang Symposium 2005


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China Total Fertilizer Production and Consumption

0

10,000

20,000

30,000

40,000

50,000

60,000

2001 2002 2003 2004 2005

Production consumption

China Nitrogen Production and Consumption

05.000

10.00015.00020.00025.00030.00035.00040.000

2001 2002 2003 2004 2005


China Potash Production and Consumption

01,0002,0003,0004,0005,0006,0007,0008,000

2001 2002 2003 2004 2005


China Phosphate Production and Consumption

0

2,000

4,000

6,000

8,000

10,000

12,000

2001 2002 2003 2004 2005


China’s growth of fertilizer production and consumption


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China NPK Production and Consumption

China NPK Production and Consumption

0

5,000

10,000

15,000

20,000

25,000

30,000

2001 2002 2003 2004 2005



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At the Fork in the Road


Prospects for China's Fertilizer Consumption (Mt Nutrients)

0

10

20

30

2000 2005 2010 2015 2020

NP2O5K2O

Main drivers:• Environmental protection• More balanced fertilization• Higher nitrogen use efficiency

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Phosphate


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2005/10 World Phosphate Fertilizer Demand (Mt P2O5/year)

2005-2005/06 Demand

Global 36.8 (-1.5% vs. previous year)

USA 3.9

India 5.2

Brazil 2.9 (3.9 mt in 2004)

China 11.1

2010-2010/11 Demand

Global 41.8 (+2.6% growth p.a.)

USA 4.2 (+2.2% p.a.)

India 6.5 (+4.8% p.a.)

Brazil 3.4 (+3.8% p.a.)

China 12.4 (+2.2% p.a.)


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Global Phosphate Rock Reserves

Country (%)China 6.600 37%Morocco 5.700 32%South Africa 1.500 8%United States 1.200 7%Jordan 900 5%Brazil 260 1%Other countries 1.410 10%

World Total 18.000 100%

Reserve (million tonnes)

Source: US Geological Survey, 2006; Mineral Commodity Summaries


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Phosphate Mining Countries

Country Million tonnes rock

Million tonnes P2O5 %

China (2004) 41.86 12.56 24- major mines 24.47 7.34- small mines 17.39 5.22

USA 35.52 10.25 19Morocco 28.79 9.19 17Russia 11.29 4.30 8Tunisia 8.20 2.38 5Other 45.70 14.21 27

Grand Total 171.36 52.89 100Source: IFA, Phosphate Rock Statistics 2006; China Chemical Planning Institute 2005


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Province Resources (billion tonnes)

%

Guizhou 3.20 24Yunnan 2.94 22Hubei 2.10 16

Sichuan 1.79 14Hunan 1.66 13Others 1.40 11

Total Resource 13.29 100Total Reserve 3.90

Source: China Fertilizer Market Week, Jan 17 2006; China National Resources Summary 2001

Phosphate Rock Resources in ChinaCentered in 5 Provinces

Resources are total mineralized materials in the ground.Reserves are part of the mineralized materials which can be economically mined.


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> 46% Chinese Phosphoric Acid Capacity in Non-Phosphate Provinces

Regions and Provinces

Capacity

Yunnan 1,675Guizhou 1,280Hubei 1,038Sichuan 711

Sub-total 4,704Northern China 747Eastern China 1,491South & Southwestern 443Central China 200

Sub-total 2,881Grand Total 7,585

Sources:China Chemical Planning Institute; IFA Processed Phosphates Capacities, 2006.

In Non-phosphate Provinces

In Phosphate Provinces

Phosphoric Acid Capacity in 2005 (Kt P2O5)


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P2O5 (Mt/a) of Demand by Region-1999 data to show the pattern

ChinaPhosphate Market Distribution


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Fragmented Phosphate Mining Market

USA

Mining Companies: 8

Total output 35 Mt


China

Mining Companies: 429

Total output 50 Mt

Large scale: 5 (> 1 Mt)

Medium scale: 13 (0.3-1.0 Mt)

Small scale: 411 (<0.3 Mt)

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Phosphate Fertilizers : Also Fragmented

USA

Capacity 12.2 Mt

Companies 9

DAP producers 9 (>90% rate)

MAP producers 9 (>90% rate)

NPK producers 0


China

Capacity 12.5 Mt

Companies > 400

DAP producers 26 (67% rate)

MAP producers 56 (71% rate)

NPK producers 80 (57% rate)

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1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

9,00

10,00

11,00

1994 1996 1998 2000 2002 2004

Year

Capa

city

Mt p

rodu

ct

DAPMAPNPK

Fast Growth of High-Analysis Phosphate Fertilizer Capacity


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Future Trends - Phosphate

Market Trends

China will eventually import phosphate rock in the northeastern regionsChina will also continue to import DAP in the northern regions due to logistical constraintsInternal P fertilizer prices will be based on “import parity” modelPhosphoric acid producers without a secured rock supply source will eventually be challengedPhosphoric acid, DAP and MAP producers will concentrate in phosphate-rich regionsNPK producers: some may compete in non-phosphate area

o If have easy access to marketo If have easy access to N, K and S


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Future Trends - Phosphate

Government Policies

Develop an “orderly” market based on central planningPhosphate rock exports are likely to be restrictedMake the industry more competitive by having fewer, larger players through regional consolidations

o but SSP and FMP producers will disappear more slowly than it should because of social considerations

Favour sustainable development and environmental quality


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Nitrogen


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Mt N

Production

Total Supply

Techn. Uses

Balance

Total Demand(e)

2000

22.2

0.8

- 0.6

21.4

2010

35.4

3.0

+ 3.1

29.3

2005

ABC 6.3 3.55.5Urea 14.2 23.720.0

Others 1.7 8.25.4

30.9

2.2

+ 0.9

27.8

China N Supply / Demand


1995

19.2

0.5

- 4.7

23.4

9.68.6

1.0

40

China Urea Trade

-5

-4

-3

-2

-1

0

1

1999 2000 2001 2002 2003 2004 2005

Imports Exports

Mt u

rea


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China Ammonia Capacity Developments

Natural gas3.2 Mt of new capacity

4.0 Mt of new Capacity

Coal

Beijing1.1

1.7

0.4 0.41.1

1.01.1

0.4

Imports

Close to 9 Mt of new ammonia capacityFrom 47 to 58 Mt NH3 in 2010


NH3 Feedstockof large plants:

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China Urea Capacity Developments

0

10

20

30

40

50

60

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Mt u

rea


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Future Trends - Nitrogen

Raw MaterialsContinued search for increased energy efficienciesDiversification of feedstock: natural gas, coal and coal gasificationDecline in the use of naphtha and fuel oil

N FertilizersIncreased production and use of urea and NPKsDeclining consumption of AN and ABC. Production of stabilized AN has emergedFledgling introduction of bulk, blended granular fertilizers for high cash value crops (e.g. cotton, tobacco)Potential oversupply of urea, as new capacity expands at strong rate: exports?Industry’s consolidation and possible restructuring, leading to the shut-down of smaller and efficient unitsGovernment’s will to improve nitrogen use efficiency is constrained by weakness of extensionExploratory probes of CRF’s (SCU’s)


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Potash


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Fast Growth of Potash Production

0,0

0,4

0,8

1,2

1,6

2,0

2,4

2,8

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Mill

ion

tonn

es M

OP


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China Potash Imports

0,0

2,0

4,0

6,0

8,0

10,0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Mill

ion

tonn

es M

OP


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China Potash Capacity Developments

Beijing

Qinghai

Xinjiang MOPSOP

2005 2010Kt product

2 900100

3 6001 200

KMgSOP 400 3 300

K2O eq 1 900 3 500


Potash Capacity

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Future Trends - Potash

Raw MaterialsContinued exploration for potash resources, including lower grade potash ore (SOP and KMgSOP)Improvement of K mining technologies and K fertilizers’ quality

Potash SupplyStrong reliance on importsGrowing K2O production; potential of doubling the 2005 level by 2011/12Creation of buffer stocks in key consuming regions in China

Potash DemandFirm agricultural demand, driven by the increasing implementation of balanced fertilizationStrong demand supported by a growth in the production and consumption of NPKs


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