Fertilisers: Growth industry

26 November 2007
Without nitrogen fertiliser, the world could only sustain 60 per cent of its current population, according to Contributing to Sustainable Development, a recent report by the European Fertiliser Manufacturers' Association. But when it comes to production, it is the Middle East, not Europe, whose exports are helping to sustain the global population growth.

The Middle East and North Africa (Mena) region will increase its share of world urea exports to more than 50 per cent by 2015, from about 40 per cent today, according to UK-based fertiliser consultant Fertecon. During the same period, the region's share of global export trade in ammonia will almost double to 30 per cent from 16 per cent.

Fastest growing

“The Middle East is rapidly becoming the biggest player worldwide,” says Barry Bain, a director of Fertecon. “China is by far the biggest producer and consumer of urea, but in terms of trade, Mena is the world's biggest source of urea and by far the fastest growing. Virtually all global export capacity growth in the next few years will come from this region.”

According to the Arab Fertiliser Association, ammonia production capacity in the region has increased more than fourfold during the past 25 years: from 2 million tonnes a year (t/y) in 1980 to 10.5 million t/y in 2005. Over the same period, urea capacity also increased fourfold, from 2.5 million t/y to 12.4 million t/y, while phosphoric acid and diammonium phosphate production rose by 350 per cent and 280 per cent respectively.

But it is the next round of capacity increases that will have the greatest impact on the region's share of the global export market. While capacity growth in other parts of the world is set to slow, in the Middle East it is accelerating.

“In the years to come, the Middle East will be the world's biggest producer and supplier of nitrogen fertilisers,” says Alain Assaf, Middle East director of Germany's Uhde.

Egypt will be a major driver of growth, with five fertiliser plants coming on stream between 2006 and 2010, while Algeria also has plans for at least two facilities. In the Gulf, Qatar, Saudi Arabia, Iran, Abu Dhabi and Oman all have plans to increase capacity in the next few years (see table, page 65). As a region, the Gulf's urea capacity is set to almost double to 20.1 million t/y by 2015, from 12.8 million t/y in 2007, according to Fertecon, while in Egypt it is expected to triple to 6.1 million t/y in the seven years up to 2011.

Gas reserves

The key driver behind the region's astronomical rise is access to cheap feedstock. Fundamentally, the production of nitrogen fertilisers, such as ammonia and urea, involves capturing nitrogen from the atmosphere and locking it together with hydrogen from hydrocarbons, such as heavy oil, coal - as is commonly used in China - or gas. Gas is the cheapest, cleanest option, and is used most widely.

This gas feedstock accounts for 50-70 per cent of total costs of the expenditure necessary to produce any nitrogen fertiliser product. The Mena region, which has more than one-third of the world's gas reserves, is therefore among the best places in the world to secure a reliable and cheap feedstock source.

High gas prices mean increased fertiliser production in the large consumer markets, such as the US and Europe, is becoming less attractive. One tonne of urea requires about 26 million British thermal units (BTUs) of gas to produce. In the US, gas costs about $7-8 a million BTU and in Europe $8-9 a million BTU. In most of the Mena region, the cost is about $1 a million BTU. In Algeria it is as little as 50 cents. “Foreign companies will definitely go to either the Middle East or North Africa,” says Assaf. “Unless they can find another source of gas.”

Production capacity

The increasing gulf in prices means that the location of export plants mirrors the gas price trend. “The increasing cost of gas is resulting in the shifting of gas-based industries from the developed world to developing countries,” says Osama Bishai, director of projects at Egypt's Orascom Construction Industries (OCI). “Lots of plants in Europe are being shut down and their markets are being served by new plants in Algeria, Egypt and the Gulf.”

China also has a high ammonia/urea production capacity, but concentrates largely on meeting domestic demand. When it comes to the export market, the Middle East has few competitors. “The other big exporting area is Russia, which accounts for more than a quarter of ammonia exports,” says Bain. “In Russia, gas costs about $1.50 a million BTU, but under government plans, this will increase in the next few years.”

For the US market, the region faces strong competition from Trinidad, which accounts for about 25 per cent of the world export market for ammonia. “Gas is not cheaper in Trinidad than in the Middle East, but production costs are okay and the transportation costs aremuch lower,” says Assaf. “I do not see UScompanies investing in the Middle East in the near future.”

Cheap gas, a strong strategic location and the global nature of the urea market give Mena producers access to markets all over the world. “For Egypt, the Mediterranean and northwest Europe have been targets,” says Bain. “But India and perhaps other parts of Asia are also potential targets, and Latin America is a strong growth market.”

Nor does the absence of US contractors from the Mena fertiliser business mean that offtake agreements will not be signed to supply the market there as well. The involvement of Canada's Agrium in fertiliser projects in Egypt and Qatar is testament to the fact that Mena production can meet demand in the Americas.

The ease of access to the Atlantic markets means that Algeria and Egypt are well placed to supply North America, particularly while high shipping costs increase their marginal advantage over more remote producers.

“Algeria's major advantage is its proximity to both Europe and the US,” says Bishai. “Demand is strong there, and it can exploit high shipping costs.”

Using gas to produce fertilisers is an excellent way for Mena countries to get good returns from their resources. “There are not many options for marketing gas that you cannot sell through a pipeline,” says Bain. “Liquefied natural gas is very expensive and requires large scale investments. You could produce other petrochemicals, but producing ammonia and urea is a relatively simple process with a well-developed international market.”

The market is also becoming increasingly lucrative as several elements combine to push up demand and the marginal benefit of being near a cheap source of gas increases. Although China produces a lot of its own fertilisers, its demand for food is stimulating international export markets. It accounts for 45 per cent of world soybean imports, for example. “The growth in crop demand in China and India is underpinning strong fertiliser demand,” says Bain. The growing biofuels market is also pushing up food demand, in turn increasing the call for fertilisers.

The world's recent crop shortage has also increased fertiliser demand. “Offtakers say there is a relationship between grain stock and urea prices,” says Bishai. “If grain stocks are low, fertiliser prices are high.”

What this means for Middle East producers is that fertiliser is a lucrative business. Excluding capital costs, urea producers are making more than $200 a tonne on a market price of about $350 a tonne. “Production costs are so low that companies are making a fortune,” says Bain.

Potential pitfall

OCI's model for the planned Sorfert fertiliser plant in Algeria, for example, is based on a return on investment of 16-18 per cent. “There are good margins now and we are very optimistic about the future,” says Bishai. “Once we are in production, we expect to enjoy relatively good margins, and if shipping costs continue to be high we will have a major advantage.”

So confident is OCI about its Algeria venture that an engineering, procurement and construction contract is in place and initial works have begun before the financing has been finalised. Nor have markets been secured for the plant's product. “Under current market conditions there is no need for the standard long-term contract to guarantee offtake,” says Bishai.

The only potential pitfall for the industry in the medium term is that so much capacity is set to come onstream in the next few years that in 2010-12 there could be a capacity glut. “Exceptionally high fertiliser prices in the past couple of years has led to a big increase in investment. Generally, this precedes a fall,” says Bain.

But the expectation of continuing high gas prices and ongoing growth in crop demand, combined with the natural construction ceiling that is today's tight contracting market, mean this is unlikely to be a significant problem.

“If there is a big influx in production at a certain point, this will affect prices for a time,” says Bishai. “But it will not affect the bigger picture. In the long term, the price of fertiliser is going up.”

Key fact

20.1 million tonnes a year is the forecast for 2015 urea production in Middle East and North Africa.

TABLE: Growth of Mena fertiliser output, 1980-2010 (million tonnes)

19801990200020052010
Ammonia2.05.38.710.517.5
Urea2.55.69.912.420.0
Ammonium nitrate0.81.12.01.82.1
Phosphate rock31.037.744.050.154.0
Phosphoric acid1.34.04.75.86.5
TSP0.91.84.51.82.2
DAP0.93.43.43.44.2
Potash0.02.01.91.82.5

DAP=diammonium phosphate; TSP=trisodium phosphate

Source: Arab Fertiliser Association

TABLE: Major ammonia/ urea capacity increases in the Mena region, 2006-15

CountryDeveloperLocationAmmonia capacityUrea capacityYear in operation
Confirmed
AlgeriaSorfert AlgeriaArzew1,00,000700,0002011
EgyptAlexandria Fertilisers CompanyAbu Qir396,000635,0002006
EgyptHelwan Fertilisers CompanyHelwan438,000702,6252007
EgyptMopcoSuez438,000702,6252008
EgyptEbicSuez660,00002008
EgyptEagriumDamietta876,0001,405,2502010
IranGhadir Petrochemical ComplexAssalouyeh340,000500,0002007
IranRazi Petrochemical CompanyMahshahir677,00002007
IranGhadir Petrochemical ComplexAssalouyeh340,000500,0002008
OmanOmifcoSur400,000660,0002008
QatarQafco VMesaieed350,000550,0002010
Saudi ArabiaSafco IVJubail1,200,0001,500,0002006
Saudi ArabiaSafco IVJubail1,200,0001,500,0002011
UAEFertilRuwais1,200,0001,500,0002010
Estimated capacity increase 2006-118,515,00010,155,500
Possible
AlgeriaBahwanArzew1,460,0002,555,0002011-15
AlgeriaFertiberiaArzew1,090,00002011-15
EgyptAlexandria Fertilisers CompanyAbu Qir660,0001,070,0002011-15
EgyptMopcoSuez438,000702,6252011-15
EgyptAfccoSuez660,0001,090,0002011-15
LibyaNOC/ Yara InternationalMarsa el-Brega700,000900,0002011-15
QatarQafco VIMesaieed660,0001,000,0002011-15
Possible capacity increase 2011-153,118,0004,762,6252011-15
TOTAL POTENTIAL CAPACITY INCREASE 2006-1511,633,00014,918,125

Afcco=Arab Fertiliser and Chemicals Company; Eagricum=Egyptian Agrium Nitrogen Products Company; Mopco=Mirs Oil Processing Company; Ebic=Egypt Basic Industries Corporation; Safco=Saudi Arabian Fertiliser Company; Qafco=Qatar Fertiliser Company; NOC=National Oil Company; Fertil=Ruwais Fertiliser Industries; Omifco=Oman India Fertilser Company

Sources: MEED; Fertecon; Arab Fertiliser Association

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