More than 50 per cent of the new urea production capacity worldwide due to come on stream over the next two years will be built in the Middle East and North Africa (Mena) region, amid a wave of investment in the fertiliser industry. Some 11.4 million tonnes of new urea capacity is scheduled to be commissioned in the region by 2012.

The main driver of this investment is the low cost of energy in the region. Energy is the main cost component in fertiliser production, with natural gas representing 50-70 per cent of the total cost of nitrogen-based fertilisers, and as such the region is well placed to leverage its access to low-cost energy supplies to take advantage of worldwide demand for fertilisers.

Modern fertiliser plants require about 0.6 kilogrammes of natural gas to make 1kg of nitrogen into ammonia or ammonium nitrate, and 0.75kg to make urea. This is equivalent to 0.8kg and 0.93kg of fuel oil respectively.

In the US, producers pay market prices linked to Henry Hub (the central delivery point for North American natural gas) indexed gas, while across most of Europe, urea producers pay gas prices linked to crude oil formulas. Middle East producers such as Saudi Arabia Fertilizer Company (Safco), Industries Qatar (IQ) and Egypt’s Orascom Construction Industries (OCI) enjoy access to the region’s natural gas resources with fixed price structures. Meanwhile, in India – the third-largest producer and consumer of nitrogen-based fertilisers after China and the US – domestic production is based on naphtha and comes at a considerable cost disadvantage. In 2009, the Indian government was forced to bear a $25bn subsidy bill to support local production.

Given the number of projects on hold, the market is likely to return to a situation of tightness after recovery

According to regional projects tracker MEED Projects, some $22.7bn worth of fertiliser projects are planned or under way in the region. Saudi Arabia, which has long dominated the petrochemicals projects market, has six fertiliser schemes in the pipeline, worth a combined $1.9bn. State-owned Safco will make a decision on whether to retender its urea expansion project in Jubail industrial city by the end of June. Safco is expected to award the contract at the end of 2010. Japan’s Chiyoda Corporation, South Korea’s Samsung Engineering and Germany’s Uhde are bidding for the $500m deal. The Sabic subsidiary, which has a capacity of more than 2.6 million tonnes a year (t/y) of urea, plans to expand its production capacity, by adding a new urea train to its current four. The last train was built by Uhde in 2005. Saudi Arabia consumes only 13 per cent of its urea production, exporting the remaining 87 per cent.

Projects leader

But it is in North Africa that most projects are being planned at a total cost of $10.2bn. Egypt has been actively expanding its fertiliser capacity in recent years with five plants coming on stream between 2006-10. The tender for another scheme is due to be issued in May. Egypt’s El-Delta Company for Fertilizers & Chemical Industries is currently pre-qualifying contractors to bid for a $300m ammonia plant at Dakahliya near Alexandria. The contract is expected to be awarded before the end of the year, with start-up scheduled for 2012.

But the focus is now shifting westwards along the Mediterranean. The majority of new projects are planned for Algeria, which has set ambitious targets to harness its vast natural gas resources to produce fertilisers for export.

Algeria is pursuing several major projects, with the aim of increasing the country’s exports more than tenfold, to reach 20 million t/y by 2020, from the current 1.7 million t/y. Many of these projects are centred on the Arzew industrial zone.

For example, Sorfert Algerie is building a 1.2 million t/y ammonia/granulated urea plant in the Arzew industrial zone. A second ammonia plant with a capacity of 800,000 t/y is also planned. Sofert Algerie is a joint venture of OCI and local state-owned oil and gas company Sonatrach, with OCI holding a 51 per cent stake.

Sonatrach has also formed a joint venture with Oman’s Suhail Bahwan Group for the construction of a 4,000 tonnes a day (t/d) ammonia plant and a 7,000 t/d urea plant at Arzew. Elsewhere in the region, Iran is working on nine projects worth $3.7bn. Five of these are being built by local contractors and another two projects are currently in the tendering phase. This additional output will meet local demand, as international sanctions limit Iran’s export potential.

Fall in consumption

The regional wave of investment in fertiliser capacity came as a response to impressive demand growth and a widening supply-demand imbalance. But like most industries, consumption levels have been hit by the global recession.

According to the Paris-based International Fertilizer Association (IFA), aggregate consumption in 2008 and 2009 fell by 6.7 per cent to 156.4 million tonnes, with phosphate and potassium fertilisers the most affected, falling 10 and 20 per cent respectively. Nitrogen fertilisers, by contrast, fell by 1.5 per cent.

From mid-2008, sales slowed, as farmers and traders delayed making purchases in anticipation of price falls. Until then, the fertiliser market had been experiencing a period of unprecedented growth on the back of strong agricultural commodity prices, driven by soaring grain consumption in emerging markets, such as China, Brazil and India, and a boom in ethanol production in North America. Prices for urea rose to record highs, peaking in August 2008 at about $800 a tonne, due to a combination of tightening availability and high energy prices.

But industry destocking in the months that followed has pushed the market into oversupply, forcing manufacturers to curtail production to stabilise the market as prices plunged below $250 a tonne in December 2008. Prices have strengthened since the beginning of 2009, and now stand at around $291 a tonne. 

Several fertiliser projects experienced delays as a result of the downturn. Across the Middle East, six projects worth a total of $4.7bn have been cancelled or placed on hold, according to MEED Projects.

The largest is Pakistan’s Engro Chemicals’ scheme in Algeria. The $1.5bn Guelma phosphoric acid plant was placed on hold while still in its study phase. The facility would have a capacity of 4,500 t/d of phosphoric acid, 13,500 t/d of sulphuric acid and 3,000 t/d of diammonium phosphate. The scheme is expected to be revived once fertiliser demand picks up and some sources say this could be as early as the end of this year.

Demand rebound

The business case for investing in fertilisers remains strong. In the medium term, world fertiliser demand is projected to gradually recover, rising 2.3 per cent a year on average to reach 186.8 million tonnes in 2013-14. The bulk of the increase in usage during the next five years is forecast come from Asia and, to a lesser extent, Latin America.

East Asia and South Asia together are expected to account for 62 per cent of total growth. With Latin America included, the three regions will combined account for three-quarters of the increase in demand.

Between 2000-07, the industry raised its overall operating rates, peaking in 2007 at an average of 97 per cent of capacity. By the end of 2007, the industry was running at close to its maximum effective capacity to meeting soaring demand. Fertiliser demand was tight in the first half of 2008 and had consumption remained at this level during the second half of 2008, a shortage could have almost certainly emerged.

Given the number of projects on hold, not just in the Middle East but worldwide, the market is likely to return to a situation of tightness once the recovery sets in.