Spur Ventures Inc. Fertilizers in China At the Fork in the Road Dr. Robert J. Rennie & Zhai Jidong (Spur Ventures) Patrick Heffer & Michel Prud homme (IFA) 2007 Fertilizer Outlook and Technology Conference Arlington, VA USA November 6-8, 2006 1
Presentation Outline China Today o Key Trends o China s Orderly Market-The Right Balance? Fertilizers in China & Key Trends o Phosphate o Nitrogen o Potash 2
China Today Key Trends 3
Rapid Economic Growth Source: National Bureau of Statistics of China (NBSC) 4
Increased Urbanization Loss of Arable Land 中国城镇和乡村人口变化趋势 % of population Source: NBSC 5
Improved Balance Between Economic Growth and Quality of Life Today 环保要求将会越来越高 Tomorrow 6
Still a Planned Economy 11 th 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 P 2 O 5 per annum Improve standards of environmental protection, energy conservation, production technology and environmental quality 7
World s Largest & Fastest Growing Fertilizer Market East Asia South Asia North America Latin America & Caribbean West Europe South-east Asia Demand in 2005/06 Variation in 2010/11 West Asia & North-east Asia East Europe & Central Asia Central Europe Oceania Africa ~53% of the total increase is expected to occur in East Asia and South Asia together North-east Asia -10 0 10 20 30 40 50 60 8
Supply Exceeding Demand Source: NBSC, SPUR 9
Expected to Become Regular Net Cereal Importer China s Net Trade (Mt) 16 12 8 4 0-4 2002/03 2006/07 2010/11 Coarse Grains Rice Wheat Source: USDA 10
As Agriculture Continues to Diversify Vegetable and Fruit Harvested Area in China 30 25 Aquaculture and Poultry Production in China Area (Mha) 20 15 10 5 0 1963 1968 1973 1978 1983 1988 1993 1998 2003 Production (Mt) 30 25 20 15 10 5 Poultry Aquaculture Source: USDA 0 1962 1967 1972 1977 1982 1987 1992 1997 2002 Source: USDA 11
China s Orderly Market The Right Balance? National Development and Reform Commission (NDRC) Responsible for planning the entire Chinese economy o 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? 12
China s Orderly Market The Right Balance? 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 & Shanghai o Value of the RMB o Export tax on urea Political stability is a key driving force in China as it liberalizes its economy o Wants to avoid FSU experience o 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) 13
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 USA o Canada, EU o eg.1 Drafting of mining laws o eg.2 Drafting of M&A regulations for foreign investors Decide what fits best for China China s Orderly Market The Right Balance? 14
Proactive Steps by the Central Government Forced consolidation of the industry by shutting down smaller players who are environment and safety violators o 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 third o but improved administration and regulation of SOE s (e.g. to pay taxes & dividends) 15
Proactive Steps by the Central Government cont d Consolidate SOE s CNOOC and CNCCC to strengthen fertilizer focus Encourage spin offs of SOE s and listing as public companies o e.g. Sinochem/Sinofert o e.g. CNOOC/China Blue Chemical Encourage minority investment by foreigners o e.g. PCS in Sinofert o e.g. Yara in China Blue Chemical 16
Proactive Steps by the Central Government cont d Chinese fertilizer internationals will invest abroad o e.g. CNOOC s attempt to purchase Unocal o e.g. CNPC investment in Alberta oilsands o 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 17
Fertilizers in China Overview 18
Main Characteristics of China s Fertilizer Consumption Strong and steady growth of consumption Still a supply-driven market Low nutrient use efficiency o Little or no soil testing Unbalanced N:K ratio Recent launch of a national soil testing programme o Low and still declining nitrogen use efficiency o Low-analysis fertilizers still common FMP (19-20%) SSP (16-20%) ABC (15-17%) Little bulk blending, but a lot of complex fertilizers o NPK s a developing trend o A step in the right direction 19
Main Characteristics of China s Fertilizer Supply Mining o Still limited, but increasing environmental pressures o Mining mostly high-grade ores o Non-sustainable practices Fertilizer Production o Little natural gas o Still large number of small ABC, SSP and FMP plants o 60% of ammonia is produced using coal as feedstock Trade o Imports of P and K: a necessity 20
China s Production of Fertilizer Materials on a Global Scale M mt nutrient 2005 data Nutrient Global China % of Global N 90 29.2 32 P 2 O 5 37 11.5 31 K 2 O 27 1.5 5 Total 154 42.2 27 Source: IFA, 2006; 10th Ferti China Guiyang Symposium 2005 21
Chinese Consumption of Fertilizers on a Global Scale M mt of nutrient, 2005 data Nutrient Global China % of Global N 91 27.8 31 P 2 O 5 37 11.1 30 K 2 O 26 5.6 21 Total 154 44.5 29 Source: IFA, 2006; 10th Ferti China Guiyang Symposium 2005 22
China s growth of fertilizer production and consumption China Nitrogen Production and Consumption China Phosphate Production and Consumption 40.000 35.000 30.000 25.000 20.000 15.000 10.000 5.000 0 Production consumption 2001 2002 2003 2004 2005 12,000 10,000 8,000 6,000 4,000 2,000 0 Production consumption 2001 2002 2003 2004 2005 China Potash Production and Consumption 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Production consumption 2001 2002 2003 2004 2005 60,000 50,000 40,000 30,000 20,000 10,000 0 China Total Fertilizer Production and Consumption Production consumption 2001 2002 2003 2004 2005 23
China NPK Production and Consumption China NPK Production and Consumption 30,000 25,000 20,000 15,000 10,000 5,000 Production consumption 0 2001 2002 2003 2004 2005 24
At the Fork in the Road 30 20 Prospects for China's Fertilizer Consumption (Mt Nutrients) Main drivers: Environmental protection More balanced fertilization Higher nitrogen use efficiency N P2O5 K2O 10 0 2000 2005 2010 2015 2020 25
Phosphate 26
2005/10 World Phosphate Fertilizer Demand (Mt P 2 O 5 /year) 2005-2005/06 Demand 2010-2010/11 Demand Global 36.8 (-1.5% vs. previous year) Global 41.8 (+2.6% growth p.a.) USA 3.9 USA 4.2 (+2.2% p.a.) India 5.2 India 6.5 (+4.8% p.a.) Brazil 2.9 (3.9 mt in 2004) Brazil 3.4 (+3.8% p.a.) China 11.1 China 12.4 (+2.2% p.a.) 27
Global Phosphate Rock Reserves Country Reserve (million tonnes) (%) 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% Source: US Geological Survey, 2006; Mineral Commodity Summaries 28
Phosphate Mining Countries Country Million Million tonnes rock 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 19 Morocco 28.79 9.19 17 Russia 11.29 4.30 8 Tunisia 8.20 2.38 5 Other 45.70 14.21 27 Grand Total 171.36 52.89 100 Source: IFA, Phosphate Rock Statistics 2006; China Chemical Planning Institute 2005 29
Phosphate Rock Resources in China Centered in 5 Provinces Province Resources (billion tonnes) % Guizhou 3.20 24 Yunnan 2.94 22 Hubei 2.10 16 Sichuan 1.79 14 Hunan 1.66 13 Others 1.40 11 Total Resource 13.29 100 Total Reserve 3.90 Source: China Fertilizer Market Week, Jan 17 2006; China National Resources Summary 2001 Resources are total mineralized materials in the ground. Reserves are part of the mineralized materials which can be economically mined. 30
> 46% Chinese Phosphoric Acid Capacity in Non-Phosphate Provinces Phosphoric Acid Capacity in 2005 (Kt P 2 O 5 ) Regions and Capacity Provinces Yunnan 1,675 Guizhou 1,280 Hubei 1,038 Sichuan 711 Sub-total 4,704 Northern China 747 Eastern China 1,491 South & Southwestern 443 Central China 200 Sub-total 2,881 Grand Total 7,585 In Phosphate Provinces In Non-phosphate Provinces Sources:China Chemical Planning Institute; IFA Processed Phosphates Capacities, 2006. 31
China Phosphate Market Distribution P 2 O 5 (Mt/a) of Demand by Region -1999 data to show the pattern 32
Fragmented Phosphate Mining Market USA China Mining Companies: 8 Mining Companies: 429 Total output 35 Mt Total output 50 Mt Large scale: 5 (> 1 Mt) Medium scale: 13 (0.3-1.0 Mt) Small scale: 411 (<0.3 Mt) 33
Phosphate Fertilizers : Also Fragmented USA China Capacity 12.2 Mt Capacity 12.5 Mt Companies 9 Companies > 400 DAP producers 9 (>90% rate) DAP producers 26 (67% rate) MAP producers 9 (>90% rate) MAP producers 56 (71% rate) NPK producers 0 NPK producers 80 (57% rate) 34
Fast Growth of High-Analysis Phosphate Fertilizer Capacity 11,00 10,00 9,00 Capacity Mt product 8,00 7,00 6,00 5,00 4,00 3,00 2,00 1,00 1994 1996 1998 2000 2002 2004 Year DAP MAP NPK 35
Future Trends - Phosphate Market Trends China will eventually import phosphate rock in the northeastern regions China will also continue to import DAP in the northern regions due to logistical constraints Internal P fertilizer prices will be based on import parity model Phosphoric acid producers without a secured rock supply source will eventually be challenged Phosphoric acid, DAP and MAP producers will concentrate in phosphaterich regions NPK producers: some may compete in non-phosphate area o If have easy access to market o If have easy access to N, K and S 36
Future Trends - Phosphate Government Policies Develop an orderly market based on central planning Phosphate rock exports are likely to be restricted Make 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 37
Nitrogen 38
China N Supply / Demand Mt N 1995 2000 2005 2010 Production Urea 8.6 14.2 20.0 23.7 ABC 9.6 6.3 5.5 3.5 Others 1.0 1.7 5.4 8.2 Total Supply Techn. Uses 19.2 0.5 22.2 0.8 30.9 2.2 35.4 3.0 Total Demand (e) 23.4 21.4 27.8 29.3 Balance -4.7-0.6 + 0.9 + 3.1 39
China Urea Trade 1 0 1999 2000 2001 2002 2003 2004 2005-1 Mt urea -2-3 -4 Imports Exports -5 40
China Ammonia Capacity Developments NH3 Feedstock of large plants: 1.1 0.4 Beijing 1.1 0.4 0.4 Natural gas 3.2 Mt of new capacity 1.0 1.7 1.1 Imports Coal 4.0 Mt of new Capacity Close to 9 Mt of new ammonia capacity From 47 to 58 Mt NH3 in 2010 41
China Urea Capacity Developments 60 50 40 Mt urea 30 20 10 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 42
Future Trends - Nitrogen Raw Materials Continued search for increased energy efficiencies Diversification of feedstock: natural gas, coal and coal gasification Decline in the use of naphtha and fuel oil N Fertilizers Increased production and use of urea and NPKs Declining consumption of AN and ABC. Production of stabilized AN has emerged Fledgling 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 units Government s will to improve nitrogen use efficiency is constrained by weakness of extension Exploratory probes of CRF s (SCU s) 43
Potash 44
2,8 2,4 2,0 1,6 1,2 0,8 0,4 0,0 Fast Growth of Potash Production 45 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 Million tonnes MOP
China Potash Imports 10,0 8,0 Million tonnes MOP 6,0 4,0 2,0 0,0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 46
China Potash Capacity Developments Potash Capacity Kt product 2005 2010 Xinjiang Beijing MOP 2 900 3 600 Qinghai SOP 100 1 200 KMgSOP 400 3 300 K 2 O eq 1 900 3 500 47
Future Trends - Potash Raw Materials Continued exploration for potash resources, including lower grade potash ore (SOP and KMgSOP) Improvement of K mining technologies and K fertilizers quality Potash Supply Strong reliance on imports Growing K 2 O production; potential of doubling the 2005 level by 2011/12 Creation of buffer stocks in key consuming regions in China Potash Demand Firm agricultural demand, driven by the increasing implementation of balanced fertilization Strong demand supported by a growth in the production and consumption of NPKs 48