Fertile opportunities for GCC's fertilizer sector

Demand for more specialised, higher value products is creating unprecedented investment opportunities for the GCC's fertilizer producers

ANALYSIS, Industry Trends

Recent fundamental changes in the world’s energy markets have had a profound impact on the global fertilizer industry. Lower oil and gas prices, combined with the shale revolution in the US and increased utilisation of ‘stranded gas’ for urea production, have resulted in significant capacity additions all over the world.

Meanwhile, demand slowdown from major urea buyers such as China, and its growing role as an exporter, have decreased the competitive advantage of many low cost producers. This supply and demand imbalance, followed by a more efficient use of fertilizers and changing environmental laws, have resulted in fertilizer commodity prices falling at fast rates.

In November 2014, we reported that tight profit margins and global overcapacity were forcing some Middle Eastern and North African producers to turn their backs on the fertilizer industry. Almost two years later, while the extra capacity remains, the overall sentiment has significantly improved. Companies are now changing their tune, seeking to not just ramp up investment but do so in a much more strategic and organised manner.

Just last month one of the GCC’s top producers of fertilizers, Sabic, said at an industry event in Moscow it plans to become “a complete Agri-Nutrient organisation” over the coming years. The announcement came as part of the petrochemical giant’s new transformation strategy, which includes plans to expand its portfolio of basic nutrients and increase its focus on speciality products. Sabic seems to have already put its plan into action as it recently launched a new type of compound fertilizer which the company claims can help improve the quality and yield of crops by up to 20%.

“With global farming and the global industry changing, the GCC fertilizer industry is now entering a new phase, characterised by moves to diversify its portfolio by producing more specialty and phosphate fertilizers, where margins are higher and where there are significant opportunities for value addition,” said Dr Abdulwahab Al-Sadoun, secretary general of the Gulf Petrochemicals and Chemicals Association (GPCA).

Dr Al-Sadoun is of the opinion that to remain profitable, the region needs to focus on value as opposed to volume, and one way to do that, he says, is by investing in research and innovation.

But despite being home to some of the fastest growing industries on the globe, the GCC is significantly lagging behind its competitors, contributing just 1% to global chemical R&D spending.

This trend is hugely unfavourable as more innovative application technology is required to meet the evolving needs of farmers, who are now focusing on optimising input as well as maximising product yield. In other words, as Dr Al-Sadoun explains, the fertilizer industry will need to choose between a commodity-based strategy, i.e. producing more at the lowest possible costs, or adding value with (semi) specialty products, which incidentally requires significant investments in research and development.

“For GCC producers to move successfully downstream and shift from commodity fertilizers towards specialty fertilizers, they will have to link application to innovation and become increasingly innovation and solution driven. This also means that greater technical know-how is required for the processes that coat commodity products or produce stabilisers, solubles and higher value micronutrients.”

Demand for more specialised products and services is in line with the needs of modern day agriculture which is increasingly adopting advanced irrigation techniques, smart equipment and new methods such as precision farming to enhance productivity.

This in turn is creating significant investment opportunities for fertilizer producers both geographically and further down the supply chain.

“During the current low fertilizer price environment it is not uncommon to find suitable acquisition targets of other fertilizer producers,” said Thomas Heinrich, consultant with Bahrain-based Nexant Energy & Chemicals Advisory.

“Production on the African continent for example is expected to increase strongly in the long-run but the region is currently facing obstacles for developing its full potential such as farmers’ access to financing and education on the use of fertilizers,” Heinrich explained.

Historically, Middle Eastern producers have shied away from distributing final products to market, and have instead focused on exporting bulk products such as ammonia, urea and more recently ammonium phosphates. While this, according to Heinrich makes perfect sense given the fact that freight costs for commodity products are generally low, “investments into in-land logistics such as freight, warehousing and distribution as well as other services to farmers including fertilizer blending, consulting, seeds and pesticides sales could be further diversification opportunities for Middle Eastern producers.”

Furthermore, investments into other nitrogenous fertilizer and explosives like ammonium nitrates and multi-nutrient products such as compound NPKs either in the Middle East or in other regions could also be of interest, he added.

The Middle East’s close proximity to two of the world’s most populous countries and some of the largest markets for fertilizers — India and China — is creating further investment incentives for companies which have access to cheap feedstock and seek to diversify their incomes by utilising existing resources. However, a lack of domestic demand due to unfavourable farming conditions particularly in countries in the GCC, is likely to continue to limit the size of the regional market, with the majority of producers expected to focus on export and trade.

The Middle East remains the largest export hub for urea in the world, a position which could be significantly reinforced with the recent re-emergence of Iran on the international market after decades of sanctions. Potential capacity additions by sanctions-free Iran could turn the Middle East into an even bigger export hub for nitrogenous fertilizers, according to Heinrich.

“The lifting of economic sanctions on Iran could certainly have implications on investments in the country. Iran has one of the largest natural gas reserves in the world. It would hence not be surprising if some of these reserves would be used to develop new fertilizer projects.

“The amount of capacity actually built will depend on the prevailing gas price. This is however more of a long-term change,” Heinrich said.

While it remains to be seen exactly when and how much new capacity Iran will add to its existing production, experts expect the Middle East to remain an interesting location for fertilizers investments. The eventual recovery of prices is another reason why companies should invest now if they want to secure a share in this growing market.

“In the long-run, as the global population will continue to grow and as more and more people are lifted out of poverty demand for fertilizers will increase.

“Hence even though in the short term we are likely to see the long market continue it is only a matter of time before demand will catch up and global capacity utilisation rates improve enough to make investments into new capacity attractive again,” said Heinrich.

To secure a place in what’s becoming a highly contested market, Middle Eastern producers will need to adapt to the ever changing needs of farmers and better engage with their customers. One way to do so is by taking their business further down the supply chain, and investing in the development of specialised fertilizers.

Regardless of which route they opt for, to carve out a role for themselves as industry leaders, GGC companies will need to make research and innovation their top priority, and focus on adding value both to their own business and that of their customers.

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