— With an ever-increasing global population, arable land per person is declining while demand for agricultural products is rising, indicating a growing need to maximize production from farmland, Al Rajhi Capital said in its latest report on Saudi Petrochemicals Sector.
Moreover, rising income level and demand for higher quality diet have resulted in higher demand for fruits, vegetables and protein from crop-fed livestock. Thus, there is a pressing need to improve efficiency of fertilizer manufacturing plants to develop agricultural products of high performance and to meet the deficit between production and consumption. Recently, use of agricultural products like corn and oil fruits as bio-energy sources has further stimulated demand for fertilizers.
“We expect prices to bounce back as demand for fertilizers will surge during the spring planting season,” the report noted. Currently, the report estimates the average ammonia prices to be $445/ton and average urea prices to be $475/ton for 2012. Recovery in the prices during the remaining nine months of 2012 will support the performance of SABIC owing to its subsidiary - SAFCO - which is equipped with production capacities of 2.6mtpa of urea and 2.3mtpa of ammonia (which is mainly used for urea production).
With the commercial production of fertilizers commencing at the new facilities as discussed above, we estimate global supply to outstrip global demand in 2012-2103, thereby pressuring the prices over the medium-term. However, we believe pressure on the prices of fertilizers will not affect the Saudi producers as they continue to enjoy feedstock cost advantage as compared to global peers. As seen from the figure below, the total production cost of urea is less than $100/ton in the MENA region compared to other foreign countries where the cost of urea is in the range of $150/ton to $400/ton.
Around 44 percent of the urea produced across the MENA region is exported to foreign countries, as these producer benefits from lower production cost. With the completion of new projects in the MENA region, export volumes of urea are expected to increase to 20mt by 2015 from 15mt in 2011.
Since the start of 2012, prices of basic petrochemicals started rising on the back of 1) high naphtha prices as a result of steady climb in crude oil prices, 2) tight supply due to the maintenance season and 3) healthy buying interest by traders over supply fears. The average price of ethylene (+9.0 percent compared to 2011 average), propylene (+1.6 percent), benzene (+7.3 percent), and polyethylene (+7.8 percent) increased in YTD 2012. However, MEG prices declined by 11.4 percent over the same period due to soft polyester sales and weak demand for other downstream products. Ethylene prices increased following outages at crackers (Eastman Chemical — 2 crackers), and start of maintenance programs (at the LyondellBasell Channelview olefins complex) in February 2012. Further, several crackers in the US, Japan and South Korea have lined up plans to conduct maintenance activities in March and April 2012. According to Platts, in Europe, an outage at Ineos’ steam cracker in Germany led to a force majeure on propylene during the third week of February.
In Asia, olefins supply was tight from the Middle East region (particularly Saudi Arabia) on account of power outage at Jubail in mid-January. Moreover, Sinopec (China Petrochemical Corp.) has also firmed up plans to cut its ethylene output in March 2012 to boost fuel production to fulfill growing demand during the planting season.
Al Rajhi Capital study revised its estimates for prices of petrochemical products based on the recent price movements of majority petrochemical products and expect average prices to stabilize at the current levels for the remainder of 2012, given the firm energy and naphtha prices and our estimates of moderate growth in the global economy.
Fertilizers are key inputs for agricultural growth as they improve soil life as well as productivity. They are also used in industrial applications such as rubber, leather, paper & pulp industries, refrigeration systems, etc. Fertilizer market mainly comprises three main nutrients — nitrogen (N), phosphorus (P) and potassium (K). Amongst the nitrogen-based fertilizers, ammonia is the major source of plant nutrition, which is critical for the production of major crops such as corn, wheat, etc. It is also a primary ingredient in other fertilizers such as urea (which represents 59 percent of the global nitrogen fertilizer market), urea ammonium nitrate (UAN), and diammonium phosphate (DAP).
According to IFA, global ammonia capacities are expected to grow by 19 percent as compared to the 2010 levels to reach 229.6mtpa in 2015, while urea capacities are estimated to increase from 184mtpa in 2011 to 196mtpa in 2012. It also estimates that the fertilizer industry will be injecting an investment of about $88 billion between 2010 and 2015. The report said improvement in demand is supporting expansion of ammonia and urea production. Despite delays in some of these projects, we expect the urea market to face an oversupply situation by 2013, which can result in pricing pressure in the medium-term.
West Asia (which mainly represents the MENA countries) consumes around 3-4 percent of nitrogen and phosphorus-based fertilizers. — SG