Market Analysis Report. June 21, 2013

Transcription

1 Q2 Market Analysis Report June 21, 2013

2 Q2 Market Analysis Report June 21, 2013 This PotashCorp Market Analysis Report was prepared for PotashCorp stakeholders. It provides a concise and up-to-date analysis of the major changes and events that shape the fertilizer industry and affect our markets. The report provides an analysis of key factors that impact agriculture, economy, and industrial and feed markets, as well as factors influencing markets for the three major fertilizer products. The following provides a table of contents: Forward-Looking Statements: Page 1 Factors to Watch During the 2013/14 Crop Year: Pages 3 13 Potash Market Update: Pages Phosphate Market Update: Pages Nitrogen Market Update: Pages 25 29

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5 Following the major shortfall in 2012, there is tremendous pressure to increase world grain and oilseed production during the coming growing season. As this chart illustrates, production would need to increase by approximately 6 percent(three times the historical growth rate) in 2013/14 to meet projected consumption. USDA s June forecast indicates production could expand by 8.3 percent, which assumes farmers will significantly increase planted area and achieve record yields. This could be very optimistic given weather-related issues so far this year in the US, Europe and the former Soviet Union. 3

6 USDA projects that global grain production will increase by 163 million tonnes (9.2 percent) in 2013/14. This forecast assumes growers will expand harvested area by 2.3 percent to the highest level since the mid-1990s. Grain yields are projected to be 3.2 percent higher than the previous record achieved in 2011/12. With almost three-quarters of the projected increase in production attributed to the USandformerSovietUnioncountries,alotisridingonthecropconditionsinthese regions. More specifically, the development of the US corn crop is critical as half of the projected global increase is associated with this one crop. 4

7 Cool/wet conditions in April and early May delayed planting in the US. Following a brief period in mid-may when rapid progress was achieved, excessive moisture in several regions of the Corn Belt prevented a timely conclusion to the planting season. We expect farmers generally stayed with their intentions to plant large acres of the major fertilizer-consuming crops. However, excessive moisture conditions in some states likely reduced US corn acreage by 2-3 million acres(2.5 percent) compared to initial intentions. With the late planting and slow emergence this spring, a significant portion of the crop will pollinate in the typically warmer days of late July/early August. Adequate moisture during this period will be critical to ensure significant yield potential is not lost. 5

8 As is the case with almost every growing season, the development of the US corn crop will be highly scrutinized and the source of great speculation throughout the summer months. In its June update, USDA projected the crop at 14 billion bushels basedonayieldof156.5bushelsperacreandplantedareaof97.3millionacres. BasedonfieldreportsandconsultantestimatesasofthemiddleofJune,we project corn production between 13 billion and 13.5 billion bushels. This is based on an expected yield range of bushels per acre and approximately 95 million planted acres. We are forecasting corn consumption in the range of billion bushels, down slightly from USDA estimates due to our expectation of lower available supply. This scenario would allow for some much-needed rebuilding of US corn stocks but implies a more balanced outlook than preliminary USDA projections. 6

9 Grain production in former Soviet Union countries has been extremely variable over thepastfiveyears.webelievethetwomajorreasonsarevolatileweatherandsuboptimal fertility practices. Preliminary forecasts indicate that production of the major grains will rebound by 26 percent in 2013/14 based on improved moisture conditions compared to last year. However, southern regions of Russia and Ukraine remain dry and the magnitude of the recovery remains a question mark. This region has evolved into a major grain exporter as growth in domestic consumption has been limited. Given the uncertainty of supply from year to year, developments in this region can have a major impact on global grain trade. 7

10 USDAisprojectingalargeincreaseinstocksheldbymajorcornexporters,whichis almost entirely contingent on the recovery in the US crop. US corn stocks should increase from near record lows set in 2012/13, but we expect there is significant downsiderisktothe USDAforecast.BasedonourestimatesprovidedintheUScorn production scenario slide, we expect corn stocks could increase to a level similar to the previous 10-year average. Despite the significant increase in projected wheat production, endings stocks for the major wheat exporters are expected to remain relatively tight. This is due to the sharp draw-down in 2012/13, production issues in the US and the anticipated rebound in global feed use. 8

11 Globalcorntradegrewatanaverageannualpaceofnearly4milliontonnespriorto 2012/13. The growth in imports was split between markets in Asia and Latin America. Global trade was constrained in 2012/13 primarily by lower available supply and higher prices but is expected to rebound sharply in 2013/14, assuming improved production prospects. USexportsareexpectedtoalmostdoubleafterfallingtoamorethan40-yearlowin 2012/13. The actual magnitude of this rebound will depend on the size of the US crop, price levels and competition from emerging exporters in Brazil and Ukraine. 9

12 The majority of the growth in feed consumption is occurring in developing countries in Asia and Latin America, which are growing at annualized rates of 4 to 5 percent. Feed consumption is projected to rise significantly in 2013/14 based on the assumption of increased grain availability and lower prices. However, given the potential risks to the global grain production outlook, we believe the feed grain consumption forecast could also prove to be optimistic. 10

13 China s soybean imports declined slightly in 2012/13 as domestic buyers worked down inventory levels in the face of tight global supplies and higher prices. USDA expects China s imports will rise to a record 69 million tonnes in 2013/14 and account for two-thirds of global trade. This may prove to be an aggressive target but the strong upward trend in oilseed demand is undeniable. Record Chinese corn imports are expected in order to keep pace with demand growth that has averaged approximately 5 percent per year over the past decade and 8percentoverthepast4years.Growthhascomefrombothlivestockandindustrial sectors with the demand for non-feed uses nearly doubling over the past eight years. Since China s ability to further increase corn acreage is limited, we expect continued growthinitscornimportsintheyearsahead. 11

14 The significant increase in palm oil production in Indonesia and Malaysia resulted in higherendingstocksandplacedsomepressureonpalmoilpricesoverthepastyear. The reduction in prices makes palm oil very competitive with other edible oils and demand is expected to remain strong in 2013/14. World trade increased by almost 6 percent in 2012 and is projected to rise by 3 percent in 2013, led by growth in demand from Asian countries. Malaysian palm oil stocks have declined by 31 percent since reaching record levels in December and this has provided some recent price support. We expect that prices will remain supportive of continued growth in palm oil production and the need for optimal fertilizer application. 12

15 World sugar production has rebounded over the past two years, driven by improved output in several of the largest producing countries. The increase in production and export supply has put some pressure on the market with sugar prices trading near three-year lows. Favorable weather conditions will be needed in the major growing regions to meet current market expectations for a large harvest this year. The second major factor to watch is the Brazilian government s move to increase the mandatory blend level for anhydrous ethanol into gasoline from 20 percent to 25 percent. Industry analysts expect this will reduce the percentage of Brazilian cane milled for sugar and could potentially reduce the volume of sugar available for export, compared to current USDA forecasts. 13

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17 Weexpectglobalpotashdemandwillincreasetoarangeof55-57milliontonnesin 2013 from 51 million tonnes last year. This is based on the expected rise in global consumption and the low distributor inventories carried into the year. China s demand is expected to rise to approximately 11.5 million tonnes, supported by large first-half volumes settled with major suppliers in late 2012/early New contracts have been concluded in India for its 2013/14 fertilizer year (April-March). We expect shipments to India during the 2013 calendar year of around 4 million tonnes, with a significant increase in deliveries in the second half compared to Inventories in other Asian markets were reduced in the second half of 2012 and we expect this, along with rising consumption, will contribute to improved demand in North American demand is anticipated to rise by more than 1 million tonnes, returning to more historical average levels. Latin America has remained a region of strength, in particular for granular potash in Brazil. For 2013, we forecast demand at or above record levels, with total shipments to Latin America anticipated to exceed 10 million tonnes. 15

18 Buyers in key offshore markets turned their attention to securing new supply after limited activity in the final quarter of With China s early settlement of potash supply contracts and strong demand in Brazil, export sales from North American producers were exceptionally strong in the first half of 2013, culminating in monthly export records in March and April. Indian customers settled new contracts with major suppliers in February, leading to improved shipments to this market in the following months. We estimate that total export shipments from North American producers will reach an all-timerecordofmorethan6milliontonnesinthefirsthalfandexpectshipmentsto remain strong through the remainder of the year. 16

19 Potash shipments to customers in North America are expected to increase by more than20percentfromthelowlevelrealizedinthefirsthalfof2012.shipmentswere still slightly below the historical average as delayed planting impacted application in some areas and customers wanted to limit inventory levels following the spring season. We anticipate the combination of low dealer inventories in most areas and farmers increased commitment to replenish nutrients in the soil will result in historically strong sales through the second half of

20 We believe the time and capital costs required to build new fertilizer capacity are often underestimated. This was highlighted during the past year by multiple announcements of project delays and postponements for all three nutrients. The International Fertilizer Industry Association (IFA) reports that timelines for most proposed potash projects have slipped by six to 18 months and several greenfield projects have been canceled. These changes have removed approximately 8 million tonnes of potash operational capability from IFA s outlook for The major greenfield project changes are delayed start-ups for the K+S Legacy project in Saskatchewan and EuroChem s project in Russia. Vale has indefinitely suspended its projects in Argentina and Saskatchewan due to unfavorable economics. Capital costs for the Rio Colorado project in Argentina reportedly increased to around $11 billion. Mosaic and Uralkali reportedly postponed the final decision on proceeding with brownfield projects that had yet to start construction. 18

21 Given the long time horizon required to develop new potash capability and recently announced project delays and postponements, we expect the majority of the capacity addedover thenext5years willberelatedtobrownfieldexpansions.from 2012to 2017, we expect approximately 14 million tonnes of new operational capability will be added, assuming all current projects are completed as announced. The largest percentage of this will come from expansions at PotashCorp mines in Saskatchewan and New Brunswick. 19

22 The phosphate market has been in a holding pattern in recent months as prolonged discussions around Indian phosphoric acid and DAP contracts have caused many buyers in other regions to wait for more clarity. India is expected to require an additional million tonnes of DAP imports between June and November as favorable monsoon rains should support consumption. However, a rapid depreciation of the rupee has created some uncertainty for Indian importers and could delay the timing of these purchases. Phosphate consumption levels remain strong in Latin America and in Asian countries other than India and China and we expect the recent buying delays could lead to stronger demand conditions in the third quarter. Despite a delayed spring planting season, we believe significant phosphate volumes were applied in most regions of theusandconsumptionwasreportedtobeverystrongincanada. 20

23 Global phosphoric acid trade is expected to be relatively flat in 2013 after declining for thepasttwoyearsduetolowerindianpurchases.followingaslowstarttotheyear, we expect improved Indian demand going forward as domestic producers attempt to operate their plants at higher rates. Europe is also a major importing region but volumes are expected to be constrained by a weak economic environment and adverse weather in many regions this spring. Morocco is the largest exporter, accounting for almost half of global trade. New capacityisexpectedtocomeonlineinthesecondhalfof2013injordanandtunisia. These facilities are joint-venture partnerships with Indian companies and the product is expected to be primarily shipped to that market. 21

24 Supportive crop economics and expectations for large planted acreage supported a strong fall application season and increased solid phosphate shipments over the past 12 months. Weather issues likely impacted spring application in some regions but, overall, we expect phosphate use increased during the 2012/13 fertilizer year. We anticipate demand will remain strong in the second half of 2013 as farmers look to capitalize on favorable crop economics and spread applications between the spring and fall seasons. 22

25 Over the past year, global phosphate fertilizer trade has been affected by reduced demand from India, a market that recently accounted for more than 30 percent of DAP/MAPimports.ItstartedtheyearwithhighDAPstocks,whichhadtobereduced before new import demand emerged. The outlook in other keyasian markets and Latin America is morefavorable and a steady increase in import demand is expected. Imports into the US market surged in late 2012/early 2013 to meet anticipated strong demand. DAP exports from Saudi Arabia are expected to continue slowly rising and Morocco volumes are forecast to be stable despite the development of new granulation capacity. Given the potential reduction in Indian imports, shipments from producers in theusandchinacoulddeclinein

26 Global phosphate exporters costs are generally determined by supply costs for phosphate rock/phosphoric acid, sulfur/sulfuric acid and ammonia. The cost of phosphate rock/phosphoric acid typically has the greatest impact on a supplier s cost competitiveness. High-cost producers such as select producers in the US, India and China have seen purchased rock values stay relatively strong even with some weakness in the solid phosphate market. Based on current costs and solid phosphate prices, some highcost producers have reportedly started to operate at lower rates. 24

27 Theglobalnitrogenmarkethascomeunderpressureinthefirsthalfof2013dueto increased supply and a delayed planting season in several Northern Hemisphere countries. China continues to be a major factor in the urea market, exporting more than 1 million tonnes in the first four months of the year despite its high export tax season. Reports indicate that significant volumes have been positioned at its ports in preparationforthelowexporttaxperiod,duetobegininjuly. New capacity is expected to come online in Algeria and the United Arab Emirates during the second half of The current market imbalance has pressured urea prices and reportedly resulted in curtailments of high-cost capacity in Ukraine and Eastern Europe. Ammonia prices have softened in recent months but have generally remained more resilient than urea prices. Supply interruptions in Egypt, Iran and Trinidad have provided for a more balanced ammonia market despite some weakness in global demand during the second quarter. 25

28 GaspricesinEuropeandUkraine(spotbasisandcontract)arewellabovethosein most other nitrogen-producing regions of the world. Russian gas prices are expected tocontinueonanupwardtrendasdomesticindustrialpricesmovemoreinlinewith export netbacks. In China, coal prices have softened in 2013 but many of its nitrogen producers(coal- and gas-based) remain in the middle to higher end of the global cost curve. Due to the recent decline in the price of urea, high cost producers, especially in Ukraine and Romania, have reportedly taken unscheduled turnarounds. US producers have benefited from lower-cost gas and a large domestic nitrogen market. While Trinidad's position on the cost curve can change due to the linkage between natural gas and ammonia prices, it remains a very competitive supplier given its proximity to the large US market. 26

29 The improved cost position for US nitrogen producers due to shale gas has stabilized domestic production. Small debottlenecking projects and the restart of production at our Geismar facility could raise production in the near term. Increased domestic production has reduced the amount of nitrogen needed from higher-cost offshore producers, primarily countries of the former Soviet Union. Trinidad accounts for approximately 70 percent of US offshore ammonia supply and is expected to remain the largest exporter to this market. Urea is more widely traded globally than other nitrogen products. Imports account for approximately one-third of solid US consumption, most coming from producers in the Middle East and Canada. 27

30 Global ammonia demand has grown at an average annual rate of approximately 3 percent over the past decade. Fertilizer use typically represents more than 80 percent of global demand, as this nutrient is fundamental to plant growth. Application of nitrogen fertilizer can be accomplished by a number of methods, which can vary from region to region. Although industrial use represents only 20 percent of ammonia consumption, demand has grown by an annual average rate of 5 percent over the past decade and by 7 percent over the past three years. Consumption for industrial purposes is expected to continue its recovery following the sharp decline during the economic downturn. 28

31 Despite global economic issues, nitrogen producers are experiencing increased demand for industrial ammonia. Production of explosive-grade ammonium nitrate (EGAN) used primarily in the mining and quarrying industry represents the single largest consumption of industrial ammonia. Environmental and emission- reducing legislation is increasing the demand for non-fertilizer urea and ammonia consumption around the world. The remaining nitrogen is used primarily in the production of acrylonitrile, caprolactam and amino resins used in the production of plastics, foams, adhesives and the chemical industry. Asia represents approximately half of all ammonia consumed for industrial uses, with China accounting for most of the consumption. China has become a hub for plastics, nylons and textile manufacturing. Korea, Japan and Taiwan rely heavily on imported ammonia to produce a range of industrial products. Europe and North America each represent approximately 17 percent of global industrial use. Demand growth is spurred by environmental emissions control for both coal power generation and diesel-powered vehicles. 29

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