Market Analysis Report

Transcription

Q3
Market Analysis
Report
September 18, 2014
Q3
Market Analysis
Report
September 18, 2014,
2014
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 following provides a table of contents:
Forward-Looking Statements:
Page 1
Agriculture Market Overview:
Pages 2 – 13
Fertilizer Market Overview:
Pages 14 - 34
MARKET ANALYSIS REPORT: 09.18.2014
1
2
Agriculture Market Update
Global crop prices strengthened in the first half of 2014 with the support of strong
demand worldwide, late planting in the US and political uncertainty in the Black Sea
region. Prices have softened in the second half with the confirmation of large planted
acres in the Northern Hemisphere and excellent growing conditions in the US.
As with any growing season, the supply/demand balance and pricing outlook for
agriculture commodities could still be affected by a wide range of factors. The points
listed on the map above are key factors that we believe could impact agriculture
markets in the near-term.
3
Stocks Are Relatively Tight Despite Record Production
Following the major supply shortfall in 2012, favorable weather and higher planted
area led to record crop production in 2013. This supported a partial recovery in global
ending stocks from the historically low levels recorded the previous year. Global
consumption and trade rose significantly as a result of increased supply and lower
crop prices. The steady rise in consumption- which has grown at an annualized rate
of more than 2 percent over the past decade- has provided ongoing pressure to
increase world production.
Strong prices in the first half of 2014 supported an increase in global crop acreage,
particularly soybeans. Growing conditions have been favorable in most major
Northern Hemisphere crop-producing regions. Whether world production can exceed
the record levels achieved in 2013 will depend on crop development through harvest
and the upcoming planting season in the Southern Hemisphere.
4
Expect Record Soybean and Corn Production
US farmers responded to healthy crop economics in 2014 and planted the largest
area of major crops since 1985. Soybean planted area rose to nearly 85 million
acres, 11 percent higher than in 2013. Corn acres fell by nearly 4 million as farmers
switched some land to soybeans and cotton.
As of the middle of September, crop ratings are favorable in most major corn- and
soybean-growing regions with USDA projecting a record soybean and corn crop.
Inventories for both crops are expected to rise significantly compared to the
extremely low levels of the past few crop years.
Alternatively, the US winter wheat crop was impacted by drought conditions in the
Central and Southern Plains. Wheat production is expected to fall by 5 percent in
2014.
5
Strong Exports and Domestic Processing Margins
Greater supply and lower prices have contributed to a strong rebound in demand for
US corn. A big driver has been rising livestock prices, which have supported
improved returns in this sector after consecutive years of challenging financial
conditions. US ethanol producer margins have been aided by lower corn prices and
good demand in the domestic and export markets.
US corn export sales have been very strong despite China’s decision to reject
cargoes containing an unapproved GMO corn variety. With a large crop on the
horizon, there is potential for further growth in US corn exports during the 2014/15
crop year.
6
Expect Large Nutrient Removal in 2014
Record North American crop production in 2013 removed significant nutrients from
the soil. We believe the increase in potash application rates over the past fertilizer
year is in part a reflection of the need to keep pace with higher removed rates and
address declining soil test levels in North America.
The potential for a record corn and soybean harvest in the US is expected to result in
high level of nutrient removal from the soil again this year.
7
Challenging Weather Conditions Could Impact Crop Production
The northern and central parts of China have suffered excessive heat and severe
drought over the last several months. Nearly 12 million acres of farmland in 12
provinces have been impacted by the drought.
One of the most affected areas is the province of Henan, which typically produces 23
percent of China’s wheat. Since June, Henan’s total precipitation was the lowest in
53 years. One-quarter of the severely drought-hit farmland will see no harvests, even
if precipitation increases. The drought could have a large impact on China’s total
crop production in 2014. USDA lowered its estimate of Chinese corn production by 5
million tonnes in the September WASDE report.
8
Expect Significant Imports to Meet Rising Consumption
China’s grain imports increased substantially in 2013/14, reaching the highest
volume in a decade and nearly double the previous year’s level. Rising demand has
kept pressure on domestic crop production despite government reports that 2013
marked the tenth consecutive year of record grain output.
In 2014, China suffered excessive heat and severe drought in key northern and
central grain-growing regions during the summer months. USDA is currently
forecasting lower Chinese wheat and corn imports for the 2014/15 crop year.
However, based on current crop conditions and lower global commodity prices, we
see upside potential for grain imports compared to USDA’s forecast.
Soybean imports are projected at record levels in 2014 due to strong demand and
domestic production constraints. Growth in palm oil imports has slowed in 2014 due
to competition from other edible oils. However, the long-term upward trend in imports
is expected to be maintained.
9
Increase in Fertilizer Sales as Monsoon Rains Improve
Monsoon rains are critical if India is to produce a large enough crop for its growing
population. As of the middle of September, the monsoon was 12 percent below
normal, a significant improvement compared to the start of the season. The recent
rainfall has been supportive to the later-planted Kharif crops and could support the
upcoming Rabi planting season.
The slow start to the monsoon season impacted fertilizer demand in some regions at
the beginning of the fertilizer year. However, phosphate and potash sales have
increased more recently with better moisture conditions. We anticipate consumption
of both nutrients will be higher during the current fertilizer year compared to the very
low levels of recent years.
10
Strong Competition and Lower-Than-Expected Imports Soften Market
One of the most important crops in Southeast Asia is oil palm, which performs very
well in this region. As a result, Indonesia and Malaysia are the world’s largest
exporters of palm oil. Despite positive long-term market drivers, several factors have
placed pressure on the edible oil sector.
Palm oil import demand from India and China, the two largest importers, has
softened in recent months. India produced a large oilseed crop in 2013 and is
importing more sunflower oil this year. Its palm oil imports are expected to recover
next year as its 2014 oilseed production is not anticipated to be as robust.
Chinese palm oil imports have been impacted by increased price competitiveness
from soy oil due to the large global soybean crop. Its total vegetable oil imports have
also been affected by rising domestic soybean crushing capacity, which supports
imports of raw soybeans over processed products.
11
Soybean Plantings Expected to Rise; Corn Area to Decline
Lower soybean prices and higher input costs have lowered Brazilian soybean
margins but returns for this crop remain favorable relative to competing crops.
Soybean acreage during the 2014/15 crop year is expected to increase by 2-4
percent to 31 million hectares.
Lower domestic corn prices will likely cause farmers to put more emphasis on
soybean production and less on full-season corn production. The area for full-season
corn in Brazil is expected to decline 5 percent to 6.4 million hectares and the Safrinha
corn acreage could also decline by 5 percent to 8.6 million hectares depending on
market conditions in the coming months.
12
Economic Incentive Remains in Place for Fertilizer Consumption
The graph above illustrates the strong historical correlation between crop and
fertilizer prices. With crop prices rising in the first half of 2014, there was positive
farm-level sentiment and a push to address soil fertility needs in many major growing
regions.
Crop prices have declined since mid-May, mainly due to higher planted area and
favorable growing conditions in the US. However, we believe commodity prices
remain at a relatively supportive level compared to fertilizer prices. In addition, we
anticipate there will be a large requirement to replenish nutrients removed by this
year’s crop.
13
14
Potential for Record Global Demand in 2014
Global potash shipments totaled approximately 53 million tonnes in 2013 as
significant market uncertainty during the second half of the year impacted demand.
We believe global consumption exceeded shipments for the second consecutive year
as farm-level usage was not affected by uncertain market conditions to the same
degree.
With low global beginning inventories and higher projected consumption, global
shipments have increased in 2014. Demand in the first half was particularly robust,
increasing by more than 10 percent compared to first-half 2013 to approximately 32.5
million tonnes. With an expectation of strong demand through the balance of the
year, we anticipate shipments in 2014 will surpass the previous record and reach
more than 58 million tonnes.
15
Record First-Half Demand Tests Global Operating Capability
Record potash demand in the first half of 2014 resulted in most producers running at
or near estimated operational capability. We estimate that operating rates exceeded
90 percent of world’s operational capability in the first half, which would be near the
five-year high.
The potential for strong second-half demand, coupled with seasonal maintenance
turnarounds and other reported downtime, is expected to keep potash supply tight for
the remainder of 2014.
16
North America and Latin America are Major Granular Grade Consumers
Potash is often thought of as a homogeneous product but it is important to identify
trends in specific grades as the supply/demand balance can vary significantly for
each product. Brazil has emerged as the world’s largest granular potash market,
consuming approximately 8.5 million tonnes of this product grade. North American
consumption of granular potash is estimated at nearly 8 million tonnes, with the US
accounting for more than 90 percent of the total.
Standard grade potash is more commonly used in developing Asian countries for
direct application or as a feedstock for NPK compound products. Granular potash is a
small percentage of the market in Asia but as agricultural practices advance, we
believe its consumption will increase in countries such as China.
Industrial grade potash is used for a wide range of products and accounts for less
than 10 percent of global potash use. It is primarily consumed in North America,
Europe and East Asia.
17
Market Could Become a Tailwind to Global Demand Instead of a Headwind
The recent revival of the monsoon rains has improved buyer sentiment in India and
fertilizer sales have picked up, with potash arrivals outpacing the previous year’s
level. Indian potash consumption is expected to be higher in 2014 as retail prices
have stabilized, but application rates are still well below scientifically recommended
levels.
Reports indicate the new government could implement policies favorable for
agriculture sector growth and the fertilizer industry. While no specific changes have
been announced, we believe a renewed focus on improving the health and
productivity of India’s soils will be a key long-term driver of potash demand.
18
Conditions Support Return to Improved Demand Growth Rates
With increased demand in China in 2014 and reduced rail shipments from Russia,
additional second-half ocean shipments have been agreed to through the execution
of optional tonnage under first-half contract terms with several potash suppliers.
Domestic prices have reportedly strengthened due to robust demand from NPK
manufacturers and local producers facing rail constraints.
With China’s rising food requirements, the need to increase crop production remains
a top priority. We believe that growth in Chinese potash consumption will remain
strong in the years ahead, driven primarily by rising domestic food production
requirements and strong prices for key grains such as corn. With potash prices
moving lower this year, the ratio of corn prices to potash prices is projected to be at
its most favorable level in more than a decade.
19
Growth Expected to Remain in Line With Historical Trends
The demand for potash in Other Asian countries has grown at a relatively steady rate
over the past 25 years. The biggest driver of this growth has been an increase in
application rates and a shift in acreage to potassium-intensive crops such as oil palm,
sugar cane, fruits and vegetables.
While lower prices for key products such as palm oil and sugar could create a nearterm headwind, we believe potash consumption will continue to be underpinned by
rising demand for high-value crops grown in this region.
20
While Acreage Expansion Could Slow, Demand Drivers Remain Supportive
Potash demand in Latin America remained strong ahead of its key planting season,
with Brazil’s granular potash imports up almost 1 million tonnes through July 2014
compared to the same period last year. Despite the recent downturn in crop prices,
we expect overall planted acreage in 2014/15 will be maintained and potash remains
affordable at current levels.
Potash consumption in Latin America has grown historically by around 3-4 percent,
driven by acreage expansion, higher application rates on its nutrient-deficient soils
and a shift to more potassium-intensive crops. We believe Latin America is wellpositioned for further expansion of its agricultural sector, which should continue to
support strong potash fertilizer consumption growth.
21
Strong Demand and Logistical Constraints Expected to Keep Granular Market
Tight
North American potash consumption rose during the 2013/14 fertilizer year,
supported by higher planted area and favorable crop economics. North American
demand has remained strong to start the 2014/15 fertilizer year, with tight supply and
logistical issues the primary concerns for domestic potash customers. Crop prices
have declined but potash costs as a percentage of projected revenue remain within
recent historical average levels.
Despite the recent upturn in consumption, potash application rates have not kept
pace with crop removal. This has resulted in an increasing nutrient deficiency and
declining soil test levels in North America. We anticipate future growth in
consumption will be driven by the need to keep pace with higher crop nutrient
removal rates.
.
22
Supply Changes Have Resulted in Volatile Markets
Global demand for nitrogen has grown at a historically consistent rate, with especially
strong demand from the US, Latin America and India. However, export supply has
been more unpredictable, which has contributed to volatile nitrogen markets in recent
years. This trend has continued during 2014 with record Chinese urea exports the
dominant theme in the first half and unplanned supply outages tightening the market
in the second half.
The points listed on the map above are key factors impacting the nitrogen market in
2014.
23
Production Impacted by Regional Conflict
FSU ammonia production was relatively stable over the past three years, supported
by strong global markets. Russia and Ukraine are the largest producers, accounting
for 66 percent and 20 percent, respectively, of the regional total.
In 2014, Ukrainian production has been affected by political tension and uncertain
natural gas supply and pricing terms. Two Ukrainian nitrogen plants near the Russian
border have been curtailed since May and other plants have operated at reduced
rates. Ukrainian production is estimated to have dropped to approximately 50 percent
of typical levels. At this point, ammonia production in Russia has not been
significantly impacted by regional tensions or trade sanctions.
24
Black Sea Shipments Down Significantly in 2014
Russia and Ukraine account for nearly all ammonia and urea trade from the FSU
region. Approximately 65 percent of ammonia exported by Russia and nearly all
ammonia exported by Ukraine flows through the port of Yuzhnyy on Ukraine’s Black
Sea coast. In 2013, the combined ammonia export volumes from Yuzhnyy accounted
for nearly 20 percent of global trade.
Both ammonia and urea exports from the Black Sea are expected to drop
significantly in 2014 due to lower plant operating rates in Ukraine. Recent trade
sanctions imposed on Russia by certain countries have created additional supply
uncertainty from the region going forward.
25
Production Curtailed by Gas Supply and Government Restrictions
Ammonia capacity has increased in North Africa but political instability and gas
supply-related issues have impacted operating rates. Algeria accounts for the
majority of new capacity but several projects have been delayed and completed
projects have been hindered by government export license issues.
Production in Egypt has fallen over the past four years due to political unrest and
reduced natural gas supply. The Egyptian government heavily subsidizes natural gas
prices to both citizens and industrial users. The cost of this subsidy has become
unsustainable and the government has reduced gas supply to industrial sectors and
proposed large price increases. Gas curtailments have caused some ammonia
producers to periodically shut down facilities or run at very reduced rates.
26
Supply Uncertainty in Major Exporting Regions
Global supply constraints have kept the ammonia market firm in 2014. In addition to
supply issues in the FSU and North Africa, Trinidad has been hit with gas
curtailments as natural gas producers perform major maintenance work to their
offshore drilling rigs. These curtailments are expected to reach up to 30 percent for
approximately three weeks in September before they improve in fourth-quarter 2014.
At the same time, global import demand has remained firm with India and Morocco
importing higher volumes to supply dry phosphate production. As well, demand from
industrial ammonia consumers in Other Asian countries and Europe has remained
stable despite increased competition from Chinese caprolactam producers. The US is
the one major market expected to reduce imports in 2014 as its domestic production
increases and demand has weakened slightly.
27
Chinese and Middle East Producers Have Increased Exports
China has become the world’s largest urea exporter as its domestic production
surplus grew and coal feedstock costs declined. Exports from the Middle East have
increased along with the development of new supply in Qatar, Iran and the UAE. The
emergence of supply from these regions has pressured higher-cost suppliers in the
FSU and Europe.
India continues to rely heavily on imported urea as production fundamentals in the
country remain constrained. It is in the midst of importing significant volumes of urea
as a noteworthy tender closed after the late monsoon season commenced. Another
significant tender is expected in the fourth quarter of 2014. Imports into Latin
America, and more specifically Brazil, remain robust. Brazil imported 30 percent more
urea in first-half 2014 than in the previous year.
28
Expect Record Exports in 2014 but Lower Second-Half Volumes
China has emerged as the world’s largest urea exporter, shipping more than 8 million
tonnes and accounting for 18 percent of world trade in 2013. Exports in the first half
of 2014 were at a record pace as the government relaxed export taxes during the
peak consumption season to help alleviate the domestic oversupply situation.
While we anticipate another record year for Chinese exports, we believe that volumes
will be more evenly distributed through 2014. With more product shipped in the first
half and less stored in port warehouses, we expect exports in the second half will fall
below the comparative period in 2013. This is providing some support to urea
markets during the second half of 2014.
29
Improved Demand Supporting Some Recovery in Phosphate Markets
Supply challenges and strong demand in several key importing regions during the
first half of 2014 resulted in a tighter than anticipated phosphate market. Markets
softened briefly in the second quarter as buying for the spring season eased and
Indian demand was slow to materialize.
We believe phosphate markets will be relatively balanced in the second half of 2014,
supported by stronger import demand in Eastern hemisphere countries during the
third quarter and the potential for renewed demand in the Western hemisphere
during the fourth quarter. We expect this demand will be met by an increase in
exports from Morocco, Saudi Arabia and China (prior to its return to the high export
tax period).
30
India Phosphoric Acid Demand to Increase as New Global Supply Is Added
India is the world’s largest importer of phosphoric acid, accounting for close to half of
global trade. We expect a small increase in global trade in 2014 as India’s demand
slowly recovers and shipments to other markets remain relatively stable. India’s
phosphoric acid imports are projected to expand over the next few years as domestic
producers target higher DAP and NPK production rates.
Morocco is expected to remain the largest exporter of phosphoric acid, accounting for
approximately half of world trade. Phosphoric acid capacity additions in Tunisia and
Jordan could increase export supply from these countries. However, as we have
seen in recent times, political and labor issues can significantly impact operating
rates, resulting in lower available supply.
31
India Projected to Have Higher Phosphate Use
Indian DAP demand was slow to emerge in the first half of 2014 due to uncertainty
over subsidy levels and a slow start to the monsoon season. States in central and
northwest India, which traditionally consume the largest volumes of DAP for the
Kharif planting season, received low rainfall early in the monsoon season. The recent
recovery of the monsoon has increased late-season Kharif demand and holds
promise for the Rabi planting season. With demand improving and import purchases
delayed, Indian DAP supply could be tight through the remainder of the year.
India’s phosphoric acid imports were up 24 percent during the first seven months of
2014. Although DAP production is down slightly, NPK production has been robust,
driving the need for greater phosphoric acid imports. With the recent settlement of
contracts for the remainder of 2014, phosphoric acid imports are expected to exceed
2013 levels.
32
Strong Imports During First Half; Quieter Market in Third Quarter
The Brazilian market experienced record demand in 2013 and this positive trend
continued through the first half of 2014. The increase in imports has been fueled by
steady growth in consumption and a reduction in domestic phosphate production
since 2013.
Purchases in the third quarter have slowed due to strong buying in the first half and
the recent decline in crop prices. Additional purchases are expected in the fourth
quarter as buyers begin preparing for the Safrinha second crop season.
33
China Is a Major Offshore Supplier
China exported nearly 2.5 million tonnes of DAP and MAP in the first seven months
of 2014, more than double its three-year average of 1.2 million tonnes. India is a key
market for Chinese suppliers, typically accounting for around half of total exports.
With slower than expected first- half Indian demand, Chinese product has been
shipped in greater volumes to less frequent trading partners such as the US and
Brazil.
The focus for Chinese producers during the fourth quarter will return to ensuring
adequate supply for the domestic market as the high tax export period approaches.
With lower inventory at the ports, Chinese phosphate exports could decline in the
second half of 2014 compared to the previous year.
34
35

Market Analysis Report

Transcription

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