Within the food value chain "From Farm to Dinner Table", we have almost 15% of the Global Infra-Energy Fund portfolio invested in companies relating to the sustainable food security megatrend, excluding those providing the transport and logistics within the food value chain. Companies involved in fertiliser production constitute about 7.5% or half the total exposure. The reason for a significant exposure is that we find the fertiliser industry is an extremely attractive segment for investment opportunities because of a range of factors relating to demand, supply, and the available investment universe in listed global equities. To explore the investment opportunities further, we look at why the fertiliser is a good investment opportunity, an overview of the global fertiliser industry, available investment universe, outlook for the industry, and individual stock selections.

Why fertiliser industry as an investment opportunity?

Just as humans need vitamins and minerals to develop and survive, so do plants. Fertiliser’s nutrients are chemical elements required by plants and living organisms to grow and survive. As a result, fertilisers increase the crop yield either in quantity or quality of the produce, providing a higher return for the grower.

Tn a world with finite arable land and a constantly growing population, farmers need to increase production to meet global grain demand. Therefore, fertilisers are essential for improving crop yields.

There are three main drivers of fertiliser demand, which include:

1. The need to feed the world’s growing population.
2. Increasing wealth leads to higher protein consumption in the form of meat -more crops are needed.
3. Higher crop yields become imperative to ensure an adequate food supply.

When the price of grain rises due to higher demand, this will boost farmers' income and have the most profound influence on fertiliser consumption. In addition, the higher grain prices will stimulate farmers to maximise production by planting more extensive plantations and a higher fertilisation rate.

Another emerging driver of demand is the “China Factor”. In the past decade, China has effectively moved from being a corn exporter to an importer and not only that has the potential to be the largest importer in 2021. China accounts for 60% of global soybean imports to further understand the volume.

The global fertiliser industry

The global fertiliser industry is one of the largest agribusiness sectors. The size of the market was US$ 172 billion in 2020 in terms of revenue. The Asia Pacific is the largest market and accounted for a market share of over 50% in 2020. The Asia Pacific will likely continue to dominate the industry due to the increasing demand for fertilisers.

The global fertiliser industry consists of three key fertiliser types, which include:

1. Nitrogen (N) is the building block of proteins and is essential for growth and development in plants, supply of nitrogen determines a plant's yield, growth, and colour.
2. Phosphate (P)is essential for root development and helps with drought resistance in addition to growth.
3. Potassium (K)assists in photosynthesis within plants and improves resistance to disease and drought, thus developing fruits and seeds.

To further understand the markets for fertiliser, we like to take a more detailed look into each of the three fertiliser markets.

Nitrogen Fertilisers

Nitrogen is the most essential nutrient in terms of trade and consumption. Nitrogen-based fertilisers account for approximately 60% of global fertiliser consumption. Nitrogen is the building block for protein and enzymes in all cells and is critical to yield and quality in plants. Corn, rice and wheat are the largest end-users of nitrogen fertilisers. Nitrogen fertilisers are generally applied every planting season to avoid leaching and volatility losses in the crop.

There are three main types of nitrogen-based fertiliser used by growers. These include Ammonia, Urea, and Ammonia Nitrate. Ammonia is the main building block for all three fertilisers, where Urea and ammonia nitrate are derivatives of Ammonia. All three fertilisers are produced through the Harber Process, which involves the catalytic reaction of air (source of nitrogen) with natural gas (the source of hydrogen) under temperature and pressure. Ammonia is produced first and upgraded to Urea, Ammonia Nitrates, and other nitrogen products (DAP/MAP). Ammonia fertiliser holds the highest level of nitrogen (82%) but is the least used fertiliser because, as a gas, ammonia fertiliser needs to be compressed and refrigerated for transport, adding high costs to production. To avoid these costs Ammonia is upgraded to liquid or solid fertilisers, such as Urea and Ammonia Nitrate., making it easier and safer to transport to the end-users.

Urea fertiliser is the largest finished nitrogen fertiliser because it can be transported as a solid or liquid product and maintains a high content in the nitrogen of 46 % by weight. Urea is traded globally and used as a reference for nitrogen products due to its commoditised nature.

Ammonia Nitrate has less nitrogen content of 34 % but has some agronomic advantages over Urea in that the nitrogen is in a more readily accessible form to plants.

Ammonia, Urea, and Ammonia Nitrate fertilisers have one common attribute: they require a lot of energy (gas) to be produced. Therefore, nations with an abundance of low-cost natural gas like Qatar, Russia, Canada, United States, Australia, and Norway are best positioned in the nitrogen-based fertiliser industry.

Phosphate Fertilisers

Phosphate Fertilisers are derived from Phosphorous(P), an essential element in all forms of life. The fundamental nature of P makes phosphate fertilisers necessary where soil phosphorous reserves are insufficient or unable to maintain adequate solution concentration for crop production. The need for phosphorus reserves in crop production has made phosphate fertiliser the second-largest product globally at slightly below 20% market share.

The vital elements of producing phosphate fertilisers are 1) mining phosphate ore bodies and 2) dissolving in sulphuric acid to create phosphoric acid that can react with Ammonia to produce solid fertilisers (mono-ammonium phosphate or MAP and di-ammonium phosphate DAP), merchant grade phosphoric acid (MAG), and super-phosphoric acid (SPA). However, because of the high phosphorous content and addition of Ammonia, DAP is the most preferred phosphate product.

Access phosphate ore bodies are critical to be able to produce phosphate fertilisers. The most considerable phosphate resources are concentrated in a small number of countries. Morocco is the largest, holding over 70% of the total reserves and resources. Other significant sedimentary phosphate "provinces" occur in Florida and Carolina in the US, North Africa, the Middle East, West Africa, Australia, and China.

Potash-based Fertilisers

Potash-based fertilisers' nutrients are required when farmers are encouraged to plant more corn and soy crops. They are the third-largest fertiliser nutrient accounting for just under 20% of global consumption. The regions that are driving the most growth are Asia and Brazil.

The main building block for potash-based fertiliser is potassium chloride (KCI), referred to as muriate of potash (MOP) is the most common and least expensive source of potash and accounts for 95% of the world potash production, potassium sulphate and nitrate account for the rest. KCI is extracted from brine or ore formed by the evaporation of ancient sea, purified, collected, dried and then packaged as granular size as a solid fertiliser.

The reserves are concentrated in the former Soviet Union (FSU)and Canada and supply highly concentrated across seven leading suppliers that represent 84% of global supply. Geographically, Belarus, Canada and Russia are the largest producers, followed by China, Germany, Israel and Jordan. Canada is the world's largest potash producer, accounting for 31.6% of the world's total in 2019.

Supply is being further expanded with one of the largest ever new Potash projects is, one by BHP Australia at Jansen, Saskatchewan. US$ 4.5 billion has been spent before another US$5.7 billion to finish constructing the mine. BHP claims just the Jansen deposit alone, with its stage one having 100 years of life.

Investment universe for the fertiliser sector

The total size of the fertiliser sector in the listed global equities markets is relatively small, just over $200 billion. It represents less than 10% of the entire listed chemical sector we discussed back in May 2021. Compared with the market value of the largest industrial gases company -Linde Germany, at $167 billion (industrial gases is a highly consolidated industry dominated by big 3, listed universes total= $330 billion). If we include other non-fertiliser types of agricultural chemicals (mainly in crop science – such as BASF, Bayer and Corteva), then there is another US$180 billion. Hence Agricultural Chemicals, in a total of ~$380 billion, is bigger than the Industrial Gases segment.

Ranking of Top listed Fertiliser Companies

1	Nutrien*	Canada	$39.6	Potash and Nitrogen
2	Industries Qatar#	Qatar	$25.6	Nitrogen
3	Sabic Agri-Nutrient	Saudi Arabia	$21.4	Nitrogen
4	CF Industries*	US	$14.0	Nitrogen
5	Mosaic*	US	$13.8	Potash and Phosphate
6	Yara International	Norway	$12.4	Industrial Gases
7	ICL Group#	Israel	$11.9	Phosphate and Potash
8	PhosAgro *	Russia	$9.7	Phosphate and Nitrogen
9	Fertiglobe	Abu Dhabi	$8.5	Nitrogen
10	OCI NV *#	Netherland	$6.1	Nitrogen

NB * are companies in the fund # those with substantial non-fertiliser businesses

Consolidation of the fertiliser sector

A wave of mergers and acquisitions (M&A) since the 1980s has vastly reduced the number of producers in the North American fertiliser market. As a result, companies from 1980 such as Freeport-McMoRan, Mississippi Chemical, IMC Global, Unocal, Texas Gulf, Ag Minerals and Chemicals, Arcadian and Vigoro either no longer exist or are no longer in the fertiliser business.

Of the five that remained a decade ago – Mosaic, Potash, Agrium, CF Industries and Terra Industries only three are left now because of two more M&A.

1	2010	Terra Industries acquired by CF Industries for US$4.7 billion
2	2016-18	Merger of Potash Corp of Saskatchewan and Agrium for US$36 billion
3	2010	Takeover of Silvinit by Uralkali both of Russia in a US$23.9 billion tie-up

The merger of Potash Corp Saskatchewan and Agrium were two Canadian companies and changed the combined entity to the new name of nutrient.

Newcomers, state ownership, and private ownership

We have seen two new fertiliser companies listed on the global equities market in the last ten years. The earliest listing was PhosAgro Russia in 2011, raising $538 million in London IPO. The most recent listing in Oct 2021 was Fertglobal, a US$795 million IPO on the Abu Dhabi Stock Exchange. Fertglobal was the combined Middle East and North African assets of OCI Netherland and ADNOC Abu Dhabi’s national oil company.

It is estimated half the world's nitrogen fertiliser production is in state-owned entities, while most of the potash fertilisers are now in private corporations being as high as 66% in state ownership in the 1980s.

One of the most prominent players that are state-owned and not listed is OCP Group of Morocco, formerly Office Chérifien des Phosphates. OCP is a 100% state-owned phosphate rock miner, phosphoric acid manufacturer and phosphate fertiliser producer. OCP has access to more than 70% of the world's phosphate rock reserves. OCP diversified in 1965 to become a phosphate processor, making it one of the world's leading fertiliser manufacturers and holds a 31% market share of the world phosphate product market.

Where are we now and the outlook for the fertiliser sector?

Not different from many other sectors, the fertiliser industry has seen an astonishing turnaround in its fortunes over the past one and half years. The beginning of the Covid-19 crisis last year marked the bottom of what had been a decade of poor prices and profits. The significant increase in fertiliser prices was a combination of favourable factors, which included:

1. Credit-hungry farmers got an expansive monetary policy, and governments hastened to ensure that food supplies would be secured and that consumers continued to pack home shelves.
2. When farmers' income rises globally, they have the cash to spend on more fertiliser applications.
3. A return of La Nina. This leads to more rainfall in some areas but less in others and overall seems to boost fertiliser demand and prices.

Companies that had been shutting down plants finally saw the change of fortunes. Obviously, share prices have risen substantially since the bottom of March 2020.

Recent market developments have seen increased volatility for pricing due to the unexpected breakout Russian Ukraine conflict, which has shocked the demand and input side of the fertiliser market. The war has seen fertiliser prices accelerate to new highs because the future fertiliser supply from Russia and Belarus has been put in doubt with sanctions. At the same time, further input cost pressures have increased with the global gas supply at risk with the potential sanctions being applied to Russian oil and gas. The impact of this event on fertiliser prices can be shown by the price movement of the North American nutrient market.

There will be uncertainty with short term price action due to the unknown outcomes of the Russian Ukraine conflict. However, one thing that is very clear is prices will remain higher in 2022 than in 2021. Moreover, the upgrade in pricing has also raised medium-term price forecasts, considering the following significant developments.

• The Russian Ukraine conflict is forcing Western European nations to seek alternate routes for fertilisers, gas, and wheat imported from Russia or Belarus. The re-routing away from Russia and Belarus will provide enhanced food and energy security for these countries over the medium and long term. However, such changes in supply routes cannot be done quickly as all markets require extra investment to add supply capacity.
• In early 4Q 2021, fertiliser markets saw further price increases due to the escalation of the energy crisis, an unprecedented rise in natural gas prices in Europe and Asia, a subsequent decline in fertiliser production, and export restrictions from China in favour of domestic needs. As a result, prices have renewed multiyear highs and continue to rise, especially for nitrogen-based fertilisers amid approaching seasonal demand in key markets in North America, Europe and China. We believe the recent energy crunch in Europe has broad implications for the entire food industry.
• Global energy costs support fertiliser prices, notably in Europe which has seen curtailment of nitrogen capacity. This has tightened up nitrogen demand/supply. European ammonia cash costs are >US$1000/t given TTF (Dutch) gas costs above $30/unit. USA Henry Hub prices had been over US$6/mmbtu in Q3 2021 but have fallen to below $4 /MMBtu, which means US nitrogen producers have enormous lower input cost advantage globally.
• The Chinese government has taken steps to restrict exports from 1 October 2021 and curb operating rates of nitrogen producers to prioritise domestic supply, with increasing coal prices and dual controls on energy consumption and intensity adding price pressure upwards. Further, this upward pricing pressure is expected to be a repeat occurrence in winter as environmental controls on coal tighten in China and capacity closures accelerate due to environmental restrictions. (NB Chinese nitrogen-based fertilisers use coal rather than natural gas as feedstock) This trend of falling exports is forecast to continue through to 2025.
• Due to strong demand and production issues, US corn and soybean supply tightened significantly in 2020/21. Despite increased production, stocks are expected to remain well below average in 2021/22. Grower cash margins are historically high, driven by solid prices across a wide range of crops.
• Key importing regions (i.e. EU, US, India, LATAM) are all competing for nitrogen products ahead of the spring season (Q4 2021/Q1 2022), resulting in upward pricing pressure which, combined with delays in new urea capacity in India, Brunei, Nigeria and Russia, is casting doubts over additional urea availability.
• Extremely low stocks-to-use ratios, which takes at least two years to replenish, with yields lowered in industry forecasts since June due to droughts in US and Brazil, and floods in China.
• High crop prices are expected to support acreage and crop input demand into the 2022 planting season.

Environmental pressures will affect the supply side, with a potential wildcard on the growth side.

Environmental pressures and restrictions were not as dominant in prior demand-driven pricing periods, which is a big difference compared to 2021-2025, which is supported by higher prices now, then plant closures and impact of CO2.

The potential wildcard future growth relates N-based fertiliser companies with low input cost of natural gas are the ideal candidates for developing a future market for ammonia/urea/hydrogen! In addition, potential future uses of Ammonia are currently emerging as part of the nascent clean hydrogen economy, where blue and green Ammonia could serve as an efficient energy carrier and as a clean fuel.

RC Global Funds Management's stock selections for the fertiliser industry

Combining all the above factors, we are very constructive on the outlook for the fertiliser industry. The current conducive conditions should last well beyond 2022 with positive industry sentiment and good fundamentals at the company level; hence we are overweight this segment with five holdings:

1. CF Industries US, OCI Netherland, and Yara International Norway – all three are predominantly Nitrogen-based
2. Nutrien Canada, which is the largest potash producer fertiliser producers
3. Mosaic US, one of the top two Phosphate

Other than these five pure plays, – Petronas Chemical of Malaysia, with over 35% of its revenue coming from its Fertiliser/Methanol division – is the largest fertiliser (both Ammonia and Urea) producer in the ASEAN region.

We have a preference for the nitrogen-based producers also for another reason – all the major players here are ideally positioned in the "Energy Transition" megatrend, and a structural shift to a demand-driven environment supports the pricing outlook for 2023 and beyond.

All material in this article is general information only and does not consider any individual’s investment objectives.

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