The fueling business of fertilizers
The chemical fertilizer industry in the Middle East is growing at a rapid pace, leading to further investment and expansion.
September 17, 2008 9:07 by kippreport
Fertilizer. The word brings up unappetizing images, which is ironic given that a huge portion of the world’s population would go hungry without it. It’s an unglamorous business, to be sure – and given the Gulf region’s penchant for gleaming office towers, one would be forgiven for thinking a decidedly low-tech industry like fertilizer production probably isn’t a key point on national leaders’ economic agendas.
In fact, fertilizer is big business in the Middle East – chemical fertilizer, that is. The type used in most industrial food production, rather than the organic kind made from the stuff critters leave behind. Good thing, for it would be a big mound of manure otherwise. Fertilizer production capacity in the Middle East and North Africa stands at 27.7 million tons, or 12 percent of the world’s total, with Egypt, Saudi Arabia and Qatar the region’s dominant producers, according to a recent report from Kuwait’s Global Investment House. The industry has been running at full capacity in recent years, driven by exports to South and East Asia, where local production has stagnated even while demand soars. Fertilizer production in the MENA region will likely show a year-on-year increase of more than 10 percent in 2008, with further growth constrained only by plants’ inability to churn out vaster amounts of urea, ammonia, melamine, and sulphuric acid, all key components of chemical fertilizers.
The industry is therefore poised for a massive expansion drive, with planned investments of $15.7bn to build bigger plants to churn out 55.3 million tons of fertilizer by 2012 – an 18.1 percent compounded annual growth rate over four years. That will represent a huge leap forward, given that over the last seven years capacity has grown by just 3.5 percent annually, higher than the world average of 2.8 percent but not much to write home about.
Why the sudden rush to expand? Start by looking at the industry’s staggering profit margins: Saudi Arabian Fertilizers Company (SAFCO), one of the regional giants, saw net profits of $533m last year on turnover of $933m. Analysts expected profits at the publicly-listed company to grow by more than 30 percent this year. But it has already beat expectations, with second-quarter profits rising nearly 125 percent due to higher sales volumes and soaring prices worldwide.
Plants in the Middle East are better positioned for fertilizer production than those elsewhere, for the same reason regional steel and aluminum producers enjoy an advantage: the proximity of energy inputs, namely natural gas, which is difficult to transport over long distances.
“Fertilizer production needs gas, which the GCC countries used to have in relative abundance,” says Eckart Woertz, program manager for economics at the Gulf Research Center in Dubai. “Thus, they have a competitive advantage here and have eyed industrial projects that can make good use of their gas reserves – like petrochemicals and fertilizer.” In addition, Saudi Arabia has large phosphate deposits in Al Jalamid, which local mining giant Ma’aden is extracting to turn into phosphate fertilizer.
There’s a catch, though. Gas is in short supply these days – even in the Middle East. All eyes are on Qatar, which has the world’s third-largest gas reserves after Russia and Iran and is the most promising potential gas source for the region. Yet despite growing demand, Qatar is in no hurry to export, even maintaining a moratorium on developing its massive North Field, which holds 14 percent of the world’s natural gas reserves, until it figures out its own energy needs. Iran, meanwhile, is sitting on about 28 trillion cubic meters of gas, the world’s second largest reserves, but its extraction industry is so underdeveloped that the country is still a net gas importer.
“There is an urgent need for new discoveries, improved recovery rates, better energy efficiency and intra-regional gas trading schemes from Qatar and Iran,” says Woertz. Solutions could also include re-jigging the energy mixes of these countries to use more coal, nuclear and renewable energy for local use, thus keeping oil for export and gas for lucrative local industries like fertilizer. If a solution to the gas shortage is not found, an otherwise promising business may be destined for the dung heap.