Industry Trend Analysis - Phosphate Mining: China To Slowly Lose Market Share To MENA - AUG 2017

BMI View: Global phosphate production will remain concentrated in the hands of a few industry players in the coming years . China will continue to dominate global production despite slowly losing market share to Morocco which boasts a strong pipeline of projects and the largest global reserves.

The production of phosphate fertilisers will remain highly concentrated over the coming years, with 75% of global supplies being produced in China, Morocco and the United States. Chinese production growth will slow over the years to 2021, while Morocco and other countries in the Middle East and North Africa (MENA) region will increase their market share. Global phosphate production grew by an annual average of 5.8% during 2012-2016 according to US Geological Survey (USGS). Forecasts from the International Fertili s er Industry Association (IFA) suggest that phosphate rock and phosphoric acid production will grow by about 10% and 12% respectively between 2016 and 2021, with large capacity additions in Morocco and Saudi Arabia. IFA claims that between 2017 and 2021 the fertiliser industry will invest close to USD110bn in more than 65 new production units of phosphate, potash and nitrogen, increasing global capacity by 90 million tonnes of products. Based on current market conditions, the industry will face a supply-driven market. Global annual production in 2016 amounted to a record 261mn tonnes according to USGS, most of which was directed towards fertiliser production. The world's reserves of the mineral amounted to 68bnt in 2016 and are mostly located in the MENA region, with Morocco and Western Sahara accounting for 73.5% of the total. However, these reserves comprise only the portion of the world's resources that is currently economically extractable, while the USGS estimates total resources to exceed 300bn tonnes.

China's Market Share To Stumble Ahead
Largest Phosphate Producers - Global Market Share (% of total)
Source: USGS, BMI

China To Lose Market Share With Consolidation Of Sector

Over the years to 2021, China will lose market share of the phosphate industry to producers in the MENA region, despite remaining the largest producer of the nutrient. Thus, although global fertiliser supply will continue to outweigh demand, the increase in global fertiliser oversupply will be limited due to China's slowing growth. Out to 2021, low prices will favour low-cost producers as well as those that are integrated across the supply-chain or benefit from strong state support. In China, production and exports of the leading phosphate products are declining as a result of unprofitable operations and more stringent environmental regulations consolidating the industry. Exports dropped to 9.5mnt in 2016, a decrease of 2.1mnt from the 2015 record. Production has remained constrained so far in 2017 despite the elimination of a USD15/tonne export tax on January 1. Yuntianhua Group and Hubei Yihua Group, two of the big four phosphate producers, announced that their 2016 losses are expected to total USD465mn and USD160mn, respectively, with the Chinese government reporting that 70% of domestic producers were unprofitable in 2016. Plans outlined at the National Phosphate and Compound Fertiliser Industry Annual Conference in May 2016 called for the permanent closure of "outdated" facilities by the end of this decade. Additionally, six of the largest domestic producers and the two main distributors are in the midst of developing detailed initiatives to boost industry profitability and accelerate restructuring yet ensure adequate domestic supplies. Initiatives include setting a minimum export price, establishing operating rate guidelines, raising rock prices, and forming a sulphur sourcing joint venture among some members.

China Largest Producer Despite Morocco's Vast Reserves
Select Countries - Phosphate Reserves (bnt)
Source: USGS, BMI

US Production To Increase From 2016 Figures With Lower Raw Material Costs

Phosphate supply from the United States will remain relatively flat over the coming years as the market remains highly concentrated in the hands of a few players. Nevertheless, we expect supply to increase later in 2017 as cost of raw materials decreases. In 2016, only five companies in the United States mined phosphate rock, with production from Florida and North Carolina accounting for more than 75% of total domestic output while the remainder was produced in Idaho and Utah. In H116, some producers reduced production of phosphoric acid and fertilisers in response to reduced world demand and lower fertiliser prices. An increase in raw materials costs also pressured phosphate production. For US producers, higher ammonia and sulphur prices boosted costs by USD30/tonne of DAP since late 2016, although this was still much lower than the highs of 2014. Raw material prices have stabilised since, and we expect them to possibly decline towards the end of 2017, providing a supply boost from the US.

China To Dominate Production
Production Of Largest Phosphate Producers (mnt)
Source: USGS, BMI

Strong Project Pipeline To Boost Moroccan Supplies

Accounting for over 90% of the domestic mining industry, phosphate production in Morocco will be boosted as the state-owned phosphate miner, Office Cherifien Des Phosphates (OCP) ramps up investments in mining infrastructure domestically and in downstream fertiliser plants across Africa. With over 50bnt of proven phosphate reserves, Morocco boasts the vast majority of global phosphate rock reserves. As only 30% of the country has been surveyed, there is huge potential for the country to build on its production of 30mnt achieved in 2016. Morocco's phosphate industry will be supported by a series of domestic and international investments led by government-owned phosphate producer OCP. Domestically, OCP holds three main phosphate rock deposits, Khouribga, Gantour and Boucraa. Of these three, the company will focus on the development of its key Khouribga deposit, which is currently capable of producing 18mnt of phosphate per year. To that end, in March 2017, OCP announced an investment worth USD370mn to develop the largest phosphate pre-treatment facility in the world at Oulad Fares and over USD1.68bn in the Beni Mellal-Khenifra region to finance up to 20 new projects including new mines, phosphate wells and other power infrastructure. These investments intend to increase production capacity at Khourigba to 38.0mnt per year by 2025. In the shorter term, OCP aims to increase production from 30.0mnt at present to over 47.0mnt by the end of 2017, through a ramp up in output from its current mining assets.

Production Marching On Despite Price Drop
Morocco Phosphate Production ('000 tonnes) & Global Average Prices (US Gulf NOLA DAP Spot Price), 2012-2016
Source: BMI, Bloomberg

Additionally, Moroccan phosphate production will benefit from commercial expansion opportunities in the region, as part of the government's broader geopolitical strategy of increasing its economic and political influence across Sub-Saharan Africa ( See: 'Phosphate Investments To Boost Exports, Rapprochement With Africa', February 9 2016). As one of the largest companies in Morocco by revenue, OCP will be used as one of the key spearheads of this regional strategy of rapprochement and will look to become the main provider of the region's increasing fertiliser needs. According to the 2017 African Economic Outlook report, OCP has already invested over USD8.5bn in four projects across Africa making it the 5th biggest investor in Africa. Investments by OCP in the region include the development of fertiliser factories in Ethiopia and fertiliser mixing and storage units in Cote d'Ivoire, following the creation of OCP Africa, a subsidiary dedicated solely to the expansion of OCP activities in Africa. Through this process of vertical integration, demand for phosphate produced in Morocco will be buoyed.

Company Country Of Domicile Phosphate sales 2016 (USDmn) Revenue (USDmn) Net Income (USDmn) Capex (USDmn) Profit Margin (%) Net Debt/EBITDA
* BMI estimate for 2015. ** 2014 phosphate sales data. na = not available. Source: Bloomberg, company reports, BMI
Mosaic Co USA 2928 7163 298 843 4.2 3.8
OCP* Morocco 3230 4332 386 1298 8.9 3.7
PhosAgro Russia 2524 2818 899 604 31.9 1.4
Eurochem** Switzerland 1259 4375 708 1340 16.2 3.6
Potash Corp (Fert. Solids & Liquids) Canada 1191 4456 323 893 7.2 3.3
Israel Chemicals Ltd Israel 1163 5363 -122 632 -2.3 7.4
Coromandel International Ltd. India 712 1496 71 13.6 4.8 2.1
Agrium Inc Canada 567 13665 592 724 4.3 2.8
Sinofert Holdings Ltd China 508 2253 -698 43 -31.0 na
Yara International ASA Norway 414 11347 758 1534 6.7 0.8
Jordan Phosphate Jordan 140 776 -125 14 -16.2 na