Tag Archives: fertilizer

Don’t Be Shocked By the Crunch (and how to play it)

14 Feb

This January new loans granted in China totaled CNY 738bn. “Not bad” I hear you cry! However, in the context of expectations of CNY 1tr, and a 29% contraction year-on-year there’s clearly something of a liquidity squeeze going on.

The sharp drop in lending has taken M2 growth to 12.4% year-on-year…the lowest pace of growth since 2001. In fact, M1 shrunk this January by 6.87%.  Yes yes yes – there’s the impact of pre-New Year spending, but the 12 month RoC shows growth at 3.1%, the lowest since this data started being collected in 1990. In nominal terms M1 has only increased CNY 813bn over the past 12 months. This is around the same amount as the mid 2000 when China’s economy was significantly smaller than it is today.

There might be rebounds in the coming months, but don’t be fooled – monetary conditions are clearly tighter than most people think. This shocking January data is the antitheses of exactly 3 years ago when Chinese monetary data shocked everyone with the strength of growth that the PBOC unleashed in the face of gridlocked capital markets and industrial activity.

This is clearly going to affect mostly those sectors most dependent on credit, such as real estate development. This is going to have wider knock on effects.

While most people are not heavily invested in China, one should readjust their holdings in anticipation of the fall out. Here’s one idea…

This slowdown is going to impact the fertilizer, agrochemical and petrochemicals sectors. While we all obsess over the monthly WASDE reports, and machinate over the upcoming Chinese potash negotiations, I contend that something bigger is at work. A slowdown in China is going to impact corn prices, and with it the prices of the aforementioned sectors will be heading south. I don’t believe recent shutdowns by the likes of Potash Corp are enough to salvage the bottom line in 2H12. I readjusted for this a while ago, but it’s not too late.

(Also note – Indian and Brazilian lead macro indicators are not rosy for chems/agchems either. In addition, note the pressure to Indian fertilizer subsidies, and pressure to Chinese fertilizer exports).

Feed the World

7 Feb

The US Grain Council says it ahs received information that points to Chinese demand for around 9m tonnes of corn imports in 2011. They claim that China is expecting to be around 10-15m tonnes short on corn inventory this year (using a 30% inventory/use as a target ratio).

Now the council is an industry body, and as such its findings might be somewhat optimistic. Nonetheless, directionally, and in terms of magnitude, demand anywhere near these levels would be nothing short of dramatic. Let’s put it in a little context….

  • Firstly, 2010 was a record year for Chinese corn imports at 1.3m tonnes since its 1995-6 season of crop failures. That puts the Grain Council’s estimate for 2011 7 times the recent record.
  • Secondly, in 2010 the global export market was around 92m tonnes. 9m is almost a 10% increase!
  • Thirdly, this 9m tonne figure is 9 times the USDA’s forecast of only 1m tonnes.
  • Finally, prior to 1995 China accounted for 0% of global soybean import demand. By 2010 it accounted for 63%. Perhaps corn is about to reach an inflection point.

There are ways to profit out of this. As we’ve discussed here before, demand for soft commodities has a positive impact along the entire value chain, especially when it comes to fertilizers. We all know that with growing food demand against a backdrop of limited arable land, there’s a need to improve yields to keep the world fed. That’s great for fertilizers.

At present farmer economics are the best they’ve ever been, and 2011 looks set to be a record year. Unlike the commodity bubble in 2008 though, fertilizer producers have been more sensible when it comes to pricing their goods this time around. Potash, for example, is in around US$450/t, while at this stage of the 2008 cycle is was about US$750/t. I believe that massive price increases in the last cycle pushed farmers to reduce their fertilizer inputs dramatically (as well as the global credit crunch!). Despite what analysts were being fed by the fertilizer industry about the integral nature of their products to global food security, we all learned that farmers can take “fertilizer holidays” with negligible reductions in their yields.

This time around though, I consider the more tempered price increases as a positive for the bottom lines of fertilizer producers. After all, the top line is comprised of both volume and price, and producers are more sensibly protecting their profits, by understanding the elasticity of their products.

I recently went to visit the CEO of a major global fertilizer company who said that this time they were not being greedy!

The upshot is, that in 1Q11 I believe fertilizer stocks (and general agchem) still have some way to go, but perhaps more importantly, their downsides are more protected.

110% Chinese Export Tariffs?

25 Nov

By now the impact on crop and fertilizer prices of China’s growing population and increasing GDP/capita is old news. The people have got to eat, and with a limited supply of arable land and increasing appetites, yield improving fertilizer prices have been strongly supported. But there’s a further less document positive fertilizer driver at work here…

As December 2010 draws closer, there are reports that port officials are imposing a 30 November deadline for DAP and Urea shipments at the current 7% season export tariff rate. Over the past couple of years Chinese authorities have imposed high export tariffs on fertilizers during peak seasons (ranging from 110%-135%) in an attempt to decrease exports, reduce domestic prices, and maintain domestic supply in the never ending need for crop yields. Nothing official has been announced yet regarding the imposition of similarly high tariffs again for 2011, but I find it hard to believe that port officials are acting in a vacuum.

In the words of Marvin Gaye, “What’s going on?”

In the first 10 months of 2010 Chinese phosphate exports increased by around two-thirds year-on-year. This occurred against the backdrop of a number of key crops (including corn) falling short of expectations. In addition, official Chinese statistics illustrate lower domestic fertilizer demand over 2009-10.

It seems that the port authorities are more than hinting at an impending official announcement aimed at improving domestic food security. This will definitely have an impact on global fertilizer supply, especially for phosphates and urea. (Note – in 2009 China accounted for about 17% of global phosphate exports).  Any tightening of supply is sure to add to the upward pricing pressures of these two fertilizer types. However, I would also expect increased potash demand from China. Why? Farmers are most likely to try and keep some sort of fertilizer application balance across the N-P-K complex.