172868_Fertilizer Industry Handbook_with notes

IR-Date: 2014-07-180

Yara Fertilizer Industry HandbookThis handbook describes the fertilizer industry and in particular the nitrogen partwhich is the most relevant for Yara International.The document does not describe Yara or its strategies. For information on Yaraspecificissues please see the Capital Markets Day presentations.Fertilizers are essential plant nutrients that are applied to a crop to achieveoptimal yield and quality. The following slides describe the value andcharacteristics of fertilizers in modern food production.12

Three main nutrients: Nitrogen, Phosphorus and Potassium• Nitrogen (N), the main constituent of proteins, is essential for growth anddevelopment in plants. Supply of nitrogen determines a plant’s growth, vigour,colour and yield• Phosphorus (P) is vital for adequate root development and helps the plantresist drought. Phosphorus is also important for plant growth and development,such as the ripening of seed and fruit• Potassium (K) is central to the translocation of photosynthesis within plants,and for high-yielding crops. Potassium helps improve crop resistance tolodging, disease and drought.In addition to the three primary nutrients, the secondary nutrients sulphur,magnesium and calcium are required for optimum crop growth. Calcium isparticularly important for the yield, quality and storage capacity of high-valuecrops such as fruit and vegetables.A complete plant life cycle is only possible if all plant nutrients are available to thecrop.Each plant nutrient has its specific physiological functions which cannot bereplaced by any other nutrient.The law of minimumThe ‘law of minimum’ is often illustrated with a water barrel, with staves ofdifferent lengths. The barrel`s capacity to hold water is determined by theshortest stave. Similarly, crop yields are frequently limited by shortages ofnutrients or water. Once the limiting factor (constraint) has been corrected, yieldwill increase until the next limiting factor is encountered.Nutrients are classified into three sub-groups based on plant growth needs.These are:• Macro or primary nutrients: nitrogen (N), phosphorus (P), potassium (K)• Major or secondary nutrients: calcium (Ca), magnesium (Mg) and sulphur (S)• Micro nutrients or trace elements: chlorine (Cl), iron (Fe), manganese (Mn),boron (B), selenium (Se), zinc (Zn), copper (Cu), molybdenum (Mo) etc.Yield responses to nitrogen are frequently observed, as nitrogen is often alimiting factor to crop production, but not the only factor. Balanced nutrition isused to obtain maximum yield and avoid shortages of nutrients.3 4

Nutrients are depleted with the harvestAs crops take up nutrients from the soil, a substantial proportion of thesenutrients are removed from the field when the crops are harvested. While somenutrients can be returned to the field through crop residues and other organicmatter, this alone cannot provide optimum fertilization and crop yields over time.Mineral fertilizers can provide an optimal nutrient balance, tailored to thedemands of the specific crop, soil and climate conditions, maximising crop yieldand quality whilst also minimizing environmental impacts.Organic fertilizer contains the same inorganic molecules as mineralfertilizerCrops can be fed with mineral or organic fertilizers (manure), and in both casesthe crop will utilize the same inorganic molecules. A complete nutrient programmust take into account soil reserves, use of manure or fertilizers, and anaccurate supplement of mineral fertilizers.Manures build up the organic content of soil and at the same time supportbeneficial micro flora (e.g. bacteria) to grow on plant roots. The efficiency oforganic fertilizer is dependent on an appropriate bacteria content in the soil. Theright bacteria break down the organic content in manures and supply them asnutrients for plant growth. But the quality and quantity of nutrient supplied toplants via this process is inconsistent and is very much dependent upon thevagaries of soil and climatic factors. Plant productivity achieved by supplyingorganic matter is low compared with mineral nutrients supplied in the form offertilizers.The separation of livestock and arable farming regions has lead to nutrientdistribution inefficiency, with a surplus in the animal farming regions. The lownutrient content and bulky nature of manures makes transportation inconvenientand costly.56

Organic farming accounts for less than 1% of cultivated land37 million hectares of agricultural land were managed organically in 2012, slightlyup from 2011.Almost two-thirds of the agricultural land under organic management is grassland(23 million hectares).With most of the are cultivated organically being grassland and low productivity,the impact of organic farming on fertilizer demand is limited.A life-cycle perspective on fertilizer is importantWhen new acreage is converted to cropland, above ground carbon isimmediately removed and converted to CO 2, whereas carbon stored in theground will leak out more gradually.When the ambition is to minimize total carbon footprint from global biomassproduction, efficient use of land, based on modern agricultural practices, istherefore of great importance. Intensive farming with high yields is a important topreserve forests - the real carbon sink tanks.Organic farming with low yields would push for further deforestation and climatewarming.78

Among the major plant nutrients, nitrogen is most important for highercrop yieldsThe fertilizer market is composed of three main nutrients – nitrogen,phosphorous and potassium. Nitrogen is by far the largest nutrient, accountingfor 60% of total consumption, and Yara is the leading producer of this nutrient.Phosphorus (phosphate) and potassium fertilizers are primarily applied toimprove crop quality. Annual application is not always needed, as the soilabsorbs and stores these two nutrients for a longer period compared withnitrogen. Nitrogen must be applied every year to maintain yield and biomass.There are fewer large suppliers of phosphate and potash fertilizers, asphosphate rock and potash mineral deposits are only available in certain regionsof the world.Nitrogen fertilizers are produced in many countries, reflecting the wideavailability of key raw materials - natural gas and air, needed for its productionon an industrial scale. The global nitrogen market is therefore less consolidated,but some regions such as Europe and the US have seen significant restructuringof their nitrogen industries in the last decade.Correct use of fertilizers can yield a 790% return on investmentUsing 192 kg N/ha (winter wheat in Europe), it is possible to produce 9.3 tons ofgrain per hectare. The fertilizer cost at this application level using CAN (27% N)at EUR 254/t (1.167 USD/kg N) would be 192 kg x 1.167 USD = 224 USD/haUsing a wheat price of 245 USD/t, the farmer gets the following alternativerevenue scenarios:• Optimal nitrogen level: 9.30 t grain/ha * 245 USD = 2,279 USD/ha• No nitrogen fertilizer added: 2.07 t grain/ha * 245 USD = 507 USD/haThe difference in revenues is 1,772 USD/ha resulting from an input cost of 224USD/ha, i.e. a return on investment of 790%.910

Nitrate is immediately and easily taken up by plantsAmmonia (NH 3 ) is the basis for all nitrogen fertilizers and it contains the highestamount of nitrogen (82%). Ammonia can be applied directly to the soil, but forseveral reasons, including environmental, it is common to further processammonia into, e.g., urea or nitrates before application. If ammonia is applieddirectly to the soil, it must be converted to ammonium (NH 4 ) and nitrate beforeplants can use it as a source of nitrogen.While ammonium and nitrate are readily available to plants, urea first needs tobe transformed to ammonium and then to nitrate.The transformation process is dependent upon many environmental andbiological factors. E.g., under low temperatures and low pH (as seen in Europe),urea transformation is slow and difficult to predict with resulting nitrogen andefficiency losses. Nitrates, in comparison, are readily absorbed by the plantswith minimum losses. Therefore, nitrates are widely regarded as a qualitynitrogen fertilizer for European agricultural conditions. This is reflected in theirlarge market share.Nitrate is a more efficient fertilizer than ureaField trials confirm that nitrates give higher crop yields than urea and thuscontribute to both higher farm revenue and better land use.Urea has a lower carbon footprint at the production stage of the fertilizer lifecyclethan ammonium nitrate. This is mainly due to the fact that part of the CO 2generated in ammonia production is captured in the urea. However, the CO 2 isreleased as soon as the urea is applied on the field. In addition, more N 2 Oisemitted from urea in the nitrification process. Urea also emits more ammonia tothe atmosphere during farming than AN. The loss of ammonium from urea alsorequires higher dosage to compensate for higher losses. Overall, the life cyclecarbon footprint of urea is higher than that of ammonium nitrate. Field trialsconfirm that nitrates give higher crop yields than urea and thus contribute to bothhigher farm revenue and better land use.1112

The more nitrate in fertilizer, the higher the yieldThere are numerous examples of experiments that support the superiorperformance of nitrates in arable, fruit and vegetable crop production, both withregard to yield and quality.For arable crops, nitrogen fertilizer containing 50% nitrate and 50% ammoniumsuch as CAN or AN are likely to be the most financially rewarding option, due tothe relatively low crop value.For higher-value cash crops such as fruit and vegetables, fertilizer productscontaining a high amount of nitrate nitrogen are likely to be the optimum choice,especially for rapidly growing vegetables which need nitrogen readily availableBenefits of nitrates are high in tropical climatesThe trial was carried out in the Cerrado region of Bahia by/at “Research andTechnology Centre of Western Bahia (CPTO) – Fundacao Bahia, Brazil. The trialwas done with a 1 st season maize (season 2012/2013, previous crop wassoybean (2011/2012) under conventional tillage system. Site location: LuisEduardo Magalhaes (LEM).The most extensive study comparing different forms of nitrogen fertilizers wasperformed on behalf of the UK government between 2003 and 2005 (Departmentfor Environment, Food and Rural Affaires, DEFRA). Besides quantitativedifferences, the study highlighted the variability of results observed with urea andUAN. The required nitrogen application rates can therefore not be predicted withthe same reliability as with ammonium nitrate.1314

Field trials confirm the advantages of applying nitrates instead of acommodity nitrogen fertilizerFor wheat in UK trials concluded that yields improved by 3%, while for orangeproduction in Brazil the yield improvement was a massive 17% using nitratesinstead of urea.Winter wheat, UK• Average of 15 field trials between 1994 and 1998, both N forms tested at 160 kgN/ha• Levington Research• Yield with urea = 8.38 t/ha, CAN = 8.63 t/ha• Grain price = 180 €/t (price at farm in NW-Germany, Nov 2011)Citrus, Brazil• Based on 1 field trial with oranges in Brazil, both N forms tested at 180 kg N/ha• Cantarella, 2003• Yield with urea = 37.1 t/ha = 909 boxes, AN = 43.3 t/ha = 1061 boxes• Price per box = 4 $ = 3.01 € (industry price excluding harvest service, Nov2011)Different quality between blended and compound NPKIn compound NPKs, all the N, P and K nutrients are included in every piece offertilizer, while in a blended NPK, mixes of straight fertilizer like urea, nitrates,DAP, TSP, MOP, SOP etc, are mixed, or blended together.The photo on the left shows a typical low quality blended product with a widevariation of particle sizes, shapes and nutrient contents. Larger, denser particleswill spread further, and smaller lighter particles will spread the least distance.Where different sized particles have different nutrient content, this leads tosegregation of nutrients upon spreading. In turn this will create uneven cropgrowth, and typical striping on crops such as cereals or rice. Compare this to thepicture on the right of compound NPKs. Here we have a purposely defineddistribution of particle sizes for a uniform spread pattern. With compoundfertilizers, all the nutrients are in every particle, so no segregation of individualnutrients is guaranteed. All together this ensures accurate feeding of crops.15 16

Careful handling of blended NPKs important to avoid segregationSegregation of fertilizer blends can occur on loading into ships or bulk heaps, aslarger particles will round to the edge of the heap. Careful handling of blendedproducts is required to prevent segregation. With compound productssegregation of individual nutrients is not possible. However, it is also important tohandle these products carefully and separation of smaller as larger particles willalter the particle size distribution and spreading pattern.Striping due to poor distribution of nutrientsOur spreading tests have shown the deviation in actual nutrient application ratecompared to target nutrient rate can be considerable. Deviation in nutrient rateswill cause a major impact on the quality and yield of grains/fresh fruit andvegetables.1718

Compound NPKs provide higher yields for the farmerThe benefits of using compound NPKs are many:1. The farmer get the nutrients they have paid for2. Saving of labor costs for balanced nutrition through a convenient singleapplication3. Less nutrient losses through volatilization and surface runoff4. Efficient and fast acting nutrients5. Less environmental impact and lower carbon footprintThe fertilizer industryDue to the transportability of fertilizers, the industry is highly global meaning thatthe price of a standard fertilizer like urea is nearly the same everywhere adjustingfor transportation costs. Consequently, it is important to focus on the globalindustry and supply-demand balance rather than regional ones.1920

Nitrogen is the largest nutrient with projected annual growth rate of 1.5%In 2013 the consumption of nitrogen and potash increased, while consumptionof phosphates declined. Nitrogen consumption increased by 1.8% whilephosphate demand ended 0.2% lower than in 2012. Potassium consumptionincreased by 2.8%.Going forward, The International Fertilizer Association (IFA) forecasts nitrogenfertilizer demand growth at 1.5% per year through 2019. A growth rate of 1.6% ayear is estimated for phosphate and 2.6% for potassium.For urea a higher growth rate is expected as this product is taking market sharefrom other nitrogen products.The key nitrogen, phosphate and potash products are urea, DAP and MOPrespectivelyUrea, DAP and MOP are the key products for following price developments fornitrogen, phosphorus and potassium respectively. They have a large marketshare and are widely traded around the world.Urea contains 46% nitrogen, and its share of nitrogen consumption isincreasing. The majority of new and pipeline nitrogen capacity in the world is inthe form of urea.Diammonium phosphate (DAP) contains 46% phosphate (measured in P 2 O 5 )and 18% nitrogen. Monammonium phosphate (MAP) contains 46% phosphateand 11% nitrogen.Potassium chloride (MOP) contains is 60% potash, measured in K 2 O.2122

Geographical variances in fertilizer applicationFertilizer demand is mostly influenced by the evolution of the planted area andyields, the crop mix, crop prices and fertilizer-to-crop price ratios, fertilizersubsidy regimes, nutrient management regulations, nutrient recycling practices,and innovation.Nitrogen is by far the largest nutrient, accounting for 60% of total consumption.Phosphorus (phosphate) and potassium fertilizers are primarily applied toimprove crop quality. Annual application is not always needed, as the soilabsorbs and stores these two nutrients for a longer period compared withnitrogen. Nitrogen must be applied every year to maintain yield and biomass.Brazil consumes substantial amounts of phosphate and potash due to a largesoybean production.Asia is the largest fertilizer market, but Latin America has the highestgrowth rateAsian share of global nitrogen consumption was 62% in 2013 with Chinarepresenting approximately half of that share.Whereas Chinese consumption is expected to decelerate going forward, thehighest growth rates should be witnessed in sub-regions with recoveringagriculture such as Eastern Europe and Central Asia and in regions with a largepotential to increase agricultural production. Latin America falls into the lattercategory, and although it still accounts for a relatively small volume, the region isexpected to keep its position as the region with the highest growth rate.Consumption in mature markets like North America and West Europe is forecastto grow at a slower pace while Chinese consumption is expected flat over thenext years.2324

Geographical variances in nitrogen fertilizers demandThere are large variations in nitrogen fertilizer use in different regions/countries.Urea, the fastest growing nitrogen product, is popular in warmer climates. UANis mainly used in North America, while nitrates are mainly used in Europe. In theUS, ammonia is also used as a source of nitrogen in agriculture, especially fordirect fall application.In China, urea is dominant. China is also the only country that uses ammoniumbicarbonate (ABC). Although ABC is gradually being phased out, it has stillaround 17% market share in China.Brazil consumes substantial amounts of phosphate and potash due to a largesoybean production.Nitrogen market is more fragmented and competitive than potash andphosphate marketsNitrogen fertilizers are produced in many countries, reflecting the wide availabilityof key raw materials - natural gas and air, needed for its production on anindustrial scale. The global nitrogen market is therefore less consolidated, butsome regions such as Europe and the US have seen significant restructuring oftheir nitrogen industries in the last decade.There are fewer large suppliers of phosphate and potash fertilizers, as phosphaterock and potash mineral deposits are only available in certain regions of theworld. The potash industry is even more consolidated than the phosphateindustry.2526

Yara and Agrium are the two largest fertilizer companies measured byrevenuesYara is the global no. 1 producer of ammonia, nitrates and NPKYara’s position gives it unique opportunities to leverage economies of scale andspread best practice across a large network of plants, an important driver forYara’s competitive returns.2728

Yara benefits from a favourable cost position in its European home market fornitrates and NPKsThe ammonia position reflects move away from traditional oil-linked natural gascontracts to more hub / spot gas exposure in contractsNitrates: Stable cost position approximately 10-20% below Europeancompetitors. The 2008 nitrate position is explained by Tertre’s gas contractwhich was revised during 2008.Yara is also the low-cost leader on NPK producing 20% below Europeancompetitors.Fertilizer industry dynamicsThis section describes in more detail the competitive forces and product flows forthe main nitrogen products.2930

The fertilizer industry is becoming more consolidated and marketorientatedIn the past, the fertilizer industry has been affected by state funds drivinginvestments from a food security point of view rather than from a business pointof view, and by weak fertilizer companies that existed as part of governmentownedenterprises or conglomerates. As state involvement is declining andconglomerates are cleaning up their portfolios, there is a trend towardsconsolidation and more financial discipline across the whole industry.This development is strengthened by WTO and EU enlargement which createsmore equal terms for all players in the industry.In recent years there has been a significant spread between “low-cost gasregions” outside Europe, creating a significant cost advantage for fertilizer plantslocated in the former. However, this spread is expected to narrow due toincreased global LNG activity and higher pipeline capacity into Europe,improving liquidity.AmmoniaAmmonia is the key intermediate product in the production of all nitrogenfertilizers. A strong ammonia position and understanding of the ammonia marketis essential for a leading nitrogen fertilizer company.3132

China is the largest ammonia producerAmmonia is the key intermediate for all nitrogen fertilizer products and largenitrogen-consuming countries are also large producers of ammonia.Ammonia is predominantly upgraded to other nitrogen products at its productionsite. Only 18.2 million tons or 11% of the ammonia produced globally in 2013was traded. Ammonia production reached 171 million tons, an increase of 2.6%compared to 2012. The trend from 2003 to 2013 shows a growth rate of 2.6%per year.Only 10% of ammonia production is tradedIn 2013, world ammonia trade decreased with 3% to 18.2 million tons implyingthat only 10% of world ammonia production was traded. Including the urea sharefrom industrial consumption, urea consumes 54% of all ammonia production.This ammonia needs to be upgraded on site as urea production requires CO 2which is a by-product of the ammonia production.For the ammonia that is traded, there are four main categories of customers:1. There is a substantial industrial market for traded ammonia2. Producers of main phosphate fertilizers such as DAP and MAP (also sometypes of NPK) import ammonia as the regions with phosphate reserves oftenlack nitrogen capacity3. Some of the nitrate capacity is also based on purchased ammonia.4. Direct application on the field, only common in USAOf the traded ammonia, Yara has a market share of around 20%. This leadingposition gives the company a good overview of the global supply / demandbalance of ammonia and enables the company to make better businessdecisions.3334

Trinidad is the world’s largest ammonia exporterThe large ammonia exporters in the world have access to competitively pricednatural gas, the key raw material for its production. Trinidad has large naturalgas reserves and also lies in close proximity to the world’s largest importer ofammonia, the US. Trinidad has large stand-alone ammonia plants and excellentmaritime facilities that cater for export markets. Yara owns two large ammoniaproduction facilities in Trinidad.The Middle East also has some of the world’s largest reserves of natural gas.The Qafco fertilizer complex in Qatar produces significant amounts of ammonia,but most of the ammonia produced in Qafco is upgraded to urea. Therefore,Qafco is a major exporter of urea and there is a relatively small surplus ofammonia left for exports.In the US, imported ammonia is used for DAP/MAP production, for variousindustrial applications and directly as a nitrogen fertilizer.India uses its imported ammonia mostly to produce DAP.The majority of ammonia trade follows the routes shown in the map, mainlyfrom countries with cheaper gasThe key centre for ammonia trade is Yuzhnyy in the Black Sea. This is the mostliquid location, and where most spot trades take place. Russian and Ukrainianammonia is sold wherever netbacks are the highest, and since they are keysuppliers to USA, Europe and Mediterranean, relative pricing for the variouslocations West of Suez is very stable.Asia is almost in a balanced situation. If there is a deficit, imports from the BlackSea are necessary, and fob prices in Asia increase. If there is a surplus, Asianexporters have to compete West of Suez, and Asian fob price levels suffer.3536

UreaUrea is the largest finished nitrogen fertilizer product and is traded globally. Eventhough many markets prefer other nitrogen fertilizers for better agronomicproperties, urea is the commodity reference product with an important influenceon most other nitrogen fertilizer prices.Urea is the main nitrogen fertilizer productUrea production increased to 169.3 million tons in 2013, up 4.9% from 2012.During the years 2003-2013, urea production grew on average at 3.9% per year.The largest producers are also the largest consumers, namely China and India.China is self-sufficient on nitrogen fertilizer but India’s imports requirement isgrowing.Most of the new nitrogen capacity in the world is urea, so it is natural thatproduction/consumption growth rates are higher for urea than for ammonia/totalnitrogen. Lately, the difference has been quite large, since urea has takenmarket share, particularly from ammonium bicarbonate in China. In addition, amajor share of the capacity shutdowns in high energy cost regions have beenstand-alone ammonia plants.As urea has a high nitrogen content (46%), transport is relatively cheap. Inaddition, demand growth is to a large extent taking place in climates which favorurea use.37 38

Natural gas-rich regions generally tend to be big exporters of ureaUrea is a global fertilizer and is more traded than ammonia. Exports from Chinaabove 8.3 million tons in 2013, up from 6.8 million tons in 2012. Global trade ofurea increased by 4.1% in 2013, to 44.8 million tons. The most important shiftswere stronger exports from China, Qatar, Oman and UAN. Qatar is for the firsttime the second largest urea exporter, only after China. In 2013, they surpassedRussia. Ukraine and Iran exported less.The main urea exporters are gas-rich countries/regions with small domesticmarkets. However, there are some exceptions.China has huge domestic capacity. Although the main purpose is to supply thedomestic market, during periods with strong global demand China is needed tobalance the market.North America, Latin America and South and East Asia are the main importingregions.Black Sea and Arab Gulf are main urea export hubsThere are two main hubs to follow in the urea trade market, Black Sea and ArabGulf. These flows determine the global prices.Black Sea exports supply Europe and Latin America, while Arab Gulf exportssupply North America and Asia/Oceania. All the other flows, of more regionalnature, like Venezuela to USA, Indonesia to other Asian countries etc, are onlyinteresting to the extent they affect the need for Black Sea/Arab Gulf material. Asan example, if China reduces its export, the Arab Gulf is not able to supply Asiaon its own. Black Sea urea will flow to Asia, and an upward price movement willtend to take place.The relative pricing between Black Sea and Arab Gulf depends on where theycompete on the marginal volume. If the main drive is from LatinAmerica/Europe/Africa, Black Sea will lead. If it is Asia/North America, Arab Gulfwill lead.3940

Domestic price and taxation set the floor price from ChinaSelling domestically is the alternative to exporting for a Chinese producer. Thedomestic price level with added tax can therefore be considered a floor pricelevel for urea in international markets.41 42

Ammonium nitrate (AN, 33.5% nitrogen) and Calcium ammonium nitrate(CAN, 27% nitrogen) are the main nitrate fertilizer productsNitrates production increased to 20.2 million tons in 2013, up 1.5% from 2012.During the years 2003-2013, nitrates production grew on average at 2.7% peryear. So in 2013 the production growth was below the 10-year trend. All thegrowth was for AN, CAN was stable.Russia is the largest producer and exporter of nitrates, followed by the USA.Keep in mind that AN solution for UAN production is included in the US figures.China has had quite strong focus on adding more nitrate based capacity and isthird largest producer. Compared to 2012 there were three countries with asignificant production drop, Hungary, Lithuania and not surprisingly Ukraine.Limited trade of nitrates globallyNitrates is mainly a European product and contains only 27-34% nitrogenmaking it less attractive to transport.Compared to 2012 more than half of the drop in AN trade can be attributed to asubstantial reduction in exports from Ukraine. Also worth mentioning that Braziland Turkey increased their AN imports sharply, by 19% and 35%, respectively.Apart from that, stable or lower import volumes.4344

Industry value driversThis section describes how the economic mechanisms of the fertilizer industrywork and what determines fertilizer prices and company profits.Fertilizer prices are cyclicalFertilizer prices are cyclical just like any other commodity. The cyclicality isprimarily caused by the “lumpiness” in supply additions resulting in periods ofovercapacity and undercapacity.45 46

Drivers of supply and demandIn general, when demand is low, there tends to be a ”supply-driven” fertilizermarket in which the established “price floor” indirectly determines fertilizerprices. This price floor is set by the producing region with the highest natural gasprices. Historically the highest gas prices were in the US and in Western Europebut since 2009 the Ukrainian and other Eastern European producers have hadthe highest gas costs together with coal based producers in China.When fertilizer demand is high, there is typically a ”demand-driven” market withfertilizer prices above floor prices for swing (highest cost) regions.The fertilizer market balance and capacity utilization are other key factors thatimpact prices for urea and other N-fertilizers.Yara’s gas consumption in its fully-owned plants is approximately 205 millionMMBtu (of which 165 is in Europe). Adding Yara’s share of joint venturecompanies (including Burrup), the total consumption of natural gas isapproximately 310 million MMBtu.Drivers of demandThe main demand driver for fertilizer is food demand which translates intodemand for grains and other farm products.4748

Nitrogen consumption growth is expected to be higher than globalpopulation growthPopulation growth and economic growth are the main drivers for increasedfertilizer consumption. Industrial consumption of nitrogen is mainly driven byeconomic growth and environmental legislation.Global grain consumption growing steadilyOver the last 5 decades, grain consumption has increased by 2.1% a year onaverage while population has grown by 1.6% per year.Dips in grains consumption have only been seen on four occasions, and thesewere related to supply issues rather than demand issues.Per capita arable land available for cultivation is decreasing, while demand forfood keeps growingThe Food and Agriculture Organization of the United Nations (FAO) confirmsthat a key challenge for agriculture is to increase productivity. Key ways ofachieving this are by replacing nutrients removed with the harvest, improvingresource management, breeding new crop varieties and expanding agriculturalknowledge.4950

Global per capita consumption of meat is increasingPork and poultry are gaining popularity on a global basis, and meat consumptionrequires feed. To produce 1 tonne of poultry meat, feed corresponding to 2 tonsof grain is needed. The multipliers are 4 for pork and 7 for beef.Nitrogen required for meat production is estimated at 20-30% of total nitrogenfertilizer consumptionStrong development in grain prices reflect the productivity challenge theworld is faced with.Strong agricultural prices and farmer margins are a pre-requisite for increasedagricultural productivity. Many parts of the world still suffer from sub-optimalgrowing practices, and continued strong incentives are needed to boost globalgrain production.5152

Higher productivity key challengeThe average per capita cereal production increased gradually from the 60’s upuntil the mid 80s, but trended lower the next 15-20 years before rising grainprices as shown on the previous page provided the necessary incentives to turnthe negative trend.Steady growth in grain consumption, production is volatile due to weather53 54

Crop producing countriesThe United States and China are large producers of agricultural products. Whilethe US is the biggest producer of maize and soybeans, China is the biggestproducer of rice.The three large grain crops, wheat, rice and corn (maize), consume abouthalf of all fertilizer used in agricultureThe fertilizer market is not only a significant market in terms of size, but also anessential industry serving global food production. Grain production is the mostimportant agricultural activity in the world, with global output at approximately2.46 billion tons for the 2014 harvest.It would not be possible to achieve this scale of production without intensiveagriculture and use of mineral fertilizers. Therefore, grains are naturally thelargest end-market for fertilizers followed by cash crops such as vegetables,fruit, flowers and vines. In order to gain a good understanding of the fertilizermarket, it is necessary to understand both the grain market and the market forcash crops.55 56

Geographical variances in nitrogen applicationThere are large regional differences when it comes to what crops nitrogen isbeing applied to.Due to strong growth in bioethanol production in the US the last 6-7 years, cornhas become by far the biggest nitrogen-consuming crop in the US. Wheat andother cereals like barley are dominating in Europe and Russia. In Asia, rice is abig nitrogen-consuming crop in addition to the fruits & vegetables segment inChina.These regional differences impact regional demand patterns as soft commodityprices develop differently and hence impact farmer economics and farmers’incentives to apply fertilizer differently depending on what crops are dominating.For Yara, with its strong European presence, wheat is the most important grain.Regional differences in fertilizer intensityThere are considerable differences in agricultural intensity (measured here inannual nitrogen applied per hectare) between the main agricultural regions ofthe world, with higher intensity in the northern hemisphere than the southernhemisphere. For example, the same crops may have application rates 2-3 timeshigher in the US than in Brazil.This illustrates the significant remaining potential for improved agriculturalproductivity especially in India and Brazil. The existing differences in annualapplication rates are especially significant when taking into account that theseregions have a much higher rate of double-cropping (2 harvests per year) than inthe northern hemisphere.5758

Yield differencesThere are large regional yield variations. These variations reflect among otherthings differences in agricultural practices including fertilization intensity asshown on the previous page.Weather and differences in soil quality imply that not all regions can achieve thesame yields. However, the large differences observed today clearly indicate thatby using the right techniques, including a correct fertilization, yields and grainproduction can be increased significantly.Fertilizer cost is less than 1/4 compared to total grain production costFertilizer costs relative to total production costs of corn has been stable over thelast three years and represent around 22% in 2014F. For other major crops, therelative share is smaller varying from 8% for soybeans up to 15% for wheat.59 60

Biofuel growth projected to continueWorld biofuel output is projected to grow by 30% from 2014 to 2030, with the USand Brazil as the two dominant producers. The significant plans for biodieselproduction in China, India, Indonesia and Malaysia are subject to someuncertainty with regard to scope and timing.Biofuel crops boost fertilizer consumptionWorld N-fertilizer consumption due to biofuels production was estimated to be3.5 million tons N in the 2009/10 growing season. This corresponds roughly to3% of global nitrogen consumption.With around 1/3 of US corn production supplying ethanol production, the US isby far the main contributor, accounting for close to 60% of all nitrogen beingconsumed for biofuels production.61 62

Current GM traits have minor effect on fertilizer consumptionThe global area planted to genetically modified crops amounted to 175.2 millionhectares in 2013.The main traits today are resistance against herbicide and insects, which havelittle impact on fertilizer consumption. Traits aiming at improving yields and yieldstability will imply higher nutrient consumption and greater incentives forinvesting in inputs like fertilizer. An example of such a trait is drought tolerance(or other traits that increases the crops ability to adopt to unfavorableconditions).Improved nitrogen efficiency is a trait that potentially can have a negative impacton nutrient consumption. However, no major breakthroughs have been made onthis recently and research on this trait is still at the “proof of concept” stage.Fertilizer is a seasonal businessThe seasonality is to a large extent linked to weather. Hence, there are largeregional differences in when crops are planted and harvested and thereforewhen fertilizer is being applied.Fertilizer is typically applied when seeds are planted, implying that the mainapplication on the northern Hemisphere is during the first half of the calendaryear while on the southern Hemisphere it is during the second half of thecalendar year. Winter wheat is an exception, while planting typically is done inthe second half of the year, fertilizer application is done in the spring.In certain countries, certain crops are harvested twice a year, this appliesespecially to countries on the southern hemisphere like India and Brazil.6364

Drivers of supplyThe main driver of supply is the cost of natural gas which is the main raw materialin the production of nitrogen fertilizer.Natural gas is the major nitrogen cost driverUsing a gas price of 6-8 USD per MMBtu, natural gas constitutes about 90% ofammonia cash production costs which is why almost all new nitrogen capacity(excluding China) is being built in low cost gas areas such as the Middle Eastand Northern Africa.Ammonia is an intermediate product for all nitrogen fertilizer, while nitric acid is asecond intermediate product for the production of, e.g. nitrates. Finished fertilizerproducts are urea, nitrates (CAN, AN), NPK and others. Industrial productsrange from high purity carbon dioxide and basic nitrogen chemicals to industrialapplications of upgraded fertilizer products.65 66

Industrial production of fertilizers involves several chemical processesThe basis for producing nitrogen fertilizers is ammonia, which is produced inindustrial scale by combining nitrogen in the air with hydrogen in natural gas,under high temperature and pressure and in the presence of catalysts. Thisprocess for producing ammonia is called the ‘Haber-Bosch’ process.Phosphorus is produced from phosphate rock by digesting the latter with astrong acid. It is then combined with ammonia to form Di-ammonium phosphate(DAP) or Mono-ammonium phosphate (MAP) through a process calledammonization.Potassium is mined from salt deposits. Large potash deposits are found inCanada and Russia, which are the world’s major producers of this nutrient.Phosphate and potash are sold separately or combined with, e.g. nitrogen, toform NPK fertilizers.The side streams of the main production process (e.g. gases, nitrogenchemicals) can be utilized for industrial productsFour different ways to produce NPK fertilizersChemically produced NPK fertilizers are made by one of two importantproduction routes:1) The nitrophosphate process or2) the sulphuric acid (mixed-acid) process.Phosphorus is produced from phosphate rock by digesting the latter with astrong acid (nitric acid or sulphuric acid). Potassium and other salts are added.The solution containing nitrogen in ammoniacal (NH 4 ) and nitrate (NH 3 )form,phosphorus and potassium is either granulated or prilled. The result is acompound NPK where all the nutrients are included in one fertilizer particle. Inaddition the fertilizers may contain secondary nutrients (sulphur andmagnesium) and/or micronutrients such as boron, zink and iron.3) In a dry blended NPK, nitrogen, phosphorus and potassium raw materials insolid form are blended together in a bulk mixer.4) The production of compound fertilizers by steam granulation, all the rawmaterials are in their solid (powder) form and mixed and granulated in thepresence of water, steam and heat.6768

Reduced energy consumption in nitrogen manufacturingThe Haber-Bosch synthesis has not been challenged for almost 80 years, buttechnology development in the 20 th century has reduced energy consumptiondown towards the practical and theoretical minimum.The energy base has changed, and technological advances have improvedenergy efficiency significantly. The graph illustrates that the industry is now moresensitive to energy price than developments in technology.Most nitrogen fertilizer plants utilize natural gas. However, any type ofhydrocarbon or coal can be used. In China most plants use coal. Energyconsumption can vary significantly. For an efficient plant using natural gas ittakes approximately 33 MMBtu of natural gas to produce one ton of ammonia(35 GJ). This translates into 40 MMBtu per ton nitrogen (42 GJ/tN). Convertingammonia to urea requires another 3 to 4 MMBtu per ton urea. This translatesinto about 48 MMBtu per ton nitrogen (51 GJ/tN)). As a rule of thumb, ammoniaplants using coal require between 50 per cent and 100 per cent more energy perunit of nitrogen produced.West European ammonia producers are highly energy efficientAmmonia producers in Western Europe have invested heavily in energy-efficienttechnology due to the historically high cost of energy in the region. According toEFMA, several ammonia plants in West Europe run on the lowest feasibleenergy consumption levels and emit the lowest possible amount of CO 2 pertonne of ammonia produced.The Western European ammonia industry is on average more energy efficientthan ammonia producers in other parts of the world. This is also driven by EUenvironmental regulations for pollution control, which requires running plants athigher standards than elsewhere.6970

Urea consumption growth higher than capacity growthHistory shows that many ammonia projects are cancelled or delayedOf the 35 ammonia projects in pipeline in 2002 to be completed within 2008, only11 were realized.7172

Long lead-time on projectsOver the last years it has typically taken at least 5-6 years from a project for anew ammonia and urea plant is initiated until the new plant is operational, evenwithout unexpected delays.Price relationsBased on the demand and supply drivers this section explores how prices in theend are determined.7374

Upgrading margin for converting ammonia into ureaWhile energy costs for the ammonia swing producers set a price floor forammonia, the ammonia price sets a floor for the urea price. If the urea pricedrops below this floor, more ammonia will be offered for sale, less urea will besold, and the relationship will be restored.In a tight supply/demand scenario for nitrogen where there is a demand drivenurea margin, the correlation is lower. Such a scenario is often seen duringperiods with strong prices for agricultural soft commodities.Correlation between long-term grain and fertilizer pricesVariations in grain prices (corn or wheat) explain approximately 50% of thevariations in the urea price, making grain prices one of the most importantfactors driving fertilizer prices. Some of the correlation may of course bespurious, like GDP growth, Chinese imports, strength of the USD etc.7576

Average demand-driven margin of USD 67/tThe location of swing urea production has varied over the past decade, from theUS Gulf, via Ukraine and now China. However, urea prices have only beensupply-driven for shorter periods at a time, with the average demand-drivenmargin for the period 2004 – 2013 approximately USD 66 per ton. From 2014 themarket has turned supply driven with China continuing being the swing producer.Urea prices determine the price range for nitratesThere is a strong correlation between urea and nitrate prices, as they to someextent are substitutes. For agronomic reasons linked to the effectiveness of thenitrogen form, farmers are willing to pay a higher price per unit nitrogen fromnitrates than from urea. The correlation is stronger in the medium to long termthan within a season. However, crop prices are also an important factor thatimpacts the nitrate price and the nitrate premium. The higher the crop value is,the more willing the farmer is to pay a premium for a product that gives a higheryield and quality.7778

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Production economicsThis section describes the cash costs associated with production of standardnitrogen products which is useful to know in supply-driven situations with pricingdetermined by the marginal (swing) producers.8182

Production economics90% of Yara’s operational cash costs are raw materials, energy and freight. Amajor part of these purchases can be terminated on short notice reducing thefinancial consequences of delivery slow-downs.Yara’s plants can be stopped at short notice and at low cost as response todecline in deliveries or to take advantage of cheaper imported ammonia.Natural gas costs the most important cost componentWith a natural gas price of USD 8/MMBtu gas cost represents around 90% of theammonia production cash costs. In this example, one dollar increase in gas cost givesUSD 36 higher gas costs.Most of the “other production costs” are fixed costs and therefore subject to scaleadvantages.A new, highly efficient plant may use natural gas in the low thirties range to produce onetonne of ammonia; the corresponding figure for old, poorly maintained plants will be inthe mid-forties.mt = metric tonneAll cost estimates are fob plant cash costs excluding load-out, depreciation, corporateoverhead and debt service for a US proxy plant located in Louisiana (ca. 1,300 metrictons per day capacity). In this example load-out barge is excluded.8384

Ammonia is the main input for urea productionTypically, it takes 0.58 tonne ammonia for each tonne urea. If we add the gascost in ammonia (USD 182) and the additional process gas costs needed for theproduction of urea (5.2 MMBtu x USD 8/MMBtu = USD 41), natural gasrepresents around 90% of the total production cash cost.All cost estimates are fob plant cash costs excluding depreciation, corporateoverhead and debt service for a US proxy plant located in Louisiana (~1,300 mtper day capacity).Consumption factors to compare price movementsAs shown in the costing example for urea, the real ammonia consumption factoris above the theoretical consumption factor, which is based on N content. Thedifference varies between plants according to their energy efficiency. Using thetheoretical consumption factors is easier when making calculations. If the Ncontent for a product is known (46% N in urea), the ammonia consumption factorcan easily be calculated by dividing the figure with the N content in ammonia(0.46/0.82 = 0.56).Based on this illustration, it is possible to follow relative variation in the variousnitrogen prices. As an example, if ammonia becomes USD10/mt moreexpensive, the production cost of urea increases by 10 * 0.56 (0.46/0.82) =5.6USD/mt. Similarly, if the urea price increases by USD10/mt, a price increaseof 10 * (0.27/0.46) = USD5.9/mt of CAN would keep the relative pricing at thesame level.8586

Phosphate processing routesThe 3 main phosphate finished fertilizer products are diammonium phosphate(DAP), monammonium phosphate (MAP) and triple superphosphate (TSP), all ofwhich are based on phosphate rock processed via intermediate production ofphosphoric acid.Nitrogen applications extend beyond fertilizerThe Industrial segment markets numerous industrial products, mainly originatingfrom Yara’s Upstream and Downstream fertilizer operations, with certain productsbeing intermediates in the production of fertilizers.8788

Main industrial products and applicationsThe ammonia nitrogen route provides opportunities in industrial processeswhere ammonia, urea or nitric acid can be used as traded raw materials.Examples are urea for the glue industry and ammonia for acrylonitrile producers(textile fibres). Other downstream applications are abatement of NO x gases frompower plants, industry and vehicles.Another branch of the Industrial tree is nitric acid, where derived products aretechnical grade ammonium nitrates for explosives, and calcium nitrate for arange of applications including odour control, waste water treatment, treatmentof drilling fluids, and catalyst applications for the production of rubber gloves.Yara Industrial’s gas business includes argon extracted from our ammoniaplants, as well as oxygen, and nitrogen. A derived product from Yara’s nitrateplants is nitrous oxide (N 2 O or laughing gas) for the medical sector. Yara’sammonia plants produce the best food and beverage grade CO 2 as a coproduct.This has led to a unique position as the leading European supplier ofliquid CO 2 . Yara Industrial’s dry ice factories in France, England, Germany,Ireland and Denmark have been developed to utilize our strong position towardsthe food and transportation industry.Multiple products and applicationsChemicals is the largest segment where GDP growth in industrialized marketsrepresents the key growth driver.Environmental applications is the fastest growing segment, growth is driven bylegislation and by the need to treat NO x emissions from heavy-duty trucks and inthe power sector.Technical ammonium nitrate (TAN) is the most global of all Industrial businessunits, where Yara already is the world’s largest independent supplier of technicalnitrates to the civil explosives industry. Asia and Australia are expected to drivegrowth in this business, with Europe and the US being more mature markets.As industrial demand has a lower share of total urea demand than for nitrogen intotal, the effect for the urea market is less. Industrial use of urea covers roughly30% of total industrial nitrogen demand.8990

The pace of growth in nitrogen chemicals for Industrial applicationsis higher than global N-fertilizer growthEffective abatement of nitrogen oxidesNO x emissions produce smog which is highly toxic to humans. Most nationalgovernments have given commitments, and are implementing legislation toreduce NO x emissions and improve the air qualityYara was at the forefront of product development when we created a newproduct for an application linked to NO x abatement. This product is now calledAdBlue, which is utilized with SCR technology for NO x abatement in heavy-dutytrucks, passenger cars and non-road vehicles such as tractors, construction andmining vehicles and trains. Yara is the world’s largest producer of AdBlue, and itsAir1 brand is the only global brand.Similar technology, based on ammonia and/or urea, is used to reduce emissionsof industrial installations such as power plants, cement factories, wasteincinerators etc.Europe is expected to progressively apply more stringent NO x emission limits.Also in the marine segment legislations on NOx and SOx are being implemented.9192

H 2 S abatement for waste waterThe presence of hydrogen sulphide (H 2 S) in waste water and sludge is definedas a septic condition. By preventing septic conditions from arising, negativeeffects like odors, health hazards, corrosion and reduced efficiency of thetreatment plant, can be eliminated or reduced.Yaras calcium nitrate based septicity control process is a natural biologicalmethod of preventing septicity and removing H 2 S by controlled dosage of nitrate.It can be used both for municipal sewer systems and industrial wastewater andsludge, and is non-toxic, non-corrosive, pH-neutral and safe-to-handle.Nitrate-based products are also used to reduce H 2 S toxic emissions in oil fieldsand pipelines.Technical AN: the main raw material for civil explosivesTechnical ammonium nitrate is the main raw material for ANFO (AmmoniumNitrate Fuel Oil) which is the most used and most economical civil explosivecurrently on the market. The main civil explosive market segments are miningand infrastructure development.ANFO was developed 40 years ago and has grown to be the most widely usedindustrial blasting agent in the world, due to its excellent manufacturing,handling and storage properties, low cost per energy unit, high safety levels andoutstanding performance.Calcium nitrate is used as a secondary nitrate in emulsion explosives. It extendsthe shelf life of the emulsion, increases the solubility of the ammonium nitrateand increases the total energy content of the emulsion.93 94

CO 2 at every stage of food production and processingThe main applications of CO 2 are for use in the production of soft drinks and inthe brewing sector, as well as for process cooling and freezing in the foodsector. Carbon dioxide (CO 2 ) is used in the production, storage and transport offoods; from the planting of salads and tomatoes as seeds in the greenhouse, orfrom when salmon are introduced as fry in fish farms until they arrive on thedining table.In greenhouses without a supply of CO 2 , the level of this gas can drop to underhalf of what is normally found in air. When the correct amount of CO 2 added atthe right time (during periods of light) some plant cultures can increase theiryield by 30-50%.CO 2 or nitrogen is used as a cooling agent for the freezing of foods, asatmospheres in the packing of foodstuffs to prolong the shelf-life of the products,and to maintain a controlled temperature during storage and transport. CO 2 gasenables low temperatures to be attained in a short time, preventing damage andminimizing thawing damage.Animal Feed industry with several nutritional products based on corechemicals9596