Last week, Sirius Minerals (TIDM:SXX), a £254m Aim-traded miner, caused a stir when it released an outline plan for a proposed $6bn (£3.7bn) phased development of its York Potash Project in Whitby, North Yorkshire (see Sirius makes progress). The scale of the proposed investment dwarfs any mining project on the UK mainland in recent years, and should hopefully provide a much needed stimulus to the local economy. Above all,though, it reflects long-term confidence in the market fundamentals governing the global fertiliser industry.
This is an industry segment which has been largely overlooked by UK investors, particularly as the main players in the fertiliser market are listed abroad, but the world food crisis of 2007/08 served to highlight the structural investment case for agricultural inputs. This point was brought home subsequently through BHP Billiton's aborted $38.6bn takeover bid for Potash Corp of Saskatchewan (TSE:POT) - the world's largest fertiliser producer.
By now, the demographic factors that compelled BHP to make a play for Canada's Potash Corp are familiar investment themes: rising discretionary income in emerging markets, dietary changes in Asia, and bio-fuel production. Ultimately, however, it boils down to a stark Malthusian numbers game. The United Nations forecasts that the world population will rise by around 50 per cent during the first half of the 21st Century; by 2050 there will be an estimated 9.1bn mouths to feed. And the bulk of the projected population increase will be in regions with inadequate water resources and high levels of land degradation.
It's oil in the price
Ironically, the surge in third-world populations has been made possible by the rise of the inorganic fertiliser industry. Facilities which had previously produced ammonia and nitrates for explosives during the First World War were given over to the production of nitrogen-based fertilisers. The global petrochemical industry also played a critical role in the development of synthetic fertilisers, as part of the radical shake-up in farming practices that took place from the 1950s onwards. The American scientist, Dr Norman Borlaug, is credited with being the driving force behind the so-called 'green revolution', which saw fertiliser-reliant, high-yield grain varieties become ubiquitous across the globe .
| Company | Price | Price change % (1-year) | Price change % (3-year) | High (1-year) | Low (1-year) | PE ratio | Dividend yield | Market cap ($bn) |
| Mosaic | $51.19 | -28.1 | 12.4 | 73.18 | 47.13 | 10.9 | 0.98 | 21.8 |
| Yara International | NOK 274.7 | -8.9 | 37.4 | 335.5 | 203.3 | 6.5 | 2.55 | 13.6 |
| Potash Corp of Saskatchewan | C$41.89 | -19.1 | 14.5 | 58.74 | 39.98 | 12.9 | 1.35 | 36.1 |
| Agrium | C$84.25 | 3.3 | 60.6 | 87.92 | 67.12 | 10.1 | 0.56 | 13.3 |
| Israel Chemicals ADR 1:1 | $11.17 | -34.3 | 11.7 | 17.15 | 9.11 | na | 7.36 | 14.2 |
The effective industrialisation of farming processes meant that the rural sector became far more energy intensive; by the end of the last century it was estimated that the equivalent of 400 gallons of oil was required to feed every American, a third of which was linked to the production of synthetic fertilisers. There is a direct link between the price of fertilisers and the price of natural gas. While prices for natural gas in North America have slumped, due to an unexpected market glut brought about by the development of the shale gas industry, it's reasonable to assume that over the long-run prices for fertilisers should be underpinned by demands on global energy resources.
Fertiliser companies also struggled with issues of over-supply during 2011, as farms across the US and Europe delayed orders in response to rising prices, which averaged 43 per cent over the previous year. Fertiliser companies temporarily cut back production, but planting for this spring has reportedly been much higher due to soaring corn prices and a poor outlook for soybean production in South America. Ultimately, if you grow crops using intensive farming methodology, you're going to rely on the big fertiliser producers.
IC VIEW:
Whatever the vagaries of short-term fundamentals, global farm yields will need to keep rising if we're to feed an extra two billion people by 2050, but along with a need for increased mechanisation in emerging market rural sectors, we will require a substantial step-up in global fertiliser output. A point confirmed in a report from the UN's Food and Agriculture Organisation, which concludes that "demand forecasts indicate that the fertiliser industry can expect a substantial global increase".
| THE MOSAIC COMPANY |
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An investment in the Mosaic Company (NYSE:MOS) is probably one of the surest ways of gaining broad exposure to the expected growth in the world's principal grain markets, given its high market share across a range of fertiliser products. Indeed, the Minnesota-based company accounts for respective shares of approximately 60 and 40 per cent in the US phosphate and potash markets. After a problematic 2011, Mosaic now offers potential upside for investors, given that the company recently confirmed that "domestic and international crop nutrient markets have strengthened significantly, meeting the upper end of management's initial expectations and resulting in an improved near-term volume outlook". With a market value of $21.8bn, Mosaic now trades at around 24 per cent below consensus valuation, on a forecast P/E multiple of 11.5 - certainly a safe long-term bet, but there's better value on offer elsewhere. |
| OUR NORSK FAVOURITE |
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Like Sirius Minerals, there are a number of junior mineral exploration companies with plans to tap into the predicted growth in world agricultural markets. One of the more interesting prospects is Allana Potash (TSE:AAA), a Toronto-listed company with activities centred on Ethiopia and Argentina. Allana recently upgraded its resource estimate at its Dallol project in Ethiopia by more than 90 per cent. An external economic study had previously assessed the project's net value at $1.85bn, while associated capital and operating expenses are expected to be amongst the lowest in the industry. A much larger entity, Oslo-based Yara International (YAR:NO), has just secured a controlling stake in Ethiopian potash company Ethiopotash, which is developing a prospect adjacent to the Allana site. Yara, which was demerged from Norsk Hydro in 2004, is the world's leading producer of nitrogen fertilisers, and is also involved in environmental services, including water treatment and air pollution control. With annual revenues of NOK 65.4bn (£6.98bn), and low operational gearing, Yara is our preferred investment option within the sector. Its shares may have come off in line with the sector over the past year, but its forward rating is considerably lower than industry rivals and it would also fit neatly into an ethical investment portfolio, if you're that way inclined. |
| THE 7 PER CENT SOLUTION |
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Founded in 1968, ICL (Israel Chemicals) is a Tel Aviv-listed (ICL:IT) integrated fertliser and specialty chemicals producer, which controls around 9 per cent of the global potash market through exclusive concessions to extract from Israel's Dead Sea, in addition to certain rights to mine the Negev Desert. It is also engaged in the production of bromine, magnesium and phosphate, along with food additives. Around 60 per cent of ICL's mineral output is sourced in Israel, but the company also owns and operates mines in the Americas, China and Europe, including mineworks adjacent to the Sirius site in North Yorkshire. With a market capitalisation of $14bn, ICL ranks as one of the world's top fertiliser and speciality chemicals producers. Last year, its revenues increased by a quarter, while operating profits grew 43 per cent. ICL is the second largest company trading in Tel Aviv, but it's considered strategically important to Israel's economy, so a majority stake is held by the state-controlled holding company – Israel Corp - with Canada's Potash Corp holding a 13 per cent stake. However, the relationship with Israel Corp is the reason why ICL is obliged to pay around 70 per cent of net earnings in dividends, which explains a current yield of around 7 per cent. Understandably, ICL shares are tightly held. Several UK broker cover shares with Tel Aviv listings and trading is made easier by the fact that it has American Depositary Receipts on Nasdaq. |
