April 11-13, 2011 Cairo Marriott Hotel, Egypt
Global Developments in Nitrogen Production Costs & Profitability
Mr. Oliver Hatfield Director- Fertilizers, Integer Research
UK
5/2/2011
Global developments in nitrogen production costs and profitability
Oliver Hatfield, Director Integer Research Director, www.integer-research.com
Overview: drivers of nitrogen competitiveness
- Recent macro developments - Review of key markets - China, Russia, Ukraine, US, Europe, MENA - Outlook - Summary S and d conclusions l i
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Macro developments
Macro developments summary
Costs • Costs up for most producers in 2008, 2008 down in 2009, 2009 rising again in 2010 and 2011. • But key distinction between different producers: stable gas prices, commodity-linked, market price (hub/spot vs oil-linked/contract) Prices/Profits • 2008 was the industry’s high water mark for profitability • Demand driven market p pulled up pp prices above marginal g cost, to record levels • 2009 reversal, marginal cost pricing, notably Ukraine • Since mid-2010 demand driven pricing and universal profitability returning
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Nitrogen industry profitability has been highly cyclical (Gross profit, US$ millions) 8000 7000 6000 5000
OPZ Ukraine
Togliatti Azot Russia
Engro g Pakistan
Abu Qir Egypt gyp
Kaltim Indonesia
China BlueChem China
Terra Industries USA
Qafco Qatar
Yara Upstream (EBITDA)
CF Industries Nitrogen USA
4000 3000 2000 1000 0 2005
2006
2007
2008
2009
Source: Integer Nitrogen cost and competitiveness service, company sources
2010 looked better than 2009, but short of the 2008 peak (Gross profit, US$ millions) 1200 2009
1000
2010
800 600 400 200
Petro okemija
China XLX
ZA A Police
China Blu ueChem
Yara Upsstream*
ZA Pulawy
Eurochem N Nitrogen
-200
CF Industries N Nitrogen
0
*Yara Upstream is operating profit Source: Integer Nitrogen cost and competitiveness service, company sources
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50%
10
40%
8
30%
6
20%
4
10%
2
0%
0
-10%
Gas p price US$ per MMBtu
Profit margin % P
Energy cost is crucial profit driver, example: CF Industries N vs OPZ
-2 2005
2006
2007
CF Industries Average gas price paid CF Industries Nitrogen gross margin
2008
2009
2010 Q1-3*
OPZ Average gas price paid OPZ operating margin
Source: Integer Nitrogen cost and competitiveness service, company sources *OPZ margin estimated
Regional developments
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Ukrainian industry becomes marginal in 2009 but covering urea cost in 2010 Evolving ownership could change cost dynamics Cash economics of typical urea producer in Ukraine (US$ per tonne)
600
Urea price exw Urea cash cost exW
500 400 300 200 100 0 2004
2005
2006
2007
2008
2009
2010
2011 (A)
2011 (B)
Source: Integer Nitrogen cost and competitiveness service, company sources (A) scenario: gas at regulated price; (B) scenario: gas at 25% discount
Most European producers struggling in 2009: hub vs indexed gas pricing a key factor European fertilizer producer 2009 profit margin Profit o t margin ag %
Company/subsidiary
Profit measure
Achema
Gross margin
7%
Anwil
Gross margin
3%
Azomures
EBITDA margin
7%
K+S Nitrogen
EBITDA margin
-1%
Petrokemija
Gross margin
-6%
Police
Gross margin
-14%
Pulawy
Gross profit, adjusted to CY
10%
Yara Brunsbuttel
Estimated operating margin
-10%
Yara Ferrara
Gross margin
Yara Sluiskil
Operating margin
-8% 4%
Source: Integer Nitrogen cost and competitiveness service, company sources
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Chinese margins thinning out: intervention flattening prices while production costs rise Typical China urea production costs and margins Profit margin
Production cost
300 US$ per tonne (production cost/margin, stacked*)
250 200 150 100 50 0 Gas
Gas
Gas
Gas
Coal
Coal
Coal
Coal
2007
2008
2009
2010
2007
2008
2009
2010
Source: Integer Nitrogen cost and competitiveness service, company sources * Combined stack represents price achieved
Russian costs rising, but profits still respectable Cash economics of typical producer in Russia (US$ per tonne)
600 500
Urea price exw Urea cash cost exw
400 300 200 100 0 2004
2005
2006
2007
2008
2009
2010
2011
Source: Integer Nitrogen cost and competitiveness service, company sources
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Medium priced gas and location advantage gives strong North American profitability North America N segment gross margin % 45% 40% 0% 35% 30% 25% 20% 15% CF Industries N Agrium Wholesale N PotashCorp N Terra Industries N
10% 5% 0% 2005
2006
2007
2008
2009
2010
Source: Integer Nitrogen cost and competitiveness service, company sources
Middle East/North Africa: low production costs, open market prices, industry leading profitability Typical example: Safco
SAFCO financials (US$ million) 2005
2006
2007
2008
2009
2010
Revenue
486
488
938
1,396
731
1,010
Cost of sales
200
198
326
221
275
293
G Gross profit fit
287
291
612
1 175 1,175
456
717
59%
60%
65%
84%
62%
71%
Gross margin
Source: Safco
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Outlook
Outlook for gas and energy prices Country/ Location
Current position on N cost curve
Likely future position
Comment*
Ukraine
High
High
Assuming gas priced at Gazprom export parity, but ????
Russia
Low to medium
Medium
Dependent on Gazprom programme to raise domestic gas price
Egypt
Low to medium
Low to medium
New low cost gas contracts reducing, new projects low, older capacity medium cost gas
Other N Africa
Low
Low
But political risk!!
Arab Gulf
Low
Low
But costs of gas gradually rising in some locations
North America
Medium
Medium
Shale gas a game changer, but carbon charges? Cash vs full cost/price?
Europe hub
Medium
Medium to high
Competitive gas market, market historically volatile volatile, ETS III
Europe indexed
High
High
Gradual erosion of indexed gas, ETS III
Caribbean
Medium
Medium
Gas to finished product index
India
High
High
Some nitrogen plants sustained by GOI intervention
Pakistan
Low to medium
Low to medium
But gas shortages, creates a dilemma
Indonesia
Medium
Medium to high
Scarcity in some locations, LNG competition
China
Low to medium
Medium to high
Gas scarcities, increasing coal reliance but costs rising
* Detailed country by country analysis in Integer Nitrogen cost and competitiveness study
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General outlook for energy prices
• Outlook for oil influential • Shift to a new price level in the last decade • EIA/IEA has upbeat medium to long term expectations • Coal energy is relatively cheap, but coal demand is rising • Growing interest in coal-based nitrogen outside China • Underground syn-gas syn gas from coal could change new project economics
Global urea cost curve, crude projection 2015 Production cost US$ per tonne (production cost)
340 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20
Capacity volume (million tpy)
0 0
10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190 200 210 220 230
Source: Integer Nitrogen cost and competitiveness service
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Conclusions and summary
- Nitrogen industry has seen periods of demand driven pricing i i and d universal i l profitability fit bilit - Nitrogen production costs are rising in most locations in line with general energy prices - But experiences differ: Ukraine is marginal for now, US medium cost, Europe marginal next? - Energy costs are expected to continue to increase, pushing up nitrogen prices - Access to low cost raw materials will remain the key driver of fertilizer competitiveness, and strong MENA profitability likely to continue
Thank you for your attention!
For a copy of this presentation or more info: oliver.hatfield@integer-research.com +44 20 7503 1265 www.integer-research.com
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