Commodity Online
DUBAI: If you have no land to grow food, help others to do that and make a fast buck too. That is the policy of Middle East counties now. Lack of land to grow food has been a problem dogging the Middle east nations and this has forced several of these nations to hunt for agri land in Pakistan and Sudan.
One factor which goes in favour of these Middle east nations is that they are producers of fertilizers, which is needed for growing food. And, demand for food is soaring like anything in the world. With population growing and more mouths to feed and no growth the agri land, the world is struggling to produce more food. For that, growers need good fertilizer.
So, if these nations hunt for land in poor nations, they have particular designs to make maximum use of their plus points. While buying land in poor nations they will also sell their fertilizers to these nations so that they can grow better food.
According to an HSBC study, many Middle Eastern countries, short of food and water, are large-scale exporters of fertilizers.
Companies in these region find themselves in a sweet spot. Those with access to gas – an essential input for nitrogen-based fertilizers – are likely to do particularly well because they have negotiated long-term and generous supply contracts.
Nitrogen-based fertilizers are by far the largest component of global consumption. They need to be applied to fields annually whereas the other two types – potash and phosphates – do not.
There is a mismatch between supply and demand for fertilizers generally as South America, India and China demand even greater quantities and the world’s population grows.
It is predicted that there will be 1.5bn to 2bn more people in 20 years’ time. Worldwide production of meat, which needs more fertilizers than arable crops, is expected to grow as consumption increases by 25 per cent, according to the United Nations food and agriculture organisation.
Experts say that for the past 20 years fertilizer prices have been stable and the margins small so there has been no incentive to invest in capacity.
When demand is spiking, the industry can’t follow. It takes three-and-a-half years before a nitrogen plant is in operation – seven years for a phosphate mine. So there will be a tension between supply and demand.
Around the world additional capacity has been planned and shares in Middle Eastern fertilizer companies have fallen by between a third and a half since the end of June on fears that high prices will not be maintained. Those fears are overdone.
The bank picks a number of large but low-profile businesses it believes are undervalued – Arab Potash Company of Jordan, Orascom Construction Industries of Egypt, Israel Chemicals and, from Turkey, Gubre Fabrikalari, Bagfas and Tekfen. It is neutral on Safco of Saudi Arabia and underweight on Jordan Phosphate Mines.
Aside from the Turkish companies, OCI and Israel Chemicals, coverage of the fertilizer sector in the Middle East is limited. But some of the numbers being talked about are large.
In February OCI paid $1.59bn for fertilizer production operations of Abraaj Capital, the private equity company.
OCI has nitrogen fertilizer assets in Algeria and Egypt. Joint ventures that it has fashioned with government-owned companies have ensured long-term gas contracts on favourable terms.
For other fertilizer makers – which in essence means the Israeli and Jordanian companies that exploit potash deposits around the Dead Sea (see the Israel Chemicals plant pictured above) – and also for phosphate miners, the advantages are less pronounced.
That is not to say Middle Eastern companies are not highly significant in the phosphates sector. Saudi Arabia and all the north African countries, in particular Morocco and Jordan, are rich in phosphates.
