PotashCorp Market Analysis Report - Q4 2013


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  • Farm income in the US and Canada is projected to be well above average for the third consecutive year. Elevated crop prices in the first half of 2013 supported robust farm income levels despite challenging livestock economics. Lower crop prices received in the second half of the year were partially offset by increased demand, lower input costs and improved livestock margins. Despite the potential for lower farm income in 2014, we anticipate a healthy economic environment relative to historical standards.
  • Canada is a good example of the strong rebound in crop production that occurred during the Northern Hemisphere’s primary growing season. A temperate summer with timely rains resulted in record yields and estimated production of major grains and oilseeds of approximately 90 million tonnes. We believe that the need to replenish soil nutrients and the strength of the Canadian farm economy will support robust fertilizer consumption in the coming year.
  • The USDA is projecting a record US corn crop of 14 billion bushels due to a large planted area and favorable growing conditions early in the year that more than offset late season hot/dry conditions.Demand for US corn is projected to increase by 17 percent, cushioning some of the impact of the increased production. Ending stocks are forecast at around 1.9 billion bushels and corn prices at $4.50 per bushel for the 2013/14 crop year, which is a healthy level to support demand growth and maintain farmer profitability.
  • For the first time, the EPA proposed to ease the annual requirement for ethanol in gasoline, acknowledging that mandated levels specified in the 2007 law are difficult, if not impossible, to meet. Subtracting mandated levels for non-corn-based biofuels leaves between 12.7 billion and 13.2 billion gallons of corn ethanol to be blended into the US gasoline supply. This adjustment would imply corn use for ethanol could fall slightly below the 4.9 billion bushels USDA currently forecasts for the 2013/14 crop year. However, given the strength of current producer and blender economics, it is possible that production could still exceed mandated levels.Future demand for ethanol will depend on political and economic considerations. The development of E15 and E85 infrastructure will be a key component of the long-term growth potential in this market.
  • US corn and soybean export commitments have been strong for the 2013/14 crop year and are currently ahead of the pace required to achieve USDA’s annual export forecast. This indicates a strong desire from international buyers to source US grain and oilseeds. During several years of tight US supply and higher prices, importers had to diversify their supply sources. With increased US production and growth in global trade expected this year, there is an opportunity for a significant increase in US corn and soybean trade. We believe this will mark the first step in a renewed growth phase for its agriculture export volumes.
  • Now that harvest in the Northern Hemisphere is largely behind us, most of the supply-side attention is focused on the South American growing season. Full-season corn and soybean planting has gone well and both crops are developing with good moisture conditions. Given the current economics, farmers have increased soybean area and cut back on corn, which is reflected in the production forecasts for these crops.While weather conditions have generally been favorable, the growingseason has not been without challenges. Farmers in Brazil are having to aggressively combat corn earworm in their soybean fields. This is a new pest and its potential impact on production is uncertain. The market is increasingly reliant on South American crops and any disruption in production or export capability can impact the market.
  • Potash is produced in only 12 countries around the world as high-quality, economically mineable deposits are rare. North American producers typically account for 30-35 percent of global production. Most producers in this region benefit from access to high-quality reserves and world-class distribution systems. More than half of the potash produced in North America is exported, with the remainder sold to domestic agricultural and industrial customers.
  • Growth Anticipated in 2014We expect global potash demand will increase to a range of 53-54 million tonnes in 2013 from 51 million tonnes last year. We believe the uncertain market conditions that occurred following the change in strategy announced by Uralkali in late July have prevented a more significant rebound. We anticipate that limited inventory will be carried into 2014 and higher consumption could lift global shipments to approximately 55-58 million tonnes next year. Shipments at the low end of our range could occur if market uncertainty persists into the first half of 2014, impacting buying patterns in major offshore markets. Demand at the higher end of the range would require greater market engagement early in the year, including a significant improvement in demand from India.
  • A recent Iowa State University research report revised potash application guidelines for various crops grown in the state. As illustrated in the charts above, the new guidelines generally call for higher potash application rates at most defined soil test ranges. For corn, using the old recommendation, a soil test level of 150 ppm (similar to the North American median soil test K level) would result in a K2O recommendation of 45 lbs per acre. Using the new recommendations, the same soil test level would result in a recommendation of 80 lbs per acre. While the study is specific for Iowa, we believe it could impact recommendations in neighboring states. It may also provide an impetus for other universities to evaluate recommended rates, which in many cases have not been revised for several years.
  • A recent article published by University of Illinois researcherschallenged a number of basic principles related to soil fertility, including the view that potash fertilizer is generally unnecessary in soils like those found in Illinois. Since its release, several responses have been written by fellow academics that address many of the claims made in the article. Emerson Nafziger, also from the University of Illinois, responded that most soils in Illinois can supply nowhere near the amount of potassium that is being removed in a typical corn/soybean rotation. If potash is not applied, soil test levels will decline.The chart above provides a summary of research data from various universities that clearly illustrate the relationship between soil potassium levels and crop yields. For corn and soybeansgrown in many regions of the Midwest, the average yield loss can range from as low as 2 percent for soils near the critical level to more than 50 percent for soils that test well below that level.
  • DAP and MAP imports by India, which had recently accounted for more thanone-third of global trade in these products, are expected to be down more than 2 million tonnes in 2013. Demand was negatively impacted by high DAP stocks at the start of the year, lower consumption due to a distorted subsidy system and industry financial constraints caused by a weaker Rupee and delayed subsidy payments. One positive factor is that retail inventory levels have been drawn down significantly, which is expected to support an improvement in Indian DAP import demand in 2014. Demand in other regions, particularly Latin America, has been relatively strong in 2013 and we believe this will continue into 2014.On the supply side, DAP exports from Saudi Arabia are expected to increase and Moroccan volumes could be up slightly with the development of new granulation capacity. Given the growth in supplies from these regions, we expectUS and Chinese exports could be relatively flat in 2014.
  • US producer sales to the domestic market were in line with historical levels through the first half of 2013. Activity was slow in the third quarter due to global market uncertainty and a late harvest. The shipment pace increased in October as the fall application season began and we expect healthy domestic demand for the fourth quarter.Strong sales to Canada and South America have not been enough to compensate for lower shipments to India. US DAP/MAP exports have declined for a number of years and this year will be no exception. Production has been relatively flat compared to recent years and with lower offshore demand, inventories have risen above historical levels.
  • The major driver of the projected increase in global ammonia trade is the potential for improved demand from the ammoniated phosphate sector in 2014. India and Morocco are expected to drive additional growth in this area. On the other hand, imports of ammonia into the US are expected to decrease, not due to a lack of demand but because of additional domestic capacity. PotashCorp’sGeismar plant restart, for example, added 500,000 tonnes per year of ammonia capacity to the US market. On the supply side, Trinidad is expected to recover from gas curtailments due to platform infrastructure maintenance. As noted on the previous slide, new trade ammonia supply is expected from Algeria destined for Morocco and Europe, assuming trade barriers are overcome. Export supply from Iran is also a wild card. It is uncertain whether the potential easing of economic sanctions could result in greater market access and the ability to obtain vessel insurance, which has been a major hindrance to it’s ability to export ammonia.
  • A late start to the harvest and market uncertainty led to reduced US nitrogen demand in the third quarter of 2013. This is illustrated by the slow pace of imports to start the fertilizer year, down 22 percent from 2012 and 14 percent below the previous 5-year average. Fertilizer year-to-date imports are at their second-lowest level in 10 years, only 6 percent above 2010 record lows. Additionally, uncertainty over nitrogen prices and US corn acreage is likely keeping some farmers from committing to application programs for the fall and to prepay volumes ahead of spring. While some of the reduced import supply will be offset by higher domestic production, we expect a strong need for additional import volumes early in 2014 to meet projected spring requirements.
  • China’s urea exports are expected to be at record levels in 2013 but the timing of the supply is different than last year. In 2012, a significant amount of product was placed in bonded warehouses prior to the close of the low-export tax season, contributing to record exports in November and December (although these are high export tax months). This year producers positioned product for export earlier in the year, leading to record exports during the third quarter. This surge put pressure on global prices and resulted in a much lower incentive to position product for export in the fourth quarter. With tighter product availability from China, export restrictions in North Africa and strong import demand from key South Asian countries, global urea prices have shown some strength in the fourth quarter.
  • Production of all of China’s major crops has increased tremendously over the last two decades, but particularly fruits and vegetables, which have more than tripled.Production of these high-quality crops requires significant application of nutrients, particularly potash, which helps improve color, taste and texture. While improved agronomic practices and better seed technology have played an important role, we believe balanced fertilization has had the greatest impact on production of higher-valued crops. However, considerable opportunity remains to increase productivity of cereal crops through improved management practices.
  • Rising demand and domestic production constraints have pushed up prices for most of China’s key crop commodities. Prices for major field crops, such as corn, have increased substantially as farmers have been challenged to keep pace with demand growth. With potash prices moving lower over the past year, the ratio of corn prices to potash prices is projected to be at its most favorable level in more than a decade. We expect this will be one factor that can have a positive impact on potash consumption in the coming years.
  • Average corn yields in China are about half of those in the US. While similar quantities of nitrogen are applied, China uses only about 25 percent as much potash per acre as the US. This nutrient imbalance severely limits yield potential and provides a significant opportunity for growth in potash consumption.The small size of farms in China is one factor that has limited the move to more modern agriculture practices. However, liberalization of land transfer rights (beginning in 2008) has started to encourage larger farms and more mechanization. We believe this is an important step that will ultimately lead to improved management practices, including proper fertilization on cereal crops. At the end of 2012, nearly 18 million hectares of land have been transferred, accounting for almost 22 percent of the total family-contracted land area.
  • China’s potash production is concentrated in the western provinces of Qinghai and Xinjiang. Most of its potassium chloride (MOP) is produced from salt lake beds in Qinghai and transported by rail to the major consuming areas. Domestic production of MOP and primary SOP has increased in recent years; the most significant recent addition of capacity is the 1-million-tonne expansion at QSLI that started operation in 2013 and will be ramped up over the next one to two years. We believe almost all of the planned MOP capacity expansions will be completed during the first half of the decade and future expansion capability is limited by the lack of high-quality deposits and shortage of water for processing in the primary producing regions.
  • Potash is imported to China both by sea and overland routes, with seaborne imports accounting for approximately 70 percent of the total. Most seaborne potash is imported through the ports of Qingdao (Yellow Sea), Nanjing (Yangtze River Delta), and Zhanjiang (South China Sea). Canada supplied on average around 30 percent of total seaborne potash imports over the past three years.Russia has the ability to deliver potash directly to its Chinese customers by rail. Cross-border imports became a significant source of China’s potash imports in recent years, typically ranging between 1.5 million and 2.0 million tonnes.
  • China faces challenges with declining phosphate rock quality. Although the government has records of more than 520 mines in 27 provinces, most production is in a handful of southern provinces. There has been a move to eliminate the small independent mines and consolidate the rest into larger, integrated phosphate complexes. DAP plants in China are not always located close to a rock mine. As a result, production costs vary widely, depending on the source and location of raw material supplies and the freight costs to ship to downstream processing plants.
  • Costs for China’s DAP producers vary widely, depending on the degree of integration, source of raw material supplies, size of plants and distance from ports. China has approximately 40-50 DAP plants; the chart illustrates the cost variability among them. Rock costs range from a low of approximately $65/tonne to a high of $85/tonne for integrated producers with some variability, depending on the distance required to ship from the mine to processing plant. Non-integrated producers have higher rock costs, primarily due to shipping costs of up to $30/tonne in some cases. Over the next 10 years, operating costs are expected to be negatively affected by inflation, particularly wages, and by higher processing costs for phosphate rock.
  • China has increased its share of global phosphoric acid production from 12 percent to almost 40 percent over the past decade. The pace of expansion is expected to level off in the coming years as the countryhas achieved its goal of self-sufficiency. It is not widely regarded as a lower-cost producer, which, combined with the potential for more stringent governmental regulations, could impact the ability of older domestic plants to remain competitive. Growth in demand for fertilizer, feed and industrial use is expected to support a moderate improvement in operating rates over the next five years.
  • China’s export volumes of DAP/MAP have ranged between 4.5 million and 5.0 million tonnes since 2010 but are likely to fall short of this mark in 2013 due to lower import demand by India. The chart on the left illustrates the importance of the Indian market to Chinese phosphate exporters. New export-oriented phosphate capacity in other countries could lead to greater competition in export markets and push out some of China’s higher-cost phosphate fertilizer exports over the medium term. Therefore, we expect its exports will trend lower over time but, as in the past, will remain a wild card from year to year depending on global pricing levels and domestic policies.
  • Growth in nitrogen fertilizer demand in China will be driven by the availability of relatively low-cost nitrogen products and the need to raise yields to keep pace with rising domestic food demand. However, nitrogen consumption is expected to grow more slowly than phosphate and potash consumption as more focus is placed on fertilizer best management practices. In some areas, this may include reducing nitrogen application rates.With rapid industrialization and urbanization taking place in China, the demand for nitrogen for non-fertilizer uses is rising rapidly. The market share of non-fertilizer demand for ammonia is expected to increase significantly over the next decade.
  • Nitrogen production is located throughout China wherever coal or natural gas is found and integration between energy and nitrogen producers is increasing. There is a clear trend to build new ammonia/urea plants close to sources of feedstock, in contrast with the former situation when nitrogen capacity was built in the main consuming regions. Approximately 70 percent of China’s nitrogen capacity uses coal as the hydrogen feedstock. Most natural gas-based urea is sold in the domestic market, with approximately 80-90 percent of urea exports from China coming from coal-based plants.
  • Despite the Chinese government’s intention of tackling the urea surplus, interest in building more ammonia/urea capacity remains strong at a local level. Most of these new projects are intended to drive economic growth and are supported by local government tax incentives. New plants will have the advantage of better technology and more efficient raw material use, which will ultimately force small and inefficient nitrogen producers out of the markets. Consolidation will be the key trend in the nitrogen industry in China, although the timing is difficult to estimate.
  • China has emerged as the world’s largest urea exporter although annual volumes fluctuate due to changes in government export policies and global prices. We expect this year’s exports will be a record of approximately 8 million tonnes. There is speculation that the government could lower the export tax in 2014 but at this moment it is still uncertain how it will be modified. This adds some uncertainty to the outlook for global urea markets but we do not believe it will significantly change export volumes. Whether or not China continues to export at the pace of recent years will depend on the cost structure of its nitrogen industry relative to other global suppliers, the pace of domestic demand growth and the potential for plant closures.
  • PotashCorp Market Analysis Report - Q4 2013

    1. 1. Q4 2013 Market Analysis Report December 10, 2013 PotashCorp.com
    2. 2. Forward-looking Statements This report contains forward-looking statements or forward-looking information (forward-looking statements). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements are based on certain factors and assumptions including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Several factors could cause actual results or events to differ materially from those expressed in the forward-looking statements, including, but not limited to, the following: variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur, transportation and petrochemical markets; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in competitive pressures, including pricing pressures; adverse or uncertain economic conditions and changes in credit and financial markets; the results of sales contract negotiations within major markets; economic and political uncertainty around the world; timing and impact of capital expenditures; risks associated with natural gas and other hedging activities; changes in capital markets; unexpected or adverse weather conditions; changes in currency and exchange rates; unexpected geological or environmental conditions, including water inflows; imprecision in reserve estimates; adverse developments in new and pending legal proceedings or government investigations; acquisitions we may undertake; strikes or other forms of work stoppage or slowdowns; rates of return on and the risks associated with our investments; changes in, and the effects of, government policies and regulations; security risks related to our information technology systems; and earnings, exchange rates and the decisions of taxing authorities, all of which could affect our effective tax rates. Additional risks and uncertainties can be found in our Form 10-K for the fiscal year ended December 31, 2012 under the captions “Forward-Looking Statements” and “Item 1A – Risk Factors” and in our other filings with the US Securities and Exchange Commission and the Canadian provincial securities commissions. Forwardlooking statements are given only as at the date of this report and the company disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
    3. 3. Report Summary • Agricultural Overview: Slides 4-11 • Fertilizer Market Overview: Slides 12-24 • China Fertilizer Overview: Slides 25-40
    4. 4. Agriculture Overview
    5. 5. Crop and Fertilizer Price Index Significant Economic Incentive for Increased Fertilizer Usage Price Index (2005 Average = 100) Crop Price Index* 450 Fertilizer Price Index** 400 350 300 250 200 150 100 50 0 Jan-05 Jan-07 Jan-09 Jan-11 * Based on corn, soybean and wheat prices (weighted by global consumption). ** Based on urea, DAP and KCl prices (weighted by global consumption). Source: Bloomberg, PotashCorp Jan-13
    6. 6. US and Canadian Farm Income Large Crops and Supportive Prices Result in Healthy Farm Economy US Farm Income Canadian Farm Income Billion US$ Billion CDN$ Net Cash Farm Income 160 10-Yr Avg Net Cash Farm Income 16 140 14 120 12 100 10 80 8 60 6 40 4 20 2 0 10-Yr Avg 0 03 05 07 09 11 13F Source: USDA, Statistics Canada, AAFC, PotashCorp 03 05 07 09 11 13F
    7. 7. Canadian Crop Production Record Production Due to Favourable Growing Conditions Million tonnes 100 Wheat Canola Corn Barley Pulses* Soybeans 90 80 70 60 50 40 30 20 10 0 03 05 *Includes lentils and peas. Source: Statistics Canada 07 09 11 13E
    8. 8. US Corn Supply/Demand Large Production Supports Improved Demand Prospects Stocks-to-Use − Percent Billion Bushels Production 16 Stocks-to-Use 25 14 20 12 10 15 8 10 6 4 5 2 0 0 2003 2005 2013F refers to the 2013/14 crop year. Source: USDA 2007 2009 2011 2013F
    9. 9. US Ethanol Profile EPA Lowers Mandate but Positive Margins Could Support Additional Production Producer and Blender Margins – Cents/Gallon Iowa Plant Margin Chicago Blender Margin US Corn Ethanol Use (Billion Gallons) Consumption Exports 15 100 80 60 12 9 40 6 20 0 Jan-10 Nov-10 Sep-11 Jul-12 May-13 -20 3 0 10 -40 Source: EIA, PIRA, ProExporter, PotashCorp 11 12 13F 14F
    10. 10. US Weekly Corn and Soybean Export Commitments Strong Recovery in Offshore Demand for US Corn and Soybeans Soybean Export Commitments Corn Export Commitments Million Tonnes, Cumulative Million Tonnes, Cumulative 2013 2012 2013 Prev. 5-yr Avg. 45 40 35 35 30 30 25 25 20 20 15 15 10 10 5 5 0 Prev. 5-yr Avg. 45 40 2012 0 0 4 8 12 16 20 24 28 32 36 40 44 48 52 Shipping Weeks, September 1 to August 31 Source: USDA 0 4 8 12 16 20 24 28 32 36 40 44 48 52 Shipping Weeks, September 1 to August 31
    11. 11. South America Crop Production Soybean Production Expected to Rise; Corn Output to Decline Soybean Production Corn Production Percent Share Million tonnes Production Global Trade Share Percent Share Million tonnes Production Global Trade Share 120 120 100 50% 80 40% 60 140 60% 58% 160 30% 40 20% 56% 100 60% 54% 80 52% 60 50% 40 20 48% 20 10% 0 46% 0 0% 03 05 07 Source: USDA, PotashCorp 09 11 13F 03 05 07 09 11 13F
    12. 12. Fertilizer Market Overview
    13. 13. World Potash Production North America Is a Major Producing Region Million Tonnes KCl Percentage North America Middle East Others 60 FSU Europe North America % of Production 40% 35% 50 30% 40 25% 30 20% 15% 20 10% 10 5% 0 0% 2004 2005 2006 Source: CRU, Fertecon, PotashCorp 2007 2008 2009 2010 2011 2012 2013E
    14. 14. World Potash Demand Growth Anticipated in 2014 Million Tonnes KCl * Forecast per PotashCorp Source: Fertecon, CRU, Industry Publications, PotashCorp
    15. 15. North America Potash Shipments Demand Has Strengthened in the Fourth Quarter Domestic Producer Shipments Offshore Imports Million Tonnes KCl 1.2 2013 Previous 5-Yr Avg Thousand Tonnes KCl 140 2013 Previous 5-Yr Avg 120 1.0 100 0.8 80 0.6 60 0.4 40 0.2 20 0.0 0 November/December shipments based on PotashCorp estimates. November/December imports based on Blue Johnson and PotashCorp estimates. Source: IPNI, TFI, Blue Johnson, PotashCorp
    16. 16. Iowa State Potash Recommendation Changes Revised Recommendations Support Need for Higher Application Rates Corn Recommendation Soybean Recommendation lb K20 per Acre lb K20 per Acre Old Recommendation New Recommendation 140 Old Recommendation New Recommendation 140 120 120 100 100 80 80 60 60 40 40 20 20 0 0 80 100 120 140 160 180 Soil Test Potassium - ppm Source: Iowa State University 200 80 100 120 140 160 180 Soil Test Potassium - ppm 200
    17. 17. Correlation Between Soil Potassium and Crop Yield Significant Yield Response From Potassium Fertilizer Application in Low Testing Soils Relative Yield - Percent Corn-Iowa Corn-Ohio Cotton-Virginia Soybean-Illinois 110 100 90 80 70 60 50 40 20 40 60 80 100 120 140 160 Soil Test Potassium - ppm Source: Various University Research Publications 180 200 220
    18. 18. World DAP and MAP Trade Demand Recovery in India to Support Global Phosphate Trade World DAP/MAP Exports World DAP/MAP Imports Million Tonnes 25 China Morocco Million Tonnes Russia Saudi Arabia US Other 25 20 5 0 Other 10 5 Other Asia 15 10 Brazil 20 15 India 0 2004 2006 2008 Source: CRU, TFI, PotashCorp 2010 2012 2014F 2004 2006 2008 2010 2012 2014F
    19. 19. World and US Phosphoric Acid Trade US Phosphoric Acid Exports Have Remained Strong Imports by Major Importer Million Tonnes – P205 India US Phosphoric Acid Exports Million Short Tons – P205 Europe Pakistan Indonesia 5 Others 2013 Latin America Previous 5-Yr Avg 0.6 0.5 4 0.4 3 0.3 2 0.2 1 0.1 0 0.0 09 10 11 12 Source: CRU, TFI, PotashCorp 13F 14F Jan Mar May Jul Sep Nov
    20. 20. US DAP/MAP Use and Inventory Exports Lower Exports Sales Have Resulted in Elevated Inventory Domestic Sales Exports Million Short Tons, Cumulative 7 2013 Previous 5-Yr Avg Inventory Million Short Tons, Cumulative 7 2013 Previous 5-Yr Avg 1.4 6 6 1.2 5 5 1.0 4 4 0.8 3 3 0.6 2 2 0.4 1 1 0.2 0 0 0.0 Source: TFI Million Short Tons 2013 Previous 5-Yr Avg
    21. 21. Ammonia Capacity Projections vs. Actual Additions Global Ammonia Projects Have Faced Delays Capacity - Million Tonnes 240 Projected Capacity 1-Year Prior Actual Capacity 230 220 210 200 190 180 170 160 2009 Source: Fertecon, PotashCorp 2010 2011 2012 2013F
    22. 22. Global Ammonia Trade Ammonia Trade Is Expected to Increase in 2014 World Ammonia Imports Million Tonnes World Ammonia Exports Million Tonnes 20.0 20.0 19.5 19.5 19.0 19.0 18.5 18.5 18.0 18.0 17.5 17.5 2014 global trade is expected to reach 19.6 million tonnes. Source: Fertecon, PotashCorp
    23. 23. US Cumulative Nitrogen Imports Potential for a Robust Spring Million Short Tons (N basis) 2013/2014 2012/2013 Previous 5-Yr Avg 11 10 9 8 7 6 5 4 3 2 1 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Note: Nitrogen imports include ammonia, urea, and UAN. Source: USDOC, PotashCorp Apr May Jun
    24. 24. China Urea Exports by Month Impact of China’s Export Tax on Urea Trade Volumes Thousand Tonnes 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Blue denotes high export tax months; Green denotes low-tax window Source: NDRC of China, CRU, PotashCorp Jul-13
    25. 25. China Fertilizer Overview
    26. 26. China’s Potash Consumption Majority of Consumption in South and Central Provinces China’s Potash Consumption by Province Potash Use by Crop All Other Crops 19% Fruits & 40% Vegetables Sugar Crops 4% Wheat 6% 10% Corn 21% Rice Source: IFA, China Agriculture Yearbook, PotashCorp
    27. 27. China Crop Production and Potash Consumption Strong Relationship Between Crop Production and Potash Consumption Crop Production – Million Tonnes Fruits & Vegetables Other Crops 1,500 Potash Consumption – Million Tonnes K20 Cereals Potash Consumption 7.0 6.0 1,200 5.0 900 4.0 600 3.0 2.0 300 1.0 0 0.0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: FAO, Fertecon
    28. 28. China Potash Consumption and Affordability Index Rebound in Potash Consumption With Favorable Crop-to-Potash Price Ratios Affordability Index Million Tonnes K2O Potash Consumption 7 Corn/MOP Price Ratio 1.40 6 1.20 5 1.00 4 0.80 3 0.60 2 0.40 1 0.20 0 0.00 2000 2002 2004 2006 Source: China Grain Consultant, Fertecon, PotashCorp 2008 2010 2012 2014F
    29. 29. China Corn Fertilization Rates and Land Consolidation Land Consolidation Creates Opportunity to Improve Farm Management Practices Farmland Rented Potash Application Rate on Corn Pounds/acre - K2O Percentage 60 25 50 20 40 15 30 10 20 5 10 0 0 US Canada Brazil China Source: IFA, USDA, Fertecon, Ministry of Agriculture, BOABC 2004 2006 2008 2010 2012
    30. 30. China’s Domestic Potash Production Domestic Production Has Increased Potash Production by Product Potash Capacity by Major Producers (2013E) Million Tonnes Product MOP 7 Primary SOP MOP Capacity Million Tonnes 6 QSLI 2.9 5 Zangge 1.2 Citic Guoan 0.4 Others Total 0.3 4 3 Primary SOP Capacity 2 4.8 Million Tonnes Luobupo Others Total 1 0 2007 2008 2009 2010 2011 Source: CRU, Fertecon, PotashCorp 2012 2013E 1.3 0.1 1.4
    31. 31. China’s Potash Imports Seaborne Imports Account for Greatest Share of Chinese Imports Million Tonnes KCl Seaborne Imports Cross-border Imports 10 8 6 4 2 0 2004 Source: CRU, PotashCorp 2005 2006 2007 2008 2009 2010 2011 2012 2013F
    32. 32. China’s Rock and Granulation Capacity Location Rock and Granulation Facilities Not Always Locate Together - Location of DAP Plants Hubei (35% of Rock Production) Sichuan (9% of Rock Production) Yunnan (33% of Rock Production) Guizhau (23% of Rock Production) Source: CRU
    33. 33. China DAP Export Cost Profile Emerged as a Major Supplier but Some Producers Are Higher-Cost US$/Tonne 500 Total cash cost Freight and export tax costs 400 300 200 100 0 Integrated (low) Integrated (high) Non-integrated Note: Higher cost integrated producers typically have higher rock transportation costs. Source: CRU, PotashCorp
    34. 34. China’s Phosphoric Acid Supply and Demand Near-Term Oversupply in Chinese Market but Moderating Going Forward Product - Million Tonnes P2O5 Production 25 Operating Rate - Percent Capacity Operating Rate 100% 20 80% 15 60% 10 40% 5 20% 0 0% 03 04 Source: CRU, PotashCorp 05 06 07 08 09 10 11 12 13F 14F 15F 16F 17F
    35. 35. China Phosphate Profile Major Supplier but Likely to be Challenged by Low-Cost Exporters 2012 DAP/MAP Exports by Destination DAP/MAP Export Forecast Million Tonnes 6 Other 16% 5 Oceania 4% Pakistan Latin America 4 4% 3 5% 60% India 2 11% Vietnam 1 0 06 07 08 09 10 11 12 13F 14F 15F 16F 17F 2012 Exports – 4.8 million tonnes Source: CRU, PotashCorp
    36. 36. China Ammonia Consumption Ammonia Consumption for Industrial Use Expected to Increase Million Tonnes 70 Urea Other N fertilizer Industrial 60 50 40 30 20 10 0 2005 2007 Source: CRU, Fertecon, PotashCorp 2009 2011 2013F 2015F 2017F
    37. 37. Major Areas of Raw Material Production Coal Is the Primary Feedstock for Nitrogen Production in China Major Areas of Coal Production and Urea Exports Major Areas of Fertilizer Production Heilongjiang Jilin Inner Mongolia AR Xinjiang AR Liaoning Beijing Gansu Tianjin Hebei Shanxi Ningxia AR Qinghai Shaanxi Shandong Henan Tibet AR Jiangsu Anhui Chongqing Guizhou Ammonia Phosphate rock Yunnan Shanghai Hubei Sichuan Zhejiang Hunan Jiangxi Fujian Guangxi AR Potash Guangdong Hong Kong SAR Macau SAR Hainan Source: Fertecon, CRU, PotashCorp Main Anthracite-Producing Provinces Main Urea-Exporting Provinces
    38. 38. China Urea Supply and Demand Local-Level Interest in Building Additional Capacity Remains Strong Operating Rate - Percent Production - Million Tonnes 100 Natural gas Anthracite (M) Capacity Thermal Coal Anthracite (S) Operating Rate Anthracite (L) Others 100% 80 80% 60 60% 40 40% 20 20% 0 0% L refers to large-scale producers, M refers to medium and S refers to small. Source: CRU, PotashCorp
    39. 39. China Urea Feedstock Capacity Share Natural Gas 28% Chinese Urea Export Costs Thermal Coal 6% Anthracite (L) 29% Wide Range of Costs Depending on Feedstock Anthracite (M) 24% Anthracite (S) 9% Others Total 4% 100% US$/Tonne 360 Total cash cost Freight and export tax costs 320 280 240 200 Natural Gas Thermal Coal (L) Anthracite (L) Anthracite (M) Anthracite (S) L refers to large-scale producers, M refers to medium and S refers to small. Approximately 80-90 percent of urea exports from China are from coal-based plants. Source: Fertecon, CRU, PotashCorp
    40. 40. Chinese Urea Exports China Has Been a Wild Card In the Urea Export Market Million Tonnes Urea 9 8 7 6 5 4 3 2 1 0 2004 2005 2006 Source: CRU, Fertecon, PotashCorp 2007 2008 2009 2010 2011 2012 2013F
    41. 41. Thank you There’s more online: PotashCorp.com Visit us online Facebook.com/PotashCorp Find us on Facebook Twitter.com/PotashCorp Follow us on Twitter