The Fertilizer Industry of the European Union by bxk16778


									Raw materials for fertilizer production

One of the major factors of competitiveness in the fertilizer industry is the availability, and more
importantly the price, of raw materials. The main raw materials required for the production of
fertilizers are natural gas for the manufacture of ammonia, rock phosphate for the production of
phosphate fertilizers, and potash.

Natural gas

In 1995, the most important producers of natural gas were Russia, which contributed 26% of total
world production, and the USA, which accounted for 25%. All other suppliers held a far smaller
share of world production: Canada had a share of 9%, and the Netherlands, the UK and Algeria
followed with 3% each. The total share of the EU 15 in world production amounted to 9%.

As far as natural gas reserves are concerned, the Russian Federation has the largest reserves,
with 34.5%, followed by Iran, which has 15%. The Middle East as a whole accounts for 32% of
total world natural gas reserves.(4)

Some 5-6% of the world production of natural gas is used for fertilizer production.(5) The EU is an
important gas producer, the main suppliers being the UK and the Netherlands, but natural gas is
also imported into the EU from North Africa, Russia and Norway.(6) The fertilizer industry is an
important consumer of natural gas in the EU, most of it being used as feedstock in the production
of ammonia. There is at present no economic alternative to gas as a feedstock, as the figures
below show.

                       Natural gas    Heavy oil      Coal
Energy consumption 1.0                1.3            1.7

Investment cost        1.0            1.4            2.4

Production cost        1.0            1.2            1.7

Source: EFMA

Compared with other regions of the world, the EU fertilizer industry faces relatively high natural
gas costs.

Phosphate rock

World production of phosphate rock amounted to 138 million tonnes in 1995, which is equivalent
to 41 million tonnes of P205. The main producers were the USA (32%), China (20%) and Morocco
(15%). Since the EU has small reserves in Finland only (production amounts to 0.7 million tonnes
p.a.), nearly all phosphates are imported (8.4 million tonnes of rock phosphate), mainly from
Morocco, the CIS, Israel and Jordan.

World exports amounted to 30 million tonnes in 1995, the main suppliers being Morocco (9.4
million tonnes), Jordan (3.9 million tonnes), the USA (3.1 million tonnes) and Togo (2.7 million
tonnes). The production of phosphate rock peaked in 1988 at a level of 166 million tonnes, which
is 17% more than in 1995. The decline is due to the reduction in fertilizer production and the
replacement of phosphates in detergents with other substances. While US production has
remained at the same level, Asia has increased production by 22%, Africa has experienced a
drop in production of 23%, and production in the CIS has fallen from 39 million tonnes to 10
million tonnes (- 74%). World exports have declined by 36% since the late 1980s.


The total available world supply of potash amounted to 20.6 million tonnes K2O in 1995/96. The
EU industry, with a production of 5.3 million tonnes, held a share of 26%, thus ranking second
behind the Canadian industry, which produced 8.1 million tonnes. These two producers were
followed by Russia and Belarus, which produced 2.8 million tonnes each.

Approximately 1.3 million tonnes K20 are manufactured annually for industrial use. A study made
by IFA revealed that world reserves of potash were sufficient to sustain production at the 1992
level for over 200 years, and that the estimated potential reserves will last for many more

As a result of political changes and the developments which have affected agricultural and
fertilizer markets in recent years, the potash industry in the EU has had to adjust its capacities

Capacities EU industry (in million tonnes K20)
1988                    9.9

1996                    6.5

By far the largest reductions have taken place in the German potash industry, in the wake of
German unification. Production capacity has been cut back from 6.2 to 3.7 million tonnes of K20
per year. The merger of the two German potash companies in 1993 included massive
restructuring. The result is a more viable and cost-efficient industry with a capacity which now
reflects the natural sales opportunities and anticipated world market trends.

Another important, though very different, development is due totake place in France, where the
potash mines will be closed by the year 2004, by which time deposits will have been exhausted.
The Spanish and British potash industries are expected to maintain their current production
levels, while production in Italy has already been stopped.

After this restructuring process, the European potash industry will be well placed to supply the
European and the world markets with a quantity of about 5 million tonnes of K20 annually. The
European potash industry will maintain the capacity to meet European potash demands fully for
the years to come.(8)


The cost of converting raw materials into intermediates and finished products, the rate of industry
investment, the cost of health, environment and safety (HES) measures, and the proximity to the
market are further key factors which have an impact on competitiveness in the fertilizer industry.
A good logistical system, covering the transportation and storage of both raw materials and
finished products, is also a prerequisite. With the possible exception of the US phosphate
industry, none of the main fertilizer industries in the world has abundant reserves of all raw
materials at low costs and a developed domestic or regional fertilizer market nearby.

The aims pursued in producing fertilizers may be different from country to country. In China,
which is the largest producer in the world but has no abundant supply of cheap natural gas, the
government’s deliberate policy to increase food production is the reason for the growth of the
fertilizer industry. A similar situation exists in India.

Source: IFA

In the Middle East, on the other hand, there is a plentiful supply of cheap natural gas, which has
led to the expansion of the fertilizer industry, but markets are rather distant. The region’s share in
world production is therefore still limited to 4 %. North Africa finds itself in a similar situation when
supplying phosphates.

As stated in the previous chapter, political and economic moves towards democracy and the
adoption of market economy principles in the Central and East European countries and the CIS
have resulted in reduced fertilizer consumption and a dramatic drop in their domestic markets.
These developments have resulted in soaring exports, to the detriment of the EU industry.

While almost all countries have a fertilizer industry of their own, in order to guarantee a secure
food supply, none of the main industries mentioned above enjoys all of the important competitive
advantages which would result in competitive sovereignty. In fact, all suffer from disadvantages of
one kind or another.

China, for example, has raw materials, but generally speaking not at a low cost. The country also
has financial, infra-structural and distribution problems, added to which the supply of natural gas
is insufficient to ensure the required supply of ammonia. Coal or fuel oil are therefore also used
as feedstock, but are less energy efficient than natural gas and entail higher investment costs.
In the CEE countries and the CIS, the fertilizer markets are depressed and plants need to be
revamped. The producers of the Middle East do not, as a group, have sufficient home market
potential and are at the mercy of the fluctuating import demand of the large importing markets.
The US industry, like that of the EU, faces relatively high gas costs and stringent health,
environment and safety (HES) legislation, with the higher costs that this entails.

Table VII: Comparison of the competitiveness of the nitrogen fertilizer industry in the main
producing regions

                      EU          China        Russia         CEEC*        USA          Middle

Technology            modern      many         need to        need to      modern       modern
                                               revamp         revamp

Feedstock             mainly      mainly       nat. gas       mainly       natural      natural
                                                                           gas          gas
                      nat. gas    coal                        nat. gas

Energy cost           high        lack of      low            high/        medium       very low

                                  cheap                       medium


Energy efficiency     hig         low          low            medium       high         high

CO2 output/unit N     low         very high    high           high/        low          low


Logistics             advanced    transpor-    inefficient    less         advanced     advanced
                                               few ports      advanced

Proximity to markets close        close        distant        close to     close        distant


Profitability 1995    medium      low          very low       low/         high         high


Table VIII: Comparison of the competitiveness of the phosphate fertilizer industry in the
main producing regions

                     EU          China        Russia         CEECs*      USA          N.Africa(10)

Phosphate rock       0.7         29.0         8.7            0.0         44.7         33.9
production 1996 (9)

Ownership              mainly       mainly       mainly        state/       private      mainly

                       private      state        state         private                   state

Profitability 1995     low          low          very low      low          high         medium

* The situation in the CEECs reflects that in the other newly independent states (excluding


After undergoing a profound restructuring process in the early 1990s, the EU fertilizer industry
has now emerged as a competitive and financially sound industry. Four main factors can be taken
into account when judging the industry’s cost position:

    •   the cost of producing ammonia,
    •   the cost of converting ammonia into finished products,
    •   the cost of transporting the product from the producer to the end-user, and
    •   the cost of health, environment and safety (HES) measures.

The main cost element in ammonia production is the price and consumption of feedstock, the
most important being natural gas. Natural gas prices vary considerably from one region of the
world to another, from low-price areas, such as the Arabian Gulf, to high-price areas, such as the
EU, where prices are 5-6 times higher. North American gas prices were, for a long period of time,
kept at a low level; however, over the past 3-4 years, they have approached the West European
level, and North America can therefore no longer be regarded as a low-cost area for gas. Russia,
the world’s largest gas producer, supplied gas to its fertilizer industry at extremely low prices until
the end of 1993. Before the break-up of the Soviet Union, it also supplied gas to its Comecon
partners at very favourable rates. Official Russian gas prices have increased substantially in
recent years, and as far as the former Comecon countries and the non-Russian CIS are
concerned, gas from Russia is being supplied at approximately the same prices as those quoted
for export to West Europe.

Even though West Europe is a high-cost area for gas, its relative position has improved
considerably over the last 4-5 years because of price developments in North America, the CEE
countries and the CIS. When an appraisal is made of gas costs in the production of ammonia, the
consumption of gas per tonne of ammonia must be taken into account. The Russian and CEE
producers consume 30-40% more gas than their West European counterparts. This implies that
the Russian industry’s gas cost per tonne of ammonia, based on official gas prices, is not
substantially lower than that of the West European industry, and that the CEE producers probably
have a higher total gas cost per tonne of ammonia. Ammonia produced in West Europe therefore
has a lower cost base for its downstream fertilizer industry than ammonia imported from Russia.

The raison d’être of the West European fertilizer industry is to provide European agriculture with a
dependable supply of competitive, high-quality plant nutrients, and remain profitable while doing
so. As fertilizer is a bulky product, the cost of handling and transportation is high. Thus, the
location of the industry relative to its end-users is important from a delivered cost point of view.
Logistically, the industry is ideally located to serve its customers. It is unlikely that any other
fertilizer industry could provide a better cost base for serving European agriculture, given that the
cost of logistics may represent over 20 % of the price paid by the farmer for European-
manufactured fertilizer, and substantially more when the product is imported from other sources.

An analysis of the competitive position of the EU fertilizer industry reveals the following

    •   the absence of a competitive energy market,
    •   negligible domestic phosphate resources, and
    •   high health, environmental and safety (HES) costs when compared with other major
        producing regions.
    •   However, the EU fertilizer industry possesses the following competitive advantages:
    •   modern technology, resulting in highly efficient production,
    •   high energy efficiency,
    •   a highly-developed fertilizer market,
    •   an advanced logistics and distribution network, and
    •   skilled labour.

The West European fertilizer industry has emerged from its restructuring as the most cost
efficient supplier to West European agriculture, and it will also be well placed to serve the
agricultural needs of the CEE countries once it enjoys the same access to those markets as the
CEE producers have to the markets of the EU. In the meantime, it may well suffer from temporary
competitive disadvantages because of differing trade and HES regulations and the fact that the
regulations which exist in other producing regions are not always enforced. These are areas
which will be examined carefully during the negotiations leading towards the enlargement of the
EU, and which will also be considered during negotiations relating to WTO membership for
certain other regions.

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