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Commodity Investing

Investments With the Fertilizer Industry

Investments With the Fertilizer Industry

by Tony Daltorio, Investment U Research
Tuesday, February 9, 2010

Last year, the financial world had plenty to say about biotech mergers, and the Kraft-Cadbury deal took up its fair share of headlines into this year. But nobody has said much of anything about the recent merger and acquisition frenzy in the fertilizer industry.

Companies already within the sector – including Agrium (NYSE: AGU), CF Industries Holdings (NYSE: CF) and Terra Industries (NYSE: TRA) – began trying to expand their market share in 2009. And they’re not the only ones intent on buying.

Major resource companies like BHP Billiton ADR (NYSE: BHP) and Vale ADR (NYSE: VALE) see the industry’s long-range potential as well. They especially have their eyes on production of potash, a potassium compound often used in agriculture.

Of course, continuing tight credit conditions have driven prices down, even in key emerging markets. No wonder too, considering that the International Fertilizer Industry Association estimates demand fell by 5.1% from 2008 to 2009.

But the trade body also predicts a “slow recovery” in 2009-2010, with an expected 3.6% increase. And Potash Corporation (NYSE: POT), the world’s largest fertilizer maker, believes demand will rebound sharply in the next few years. Many industry analysts agree, forecasting 50% more in potash orders this year, pushing prices from $400 in 2009 to $450 in 2010… and even $500 by 2011.

As for further into the future? The United Nations sees the global population swelling from 6.8 billion today to 9.1 billion in four decades. Naturally, that kind of growth also calls for food increases and greater demand for one of the major aids in growing crops: Fertilizer.

Vale Gets Down And Dirty

Vale, the world’s biggest iron ore producer, wants to diversify out of the metal and into other profitable areas like Brazilian agriculture and fertilizer.

Its focus on that specific market makes sense, considering how the country produces and/or exports the most soybeans, coffee, sugar, chicken, beef, orange juice and ethanol in the world. So it should come as no surprise that it uses the fifth largest amount of fertilizer and imports a significant amount of phosphate, potash and urea as well.

Vale already has close ties to the fertilizer business, since it mines one of the key, raw ingredients necessary: Potassium. And the company believes it can cut costs by utilizing the same basic types of technology it mines iron ore with on its new ventures. So it eagerly stepped into its biggest deal in years, paying Bunge (NYSE: BG) $3.8 billion for phosphate mines and production facilities.

The transaction also included a 43.3% stake in Fosfertil, Brazil’s main provider of raw material for fertilizer products and mixers. An integral part of the country’s agricultural sector, Fosfertil supplies 22% of the country’s phosphate fertilizers and 23.4% of its nitrogen fertilizers.

Vale wants to concentrate on Brazil as its main market for phosphate production, which would complement its world class potash deposit in the northeastern region of the country. And that focus certainly won’t hurt the potash projects in Canada and Argentina Vale acquired from Rio Tinto (NYSE: RTP) for $857 million, or the $479 million Vale set aside to bring its Bayovar project in Peru online this year.

This latest deal gives Vale a firmer grip on domestic fertilizer production. It helps the company take advantage of rising global food consumption and agricultural output in South America and Asia. And it certainly puts it a step closer to its goal of become one of the world’s top fertilizer producers by 2017.

Of course though, it isn’t the only one out there trying to get its hands dirty.

The Competition

Though not as ambitious as Vale just yet, BHP Billiton also made a recent move to add to its fertilizer position. A year after buying Canadian junior potash company Anglo Potash, it agreed to purchase Canada’s Athabasca Potash for about $341 million.

Athabasca has one of the largest exploration permit areas in the so-called Saskatchewan basin, covering approximately 2,664 square miles. The takeover gives BHP access to exploring rights in more than 5,400 square miles in perhaps the richest potash concentration in the world.

It also gives BHP the Burr project, which happens to be adjacent to its own Jansen project, another potash site that should produce about eight million tons of agricultural-grade potash a year. It also might cost as much as $10 billion to develop, on top of the $240 million the board recently approved for the Saskatchewan project this year. But the company sees it as well worth the effort and the money, especially with rivals eager to get in wherever they can.

Rumors continue to swirl about the world’s largest mining company expanding its position in fertilizers by purchasing one of the more significant players like Mosaic (NYSE: MOS) or even Potash of Saskatchewan, the biggest fish in the sector.

Growth can only follow*.

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