Global market dynamics and 2020 outlook

Rabobank’s view on the fertilisers market

Dirk Jan Kennes

Food & Agribusiness Research and Advisory (FAR)

Rabobank International

Demand dynamics

Rabobank’s view on the fertiliser market

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Farm inputs – Long term demand drivers remain positive

Supply Demand

Source: Rabobank analysis

As agri demand growth exceeds supply yield improvement has become imperative

YIELD

LOW HIGH

Ha

Food, feed, fuel demand 2005

Food, feed, fuel demand 2020

Ad

dit

ion

al

14

0 m

illio

n

hecta

res

30% yield

increase

3

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Higher and more volatile prices

0

100

200

300

400

500

600

700

USD

/ T

onne

Wheat (US) Corn (US) Soybeans (US)

On average

higher and

more volatile

prices

oversupply tight

Source: Bloomberg, Rabobank

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Farm inputs

Crop farming

Trade Livestock farming

Processing Retail Consumer

Crop farming: sustainable intensification

Issues

Increase crop per ha, per drop water and per kg nutrient

Increasing capital intensity

Enabling environment crucial

Managing risks (inputs, prices, production, marketing)

Enable entrepreneurship in a consolidating world

Investment themes

Rising land prices

The emergence of the rural entrepreneur

5

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Farm inputs – The start of the food & agri chain

0

100

200

300

400

500

600

700

800

900

1000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

US

D/

Acre

Seed Fertilizer, Lime, and Gypsum

Chemicals Custom Operations

Fuel, Lube, and Electricity Repairs

Hired Labor Other Variable Cash Expenses

Interest Total Fixed Expenses

Total, Gross Value of Production

Gross value of production & expenses for US corn producer

60% 24%

16%

Nitrogen (N)

Potassium (K2O)

Phosphorus (P2O5)

World Fertiliser market: USD100 billion plus

Sources: Global Insight, IFA, Rabobank analysis

Fertiliser prices respond fast to improving farm margins

Fertiliser prices respond fastest to the improving fundamentals in ag market

6

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US corn farmers see fertilisers and seeds as most important inputs

0,00

20,00

40,00

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160,00

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

US

D/

pla

nte

d a

cre

Seed

Fertilizer

Chemicals

Fuel and Electricity

US corn farmers’ spending on seed, fertiliser, agrochemicals, and fuel & electricity

7

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Historical fertiliser demand development explained

The volume of the fertiliser demand is the product of three components:

(1) Area * (2) crop mix factor * (3) application rate = volume of fertiliser market

1. Area: area dedicated to crops that are fertilised

2. Crop mix factor: average number of kg of nutrients per ha for actual crop mix with application rates in base year

3. Application rate: average number of kg of nutrients applied per ha for a specific crop

In the following slides you will see the evolution of the market volume of fertiliser in the top left graph.

The explanatory factors are given in the other slides:

area development in the top right graph,

crop mix changes (change of average application rate due to change in crop mix and assuming base year application rates) in the bottom left graph

application rate changes in the bottom right graph

The average of 2006 and 2007 is taken as the base year for all factors

The next step is to include FAR’s prediction for areas in 2020 for the different crops in the model and make an assumption about application rate development from now to 2020. Based on these two items the 2020 fertiliser demand can be predicted.

Area, crop mix and application rate together explain volume of fertiliser market

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EU27

Area impact (2006-2007 = 100)

Application Rate impact (2006-2007 = 100)

Market Volume (2006-2007 = 100)

Crop Mix impact (2006-2007 = 100)

EU27 = all current EU member states included in all years

0

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300

1961 1970 1980 1990 2000 2009 2020

K

N

P

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1961 1970 1980 1990 2000 2009 2020

area

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1961 1970 1980 1990 2000 2009 2020

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1961 1970 1980 1990 2000 2009 2020

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N

P

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North America

Area impact (2006-2007 = 100)

Application Rate impact (2006-2007 = 100)

Market Volume (2006-2007 = 100)

Crop Mix impact (2006-2007 = 100)

North America = Canada, Mexico, United States of America

0

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100

150

200

1961 1970 1980 1990 2000 2009 2020

K

N

P

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200

1961 1970 1980 1990 2000 2009 2020

Area

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1961 1970 1980 1990 2000 2009 2020

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1961 1970 1980 1990 2000 2009 2020

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N

P

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Asia

Area impact (2006-2007 = 100)

Application Rate impact (2006-2007 = 100)

Market Volume (2006-2007 = 100)

Crop Mix impact (2006-2007 = 100)

Asia = Bangladesh, China, India, Indonesia, Malaysia, Pakistan, Philippines, Thailand, Vietnam

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200

1961 1970 1980 1990 2000 2009 2020

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1961 1970 1980 1990 2000 2009 2020

Area

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1961 1970 1980 1990 2000 2009 2020

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1961 1970 1980 1990 2000 2009 2020

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South America

Area impact (2006-2007 = 100)

Application Rate impact (2006-2007 = 100)

Market Volume (2006-2007 = 100)

Crop Mix impact (2006-2007 = 100)

South America = Argentina, Brazil and Chile

0

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200

1961 1970 1980 1990 2000 2009 2020

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N

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1961 1970 1980 1990 2000 2009 2020

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1961 1970 1980 1990 2000 2009 2020

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Conclusion Global demand growth of 2% for nitrogen and 3% for potassium towards 2020

Changing farming best-practices

Integrated approach regarding farm inputs necessary

Potential depressed farm earnings in coming 3 years might delay the

penetration of these innovative farming practices

Relative high agricultural commodity prices incentivize farmers towards sustainable intensification

Balanced crop nutrition will gain importance

Improved application technology

Increased regulation (e.g. EU legislation)

Potential depressed farm earnings in coming 3 years might delay the

penetration of these innovative farming practices

Farmers’ instant response to improve yields through increased fertilizer spending not sustainable longer term

Potential depressed farm earnings in coming 3 years might delay the

penetration of these innovative farming practices to materialize beyond 2020

Global demand growth of 2% for nitrogen and 3% for potassium till 2020

Beyond 2020 much lower growth rates for fertilizers likely

Long term volume growth expected to significantly lower resulting from lower application rate growth in Asia and Latin America

13

Trade dynamics

Rabobank’s view on the fertiliser market

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The regional fertiliser (im)balance necessitates trade

Source: IFA, Rabobank analysis Figures in thousand tonnes

While nitrogen supply-demand is relatively balanced, phosphates and potash market relies heavily on international trade

Large export region for Potash and Phosphate products

-2000

0

2000

4000

6000

8000

Africa

-2000

2000

Oceania

-6000

-2000

2000

Latin America

-10000

-6000

-2000

2000

6000

10000

14000

North America

-9000

-5000

-1000

3000

7000

East Asia

-10000

-6000

-2000

2000

South Asia

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10000

Middle East

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9000

12000

15000

Euro/Asia

-1000

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Central Europe

-6000

-4000

-2000

0

2000

West Europe

□ Nitrogen balance 2012 □ Nitrogen balance 2016 □ Phosphate balance 2012 □ Phosphate balance 2016 □ Potash balance 2012 □ Potash balance 2016

Large export region for all

nutrients

Major import regions that have large bearing on price

dynamics

15

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Key importing countries

Urea

Total traded volume of 40 mt

MOP

Total traded volume of 43 mt

DAP

Total traded volume of 16 mt

India is top importer of fertilisers, followed by USA and Brazil

USA 16%

Brazil 7%

India 16%

Thailand

6%

Others 55%

India 48%

Pakistan 4%

Vietnam 4%

France 3%

Brazil 3%

Others 38%

USA 19%

Brazil 16%

India 14%

China 12%

Indonesia

5%

Malaysia 5%

Others 29%

Source: IFA 2010 figures, Rabobank analysis

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Key exporting countries

Source: IFA 2010 figures, Rabobank analysis

Urea - fragmented market

Total traded volume of 40 mt

MOP – oligopolistic structure

Total traded volume of 43 mt

DAP

Total traded volume of 16 mt

Different industry structures impact supply dynamics

Russia 11%

Ukraine 6%

Egypt 8%

Oman 9%

Qatar 7%

Saudi Arabia

8%

China 18%

Others 33%

USA 26%

China 25% Russia

12%

Morocco 12%

Tunisia 7%

Jordan 5%

Lithuania

5% Others

8%

Canada 37%

Russia 19%

Belarus 16%

Israel 11%

Germany

10%

Jordan 4%

Others 3%

Potash supply dynamics

Rabobank’s view on the fertiliser market

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Current oligopolistic structure of industry favors supply side long term

Medium-term supply expected to remain tight despite currently peaking inventories

Recent contract negotiations favored buyer side

Key players/price setters

Decreasing interest from giant miners

Price followers operate in and benefit from strict supply discipline

Supply side

Key drivers include

– Contract negotiations with India and China sets price bottom

– Agricultural commodity prices that drive farm margins

Demand in key markets will continue to rise especially where nutrient-balance needs attention

Securing stable and timely supply of potash is a key priority of Indian, Chinese and Brazilian governments

Demand side

Source: Rabobank FAR

19

Initiatives to break oligopolistic structure fading away

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Winners and losers in potash market

89% 86% 86%

85%

67%

75% 78%

0%

20%

40%

60%

80%

100%

120%

2005 2006 2007 2008 2009 2010 2011

Potash Corp Mosaic Belaruskali

Israel Chemicals K+S Agrium

Uralkali-Silvinit World

Capacity utilisation development

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

K+S BPC Canpotex ICL

World export market share development

Source: Company reports, Rabobank Source: IFA, Rabobank

Observations on capacity utilisation

Distinct differences in capacity utilisation for various players

Observations on potash exports

Rising market share of BPC

But declining market share of Canpotex

20

Canpotex carries large burden while peers gain market share

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All 3 scenarios point towards a buyer’s market

BPC and Canpotex players may try to oversupply the market to discourage competition

Overall, pricing dynamics are set to change

– Players outside the cartel can distort the market

– Importers will have more supply options

– Price bottom based on cost of production of marginal producer

Scenario analysis - 2011

Source: Rabobank FAR

21

New capacities and players will have impact on the market

High import reliance of India, Brazil and China

Bala

nced d

em

and-s

upply

Excess s

upply

Low import reliance of India, Brazil and China

Wildcard

Base Case

Upside

Current status

Key takeaways and implications

Market less favourable for independent players

China

India Brazil

Brazil

China

India

India

China Brazil

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General assumptions in 2011 scenarios

Demand growth at consistent 3% rate p.a. (exception: Chinese demand growth of 5.6% p.a.)

Part of demand in China, India and Brazil is fulfilled through strategic investments in greenfield projects

Demand

2011 base for world capacity based on IFDC data. Forward expectations based on Rabobank analysis of 63 new projects

Capacity developments that are considered in all scenarios (excluding importer driven supply):

– Greenfield project of BHP Billiton (Jansen); only 1. 2 mt K2O/ 2 mt KCl

– Greenfield project of EuroChem; 2.8 mt K2O/ 4.6 mt KCl

– Greenfield project K+S; 1.6 mt K2O/ 2.7 mt KCl

– Brownfield expansions of Mosaic, PCS, Agrium, Uralkali, Belaruskali; around 6mt K2O

Operating rate of 85% assumed for calculating supply

Capacity and supply

Source: Rabobank FAR

22

All three scenarios point towards large potential surpluses

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Three variables will set the extent of oversupply

Brazil, India and China collectively import close to 18 million tonnes KCl

annually

Growing import reliance, frustration from one sided contract negotiations

and strategic importance of potash nutrient for long term viability of their

growing agri sector represent primary drivers

No dearth of options in the form of developing greenfield mines

Importer’s lure to secure stable supply

Elevated potash prices and profitability has attracted investments from

number of new players

Capex of at least $1000/tonne needed to build greenfield mine and securing

financing may represent key bottleneck in realising production

Securing financing for the greenfield projects

Response of existing low cost players and large volume – Potash Corp and

Uralkali- will be critical in limiting the extent of oversupply

Flexible and buyer friendly contract negotiations may dilute importer’s

incentive to make strategic investments in greenfield mines in the short term

Fiercer competition may trigger further consolidation in the market

Response of traditional players to discourage entry of new players

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Looming oversupply in the market (A look at original scenarios in bullish environment)

Wildcard/Downside case

19.5 2,7 1,0 0.9 7.2 3,4 1,2 2,9 0.4 0,7 2 1,2 121

0

20

40

60

80

100

120

140

Curr

ent capacity

Cert

ain

capacitie

s

(fig

ure

1)

Zhongchuan

min

ing/Q

inghai …

Junio

r m

inin

g

investm

ent

by …

SD

IC X

injiang

Luobupo P

ota

sh, …

Junio

r m

inin

g

investm

ents

by …

Vale

, Arg

entina

Vale

, Bra

zil

Vale

, Canada

Verd

e P

ota

sh,

Bra

zil

Aguia

Resourc

es,

Bra

zil

Pota

ssio

de B

razil,

Bra

zil

Rio

Verd

e, Bra

zil

Capacity in 2

020

55% increase including capacity from Potash juniors and importer driven investments

78

Upside case

78 19.5 2,7 3,4 1,2 2,9 107

0

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120

Curr

ent capacity

Cert

ain

capacitie

s

(fig

ure

1)

Zhongchuan

min

ing/Q

inghai Salt

Lake J

V,

Canada

Vale

, Arg

entina

Vale

, Bra

zil

Vale

, Canada

Capacity in 2

020

38% increase including capacity from Potash juniors and importer driven investments

78

97.2

5 4,6 2,7 2,6 2 1,4 0,758 0,5

0

20

40

60

80

100

120

Curr

ent capacity

(2011/1

2) PCS

Euro

Chem

K+

S

Ura

lkali

BH

P

Mosaic

Agrium

ICL

Cert

ain

capacity in

2020

25% increase excluding capacity from Potash juniors and importer driven investments

Certain capacities considered in building scenarios

78

111

19.5 2,7 1,0 2 3.4 1,2 2,9 0.4

0

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Curr

ent capacity

Cert

ain

capacitie

s

(fig

ure

1)

Zhongchuan

min

ing/Q

inghai Salt

Lake J

V

Junio

r m

inin

g

investm

ent

by

Chin

a

Junio

r m

inin

g

investm

ent

by I

ndia

Vale

, Arg

entina

Vale

, Bra

zil

Vale

, Canada

Verd

e P

ota

sh

Capacity in 2

020

43% increase including capacity from Potash juniors and importer driven investments

Base Case

24

Extent of oversupply will largely depend on geopolitical factors

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Potash market outlook: Base scenario

44% 41%

43% 46%

48%

57%

66%

70% 72% 73%

19% 16%

18% 19% 20%

26%

29% 30% 31% 30%

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60%

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90%

100%

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20000

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80000

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Th

ou

san

d t

on

nes

Excess capacity on open market (RHS) Excess supply (RHS)

Total global demand Total capacity

New capacity secured through acquisitions by China, India and Brazil

Source: Rabobank FAR, IFDC

Key takeaways

Tight market until 2015

Build up of excess capacity post 2015

Overall, India’s import reliance remains same as that in 2010 peak

China’s import requirement declines by 11% over 2010-2020

Brazil’s import demand declines by 82% over 2010-2020

Net loss of 6 million tonnes KCl in import demand over 2010-2020

25

Partial supply secured by importers marking gradual shift towards buyer’s market

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Potash market outlook: Wildcard scenario

44% 41%

43%

48% 51%

70%

88%

97% 100% 100%

19% 16%

18% 20%

22%

31%

37% 39%

42% 42%

0%

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30%

40%

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60%

70%

80%

90%

100%

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60000

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80000

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

Th

ou

san

d t

on

nes

Excess capacity on open market (RHS) Excess supply (RHS)

Total global demand Total capacity

New capacity secured through acquisitions by China, India and Brazil

Source: Rabobank FAR, IFDC

Key takeaways

Strong shift away from pure market economics

India’s import reliance declines by 82% over 2010-2020

Brazil’s import reliance declines to nil over 2010-2020

China’s imports declines by 28% over 2010-2020

Net loss of 16 million tonnes KCl in import demand over 2010-2020

26

Significant part of supply secured through several strategic investments by importers resulting in strong shift towards buyer’s market

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Potash market outlook: Upside case

44%

41% 42%

44% 46%

53%

60% 62%

63%

59%

19% 16%

18% 19% 20%

25% 28% 29% 28%

25%

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90%

100%

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80000

2010/11 2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20

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ou

san

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on

nes

Excess capacity on open market (RHS) Excess supply (RHS) Total global demand

Total capacity New capacity secured by China and Brazil

Source: Rabobank FAR, IFDC

Key takeaways

Negotiation power of suppliers remains strong

Biggest implications for players relying heavily on Brazilian market

India’s import reliance further increases by 34% over 2010-2020

China’s import reliance grows by 30% over 2010-2020

Net loss of just 1 million tonnes KCl in import demand over 2010-2020

27

Minimal action from importers to secure supply resulting in continued seller’s market (scenario 1)

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2013 scenario point towards a seller’s market

Uralkali has taken the initiative to oversupply the market to discourage competition

Overall, dynamics are set to change

– Short term price drops play at the advantage to the importers

– Opportunities for further consolidation in the global potash market

Scenario analysis - 2013

Source: Rabobank FAR

28

Oligopolistic structure will survive and optimise value over volume long term

High import reliance of India, Brazil and China

Bala

nced d

em

and-s

upply

Excess s

upply

Low import reliance of India, Brazil and China

Wildcard

Base Case

Upside

Current status

Key takeaways and implications

China

India Brazil

Brazil

China

India

India

China Brazil

2013 status

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Incorporating latest announcements: Upside Case Revisited

Upside case revisited Total capacity share of Canpotex and BPC Key takeaways

Negotiation power of suppliers remains intact and Canpotex and BPC occupy majority of capacity share

Import reliance of all three importers grows and supply options remain unchanged

In fact deferment of two promising mine expansions by Mosiac to add to importers’ woes

Maximum upside for potash prices on tight supply

29

Minimal action from importers and delays in more promising capacity additions by incumbents to tighten supply towards 2020

40%

26%

19%

7%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

10000

20000

30000

40000

50000

60000

Th

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Excess supply (RHS)

Excess supply (RHS)

Total global demand

Total capacity

New capacity secured by China and Brazil

50%

52%

54%

56%

58%

60%

62%

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Conclusion

Structural shift in supply side requires action from big importers

Market entry of new but significant players

Host of junior mining projects in various stages of development

More competitive pricing of potash likely in future

Change on supply side could be irreversible and structural

Viability of most of the greenfield potash projects under question current

bearish market

Immense pressure on junior and senior miners to secure financing

This could be a positive news for current players

Challenges facing new capacity developments good for the oligopolistic supply structure

Supply concentration will potentially remain unchanged if big importers stay

on sidelines

Junior mining projects only viable under more push from importers

India, China and Brazil need to improve their supply mix

Spotlight on big importers to build a balanced ‘potash supply mix’

30

Urea supply dynamics

Rabobank’s view on the fertiliser market

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Factors affecting future nitrogen supply

Regional urea cost of production in 2012

* Represents current capacity in million tonnes () represents % share in global urea capacity Source: CRU, Rabobank

32

Shale gas has shifted the cost curve for North America triggering new capacity developments; Projects in MEA driven by lowest cost position of the region

27*

7*

7*

118*

13*

9*

0

50

100

150

200

250

300

MEA (15%) North America (4%) Central and South

America (4%)

Asia (65%) FSU (7%) Europe (5%)

US

D/

ton

ne

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New project activity set to accelerate in the top three importing countries: USA, India and Brazil Potential combined loss of 2.4 million tonne urea imports to top three importers

33

Major urea importers

Lowest cost export oriented capacity

+4.2

+7.0

+1.2

+19

+26

+3.5

+3.3

Other key production regions

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China: Key swing exporter of urea

60

80

100

120

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160

180

19

90

19

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10

20

11

Index (100 = Jan 2006)

N per tonne of harvested produce (total harvest) N per hectare (total sown area)

Crop yield (total tonnage per total sown area)

Demand: Nitrogen consumption increase has coincided with

productivity gains

-10,000

-5,000

0

5,000

10,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Metric tonnes of nutrient (thousands)

China nitrogen balance China phosphate balance

China potassium balance Total macro-nutrient fertiliser balance

Supply: China is world leading exporter of urea

Source: IFA, CNCIC, Rabobank Source: IFA, Rabobank

Domestic production growth concentrated in energy rich Western region

Drive towards consolidation of Chinese urea industry

Future competitiveness in exports is however questionable

Focus to grow on expanding domestic consumption market as tax structure, high cost or production and logistics limit export viability

34

Nitrogen fertiliser use in China has been increasing in-line with gains in agricultural productivity

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India: Largest importer of urea with 26% reliance on imports

22.2

29,5

1,2 1,2

1,2

1,3

1,2

1,3

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

Current capacity

(2011/12)

Chambal Fertilisers Tata Chemicals RCF KRIBHCO AB Nuvo IFFCO Certain capacity in

2020

33% increase in capacity over 2012-2020

Government incentivized urea production expansion

Minimum RoE of 12% ensured by government

Policy applicable for 8 years from start of production

Large import substitution if all planned capacities come onstream

However, cost and availability of natural gas feedstock remains a question

Despite the new capacities, India would still import about 5.5 million tonnes urea in 2020 (down from 7 million tonnes in 2011)

35

But expanding domestic production on the back of Urea Investment Policy will bring import reliance down to 16%

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USA: Second largest importer of urea with 50% reliance on imports

11.2

15.4

1,3

0,3

0,8

1.8

0

2

4

6

8

10

12

14

16

18

Current capacity

(2011/12)

Yara OCI* Agrium CF Industries Capacity in 2020

37% increase in capacity in North America over 2012-2020

North America has strongest investment fundamentals outside MEA region

However, urea imports to decline to just 6 million tonnes in 2020 from 6.5 million tonnes in 2011

36

Substantial capacity expansions on the back of low-priced shale gas to bring import reliance down to 37%

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Brazil: Third largest importer of urea with 70% reliance on imports

1,7

2,9 1,2

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Current capacity (2011/12) Petrobras Certain capacity in 2020

70% increase in capacity over 2012-2020

Import dependence to decline somewhat by 2020

Brazil’s urea imports expected to decline to 2 million tonnes in 2020 from current level of about 2.5 million tonnes

37

New capacity will help reduce import reliance to 40%

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Trend towards self sufficiency by big importers will start to impact global market balance post-2016

Source: IFDC, company reports, Rabobank 2013

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Implications on trade flows, price and supplier strategies

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

50

100

150

200

250

300

2011

2012

2013F

2014F

2015F

2016F

2017F

2018F

2019F

2020F

Mil

lio

n t

on

nes

Demand

Supply (85% capacity utilisation)

Total Capacity (Rabo estimate)

% Excess supply (RHS)

Need to integrate downstream closer to farm gate in key consumption markets

Keep production cost competitive by building capacities outside high cost regions

Minimise cost for P and K sourcing through upstream integration in NPK marketing

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Conclusion

Global urea market is set to enter an era of oversupply

US shale gas revolution alters global urea trade flows

Delay in capacity expansion resulting from high engineering and construction

costs

Political instability in MENA can delay expansion capacity

New capacity developments in low-cost production regions

Increase in import volumes at international prices has laid out ambitious

plans to achieve self sufficiency in urea in India

Is it wise to pursue this ambition in light of global urea dynamics and specific

state of Indian economy?

Brazil will significantly reduce its dependence in urea imports

Key importing countries driven to reduce their import reliance

High-cost producers need to strengthen their market position through cross

industry partnerships and downstream integration closer to farmers

Winners will be those who can achieve low costs of production and/or are

placed close to a demand market enabling them to quickly respond to

demand dynamics by altering production cycles

Market intelligence and access to growers will be key success factors in this

case

Strategic routes of the urea value chain partners would need to change

39

Thank You!

Rabobank’s view on the fertiliser market