Yara is, directly or indirectly influenced by major global trends. 2008, with the financial crisis, saw globalization come under pressure, raising concern about protectionism. Economic growth suffered a set-back in 2008, whereas population growth continued, although at lower rates in recent years, still expected to level out at 9.2 billion by 2050. A third global trend relevant to Yara’s business, urbanization, continued with a majority of the world’s population living in urban areas from 2007/2008, and the proportion set to grow, to an estimated 57 percent in 2025.
Growth – of economies and populations – creates increased demand for food, and consequently for Yara’s crop nutrients and agronomic solutions. Urbanization contributes to environmental challenges, increasing the demand for Yara’s industrial products and environmental solutions and takes cultivated land out of production. Globalization is a major facilitator for global trade and the transfer of capital and knowledge.
The price hike of several major food crops in 2007–2008 was an important factor in the world economy in 2008, featuring prominently on the international political agenda in the first half of 2008. Despite bumper harvests in large parts of the world, the record-high prices caused the situation to be seen as a global food crisis, further undermining the universal goal of food security.
In May 2008, the OECD and FAO jointly published the ‘Agricultural Outlook 2008–2017’, projecting that food prices, once they have fallen from current peaks, will remain at higher average levels over the medium term than in the past decade. The report expects continued yield growth for crops to be more important than new areas brought into cultivation in determining crop supply, requiring improved productivity especially in the developing countries, which represents much of the increase in food demand as well as supply.
2008 saw exceptional turmoil in international economy, with a lengthy period of sustained growth coming to a close, gliding into a recession from the beginning of 2009. In December 2008, the World Bank (WB), in its ‘Global Economic Prospects 2009’ (GEP) report, projected that world GDP growth will be 2.5 percent in 2008 and 0.9 percent in 2009.
Whereas growth in developing countries is expected to stay positive, at 4.5 percent in 2009, growth in high-income countries will turn negative. In January 2009, the International Monetary Fund (IMF), with an update to its ‘World Economic Outlook’, projected world growth to fall to 0.5 percent in 2009, continuing the sharp fall of late 2008. The IMF projected global growth to rebound to 3.0 percent in 2010, when measured in terms of purchasing power parity.
In the GEP 2008, subtitled ‘Commodities at a Crossroads’, the WB notes that “Recent sharp declines in oil and food prices mark the end of what has been the most historic commodity price boom of the past century”.
At the end of 2008, over just a few months, the prices of several commodities had plummeted with 60–80 percent since record prices were recorded, such as that of oil, reaching147 a barrel in July. The IMF projected commodity prices to stabilize in 2009/2010 – albeit at 20-year highs.
2008 saw political attention to the agricultural sector and food production increase. In June, the FAO hosted a high-level conference on food security. Here, world leaders, agricultural experts and industry leaders – among them the CEO of Yara – discussed ways to deal with the demands for food, adopting a declaration calling for increased investments in agriculture, agribusiness and rural development. The discussion continued in other high-level forums including the General Assembly of the United Nations in September, where Yara participated in the first ever Private Sector Forum.
In 2008, the European Parliament and Council agreed on the “Climate action and renewable energy package” aiming to fight climate change and promote renewable energy up to 2020 and beyond, including changes in the EU Emissions Trading System (ETS). As of 2013, the national allocations plans for emission allowances will be replaced by an EU-wide cap, on the basis of harmonized rules for all members of the EU and the European Economic Area. By the end of 2008, Norway and the Netherlands already had chosen to include such N2O emissions for the trading period 2008–2012.
During 2008, renewed attention was given to bio-energy, and in particular bio-fuel, with perceptions slightly changing due to the food crisis, raising the question of using crop land to produce energy. The financial crisis and declining energy prices reduced the economic attraction of the business. The 2008 FAO ‘State of Food and Agriculture’ report – focusing on bio-fuels specifically – still finds that “demand for agricultural feedstock for liquid biofuels will be a significant factor for agricultural markets and for world agriculture over the next decade and perhaps beyond”.
The Fertilizer Market
Growth in global nitrogen fertilizer consumption slowed in 2008, compared to the strong growth in the previous two years. Volatility was high, as demand was strong during the first three quarters of the year, but slow in the fourth quarter. Due to the economic slowdown, uncertainty on future demand developments increased, including reduced demand growth for biofuels. Investors withdrew their money from commodities, including grain.
In addition, the 2008 global grain harvest was higher than expected. Regions with their main application season during the fall did not need to buy much fertilizer. Following strong buying in the first half of 2008, stocks were sufficient to cover a reduced level of consumption in these regions. Amid declining fertilizer prices, a difficult financing environment and general uncertainty, buyers on the northern hemisphere chose to postpone purchases.
Outside China, only Iran and Egypt added significant capacity during 2008. Overall, the fertilizer markets tightened compared to 2007, with higher prices for all fertilizer products. But during the fourth quarter, the markets turned supply driven, and production curtailments were necessary to balance the market.
Fertilizer volume developments
For the 2007/08 season, nitrogen fertilizer sales in Western Europe were up by an estimated ten percent. Strong crop prices and the abolishment of the set-aside regime, led to increased demand from farmers who wanted to maximize yields. Combined with favorable weather, the size of the 2008 crop increased significantly, compared to 2007.
During the second half of 2008, nitrogen fertilizer sales in Western Europe were down by an estimated 15 percent due to the factors explained above. In North America, a reduction in corn plantings in 2008 was offset by higher application rates due to the strong grain prices, and consumption during the 2007/08 season was flat. During the second half of the year, nitrogen deliveries were estimated 15 percent down from the previous year, due to the same factors as in Europe.
Asian demand, including China and India, remained strong in 2008, but with lower growth rates than the previous years. India did not increase its urea imports in 2008, as the food supply situation in India improved, following several favorable crop seasons. In China, both consumption and production continued to grow, but exports of both nitrogen and phosphates declined, contributing to a tighter global market. Urea export was 4.4 million tons in 2008, down from 5.3 million tons in 2007.
Brazilian fertilizer deliveries were down nine percent on 2008. As the global economic slowdown happened right before the peak season in Brazil, consumption was hit hard.
Fertilizer price developments
The average prilled urea price (fob Black Sea) was USD 499 per ton, compared with USD 308 per ton in 2007. The market stayed demand-driven throughout the first three quarters of the year, but turned supply-driven in the fourth quarter. Substantial production curtailments were needed to balance the market at the end of the year.
The average ammonia price (fob Black Sea) was USD 525 per ton, compared with USD 264 per ton in 2007. Due to the strong increase in fertilizer prices, upgrading margins from ammonia became unusually large, and all producers tried to maximize upgrading of ammonia. This contributed to a tighter ammonia market as well.
The average CAN price in Germany was USD 466 per ton, compared with USD 245 per ton in 2007. The price increase reflected the increase in urea and other nitrogen products. In addition, nitrate demand in Europe was very strong during spring 2008, due to high grain prices and increased planted acreage in Europe.
The average DAP price fob US Gulf was USD 985 per ton, up from USD 428 per ton in 2007. Also the raw materials for phosphate fertilizer, phosphate rock and phosphoric acid, increased strongly in price, following the price increases of DAP.
Energy price developments
The average US natural gas price at Henry Hub was USD 8.9 per MMBtu in 2008, compared with USD 7.0 per MMBtu the previous year.
The average price for Brent crude oil was USD 97 per barrel in 2008, compared with USD 73 per barrel in 2007. The average low-sulfur fuel oil (LSFO) price in Rotterdam was USD 523 per ton, up from USD 341 per ton last year. Gasoil prices increased from USD 636 per ton to USD 904 per ton. The average European gas price at Zeebrugge was USD 10.8 per MMBtu, compared with USD 6.1 per MMBtu last year.
The Industrial market
During 2008, the mining sector witnessed significant activity supporting strong demand for technical nitrates. Environmental regulations in Europe continue to drive growth in environmental products, with Adblue showing continued development.
The deteriorating economic environment during the fourth quarter of 2008 has led major chemical companies to reduce growth assumptions and introduce temporary production curtailments affecting ammonia and technical urea.