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Market Analysis Report

March 27, 2014

Q1

Market Analysis Report

March 27, 2014

Q1

This PotashCorp Market Analysis Report was prepared for PotashCorp stakeholders.

It provides a concise and up-to-date analysis of the major changes and events that

shape the fertilizer industry and affect our markets. The report provides an analysis

of key factors that impact agriculture, economy, and industrial and feed markets,

as well as factors influencing markets for the three major fertilizer products.

The following provides a table of contents:

Forward-Looking Statements: Page 1

Economic and Agriculture Market Overview: Pages 2 – 10

Fertilizer Market Overview: Pages 11 – 20

Market Profile – Africa, Europe and FSU: Pages 21 – 41

1MARKET ANALYSIS REPORT: 03.27.2014

Improved Outlook for Many Advanced Economies


The global economy is expected to grow by 3.7 percent in 2014, up from an estimated

3 percent in 2013. A year-over-year improvement this substantial has only been

achieved nine times since 1980. The International Monetary Fund (IMF) forecasts that

advanced economies will lead this recovery as a result of a 2 percent increase in trade

volumes and relatively effective monetary policies.

The near-term outlook for emerging economies is mixed. China’s economy has shown

some signs of weakness as key industrial, retail and real estate data have disappointed

thus far in 2014. India’s economy has gone through a challenging period in recent

years but is showing signs of recovery due to a resurgence in exports and a

moderation in inflation. Brazil is managing through a period of slower economic growth,

while the prospects for most countries in Southeast Asia remain strong.

Currency Devaluation Creates Agricultural Opportunity


Currencies in select developing markets have deteriorated over the past year relative

to the US dollar. The Russian and Ukrainian currencies have weakened as global

markets grew increasingly concerned over the political instability in the Black Sea

region and the likelihood of sanctions against Russia. The Russian ruble and Ukrainian

hryvnia have lost 20 percent of their value since the beginning of the year.

Currencies in key regions of South America have also struggled. The Argentinean peso

has lost 60 percent of its value since the beginning of 2013 as a national debt default

looms and inflation runs out of control.

Although lower currency values create higher prices for imports, they also offer

opportunity for exporters as many agricultural commodities are denominated in US

dollars.

Significant Economic Incentive for Increased Fertilizer Usage


Larger planted acreage and supportive growing conditions in 2013 resulted in a record

global crop. Prices for many grains and oilseeds softened compared to the historically

high levels set in 2012, but still remain above historical averages. Crop prices have

recently been buoyed by political tension in the Black Sea region and a reduction in the

projected output for major Brazilian crops.

Fertilizer prices also softened during 2013 as each nutrient faced unique supply and

demand challenges. The graph above illustrates that relative to grain and oilseed

prices, fertilizer is still very affordable in most regions of the world. In addition, the large

crops produced this year will have removed record amounts of nutrients from the soil,

which should also support fertilizer consumption in 2014.

Expect Some Acreage Shifts in 2014


We expect some shifts in the US crop mix this spring, with the potential for a reduction

in corn acres likely to gain the most attention. Given the increase in corn stocks this

past year and the outlook for demand in 2014/15, we believe corn could decline to 92-

93 million acres in 2014. This would still represent a historically high total acreage.

Soybean and cotton acreage are expected to increase and we anticipate that higher

spring wheat area will partially offset lower winter wheat acreage. We do not expect a

significant change in total acreage for the major crops grown in the US.

Fertilizer Demand Should be Strong Despite Potentially Lower Corn Acreage


We expect relatively strong fertilizer consumption this spring due to a favorable

relationship between crop and fertilizer prices. Lower corn acreage could reduce

nitrogen consumption slightly compared to the historically high levels applied over the

past two years. With total cropped area expected to remain high and application rates

not keeping pace with nutrient removal in previous years, we do not anticipate a major

impact on intended potash and phosphate usage.

Harsh weather has affected fertilizer movement on all modes of transportation this

winter, and if conditions do not improve quickly this could have an impact on the

amount of fertilizer in place for spring application.

Fertilizer Movement Has Been Slow Compared to Recent Fertilizer Years


Canadian fertilizer use surged over the past two fertilizer years due to increased crop

acreage and highly supportive crop economics. We expect some pullback in planted

area this year due to lower crop prices and higher grain and oilseed inventories.

Fertilizer movement has been slow on a fertilizer year basis because of market

uncertainty last fall, concerns over weaker crop prices and short-term cash flow issues

due to a grain backlog at the farm level. Domestic nitrogen plant outages and

transportation issues this winter compounded supply-side challenges. The combination

of decreased planted area and potential for fertilizer supply constraints could lead to

reduced fertilizer usage this spring.

Soybean Production Expected to Rise; Corn Output to Decline


The market has anticipated a record South American soybean crop for several months,

however adverse weather in eastern and southern regions of Brazil during the critical

pod filling period has partially reduced this expectation. The USDA lowered its Brazilian

soybean production estimate to 88.5 million tonnes, which is still above most industry

estimates. Brazil’s corn production is expected to decline from last year because of

acreage lost to soybeans and cotton, and hot and dry weather in major producing

states is also likely to reduce yields.

The export market share for both South American crops is expected to decline from

last year due to increasing competition from the US as its crop production recovers.

Political Tension Has Created Uncertainty in Grain Markets


Political turmoil in Ukraine and Russia has created uncertainty for grain and oilseed

markets given the importance of this region to global trade. Ukraine is currently the

third largest corn exporter in the world after the US and Brazil, and accounts for 16

percent of global trade. Ukraine and Russia are key wheat exporters, accounting for a

combined 17 percent of world exports. Ukraine is also the world’s largest sunflower

and a major rapeseed producer.

As of the date of publishing, there have been no reports of grain vessel interruptions

but traders are concerned about booking new cargoes from the region. Also, Ukrainian

farmers are reluctant to sell their crops due to currency uncertainty and availability of

credit could be a factor for the upcoming planting season.

2014 Shipments Expected to Match Growth in Consumption


Global potash shipments totaled approximately 53 million tonnes in 2013 as significant

market uncertainty in the second half of the year impacted demand. We believe global

consumption exceeded shipments for the second consecutive year as farm-level usage

was not affected by uncertain market conditions to the same degree.

We enter 2014 with improved market engagement and believe global shipments for the

year could be in the range of 55-57 million tonnes (an increase of approximately 5

percent from 2013 levels), with those during the first half expected to be particularly

robust. Whether demand is closer to the high or low end of the projected range will in

large part depend on the level of market engagement through the second half of the

year.

Expect Demand Will Increase to Historical Average Levels


Potash shipments to the North American market were below the historical average in

the past two years as consumption has not fully recovered following the downturn in

2009 and buyers reduced inventory levels. In 2014, we expect potash demand to be

strong as supportive economics and the need to replenish soil nutrients should

increase requirements at the farm level. We anticipate shipments through the first half

of 2014 will outpace those during the same period in the past two years.

Domestic producers are projected to supply more than 90 percent of this market as

their logistical capabilities provide an advantage as customers have increasingly

required just-in-time delivery.

Expect Increased Demand and Lower Operational Capability in 2014


With the potential for improved demand and lower global operational capability, we

believe potash markets could be relatively balanced in 2014. Global operational

capability is forecast to decline by approximately 3 percent due to announced

operational changes. Based on our global demand forecast of 55-57 million tonnes,

world operating rates could range between 86 percent and 89 percent in 2014. This

would be well above the 81 percent operating rate of the past two years.

Improved Demand Supporting Some Recovery in Phosphate Markets


The phosphate market shifted in late 2013 from an over-supply position to one that is

currently relatively tight. Key drivers were a demand resurgence following a lengthy

period of deferral in the second half of 2013 and reduced supply in several major

producing regions. Supply-side issues included difficult vessel loading conditions in

Morocco and plant outages in other African countries and the US. Looking ahead to the

remainder of 2014, we believe the following are important factors to watch in the

phosphate market:

- Timing and magnitude of demand recovery in India

- Level of spring demand in North America and the pace of import volumes

- Latin American buying patterns following very robust import demand in 2013

- Operating rates in Saudi Arabia and Morocco.

Demand Recovery in India to Support Global Phosphate Trade


DAP and MAP imports by India, which recently accounted for more than one-third of

global trade in these products, were down more than 2.5 million tonnes in 2013. That

sharp reduction significantly lowered wholesale and retail inventory levels, which is

expected to support improved DAP imports by India in 2014. Demand in other regions,

particularly Latin America, was very strong in 2013 and we believe this will continue in

2014.

On the supply side, DAP exports from Saudi Arabia are expected to increase and

Moroccan volumes could rise during the remainder of the year as loading issues are

likely to subside. Given the growth in supply from these regions, we expect exports

from the US and China could be relatively flat in 2014.

Impacted by Lower Producer Shipments and Deferred Import Cargoes


DAP and MAP shipments to the US market from domestic producers are well below

the previous three-year average through the first 8-months of the fertilizer year. A late

harvest and global market uncertainty impacted shipments early in the fertilizer year

and logistical constraints have constrained shipments over the past 2 months. Offshore

imports during this period were slowed by the delay/deferral of several vessels

destined for this market.

Despite the slow down in domestic shipments, US producer inventories have tightened

due to production related issues.

Supply Restrictions Have Impacted Ammonia Trade


The top 10 ammonia exporting countries account for approximately 80 percent of

global trade but more than half of these countries are experiencing supply constraints.

Political tension in the Black Sea region could impact the supply and cost of production

for Ukrainian producers. Reports indicate Ukraine could lose its negotiated gas

discounts with Gazprom beginning April 1 as a result of significant outstanding

payables for previous deliveries. Russia is the second largest ammonia exporter and

ships more than half of its product through the Ukrainian port of Yuzhnyy.

Export volumes from North Africa have been limited by gas supply issues (Egypt) and

government export license issues (Algeria). The gas supply situation in Trinidad,

however, has improved from 2013 and provides the opportunity for increased ammonia

production and exports in 2014.

A Shift in the Largest Global Suppliers


The top 10 urea exporting countries account for more than 70 percent of global trade,

with China emerging as the largest supplier. Over the past two years, China has

accounted for approximately 18 percent of trade as lower coal prices and a surge in

capacity supported export volumes. Additional capacity has come on stream in the

Middle East over the past two years, contributing to its approximate two-fold rise in

exports since 2010. Russia is a large exporter of all major nitrogen products but its

supply patterns could be impacted by political developments in that region.

Despite increases in capacity and trade, exports from countries such as Iran, Egypt

and Algeria have been limited by gas supply constraints and government intervention.

US Imports Trail Historic Levels


Increased domestic nitrogen production and cautious buying due to volatile

international prices have contributed to lower US imports this fertilizer year. Ammonia

production is up approximately 100,000 short tons per month, with most of the increase

supporting additional UAN production.

We believe urea has the greatest potential to be in tight supply this spring given

reduced import volumes and lower domestic producer supplies. Key factors to watch

are the amount of product imported over the next few months and the ability of the

distribution system to move the product in time for spring.

More Than 20 Percent of Consumption Outside of Asia, North and Latin America


Fertilizer is needed everywhere that crops are grown and most of the growth in

consumption has occurred in developing countries in Asia and Latin America. Together

with North America, these major fertilizer consuming regions account for almost 80

percent of global consumption.

Yet other markets – particularly countries in Europe, the Former Soviet Union (FSU)

and Africa – currently consume significant amounts of fertilizers or have the potential to

significantly increase consumption. This section of the report will profile these three

regions and provide an overview of the opportunities and challenges related to

increasing fertilizer use, particularly potash.

Growing Population with Significant Urbanization


Africa accounts for 15 percent of the world’s population and is one of the regions

projected to experience significant population growth in the coming decades. Primarily

driven by Sub-Saharan Africa, population on this continent is projected to grow by 35

million every year – approximately the current population of Canada.

At the same time, a big shift to urbanization is expected. The urban population share is

projected to surpass 60 percent compared to the current 40 percent. Two factors are

influencing this urban migration: economic growth that will drive employment

opportunities in urban markets, and government initiatives to encourage consolidation

among primary agriculture producers in an effort to increase food production. This is an

important shift, as urban consumers tend to eat more food and have more balanced

diets.

Rising Population Requires Increased Productivity on Existing Land Base


Less arable land per person is available for agriculture as African populations rise and

urban areas expand. With Africa’s finite land base and expanding population, this multi-

decade-long decline in arable land is expected to continue.

In Africa, approximately 0.2 hectares per person is available for crop and animal

production; this is only slightly above the average among developing countries. Arable

land per person is low in many of the countries with the greatest need to raise food

production, which highlights the importance of increasing long-term crop productivity.

Africa Is a Significant Importer of Food


Despite its vast agricultural potential, Africa has remained a net importer of agricultural

products in the last three decades. FAO data shows that in 2007 only about one-third

(19 out of 53) of African countries had enough agricultural export revenue to pay their

food import bills. The remaining countries had to draw money from other resources or

wait for food donations to ensure a stable supply.

Countries aiming to tackle rising food import bills and to solve food insecurity look for

initiatives to directly reduce the agricultural (including food) trade deficit. This is

accomplished by finding ways to reduce agricultural imports by boosting production

and, in some cases, increasing agricultural exports. Methods include support and

initiatives for higher fertilizer consumption. For example, in the southern part of Ghana

agricultural growth has been a major driver of poverty reduction. Fertilizer imports into

Ghana have nearly tripled since 2006 as efforts are made to increase agriculture

production.

Higher Yields Will Be Primary Driver of Production Growth


It is difficult to overestimate the importance of agriculture to Africa’s economic

prospects. More than 65 percent of Sub-Saharan Africa’s estimated 750 million people

are engaged in agriculture, and the sector generates more than a quarter of gross

domestic product in most countries.

In recent decades, crop acreage expansion and yield improvements have been fairly

equal contributors to production growth. However, in most countries future growth will

require a greater emphasis on improving productivity as the potential to expand

cropped area becomes more limited.

Yields in Sub-Saharan Africa Lag As Does Fertilizer Use


Africa’s low crop productivity has many causes, including limited use of modern

agricultural practices, inadequate markets for farm products and low annual rainfall in

some countries. Low and imbalanced fertilizer use (illustrated in the graph on the right)

is potentially the single largest contributor to low yields. Crop yields in Sub-Saharan

Africa are estimated to be less than 25 percent of what is economically attainable.

Potash and phosphate use in most Sub-Saharan countries is a fraction of the total used

in other developing markets.

An effective way to educate farmers is through demonstration. Working alongside

farmers in Kenya, researchers demonstrated that balanced fertilizer application can

more than double corn yields, compared to the farmers’ traditional method of crop

management. We believe these success stories will eventually encourage wider

adoption of best practices throughout Africa.

Low Growth Rates and Increasingly Unbalanced Application Rates


Improving agricultural productivity in Africa is essential in tackling the continent’s food

insecurity in the future, as water and land resources become increasingly limited.

There is tremendous opportunity to close the yield gap and improvements in

fertilization practices can play a major role. Africa currently accounts for less than 3

percent of global fertilizer consumption and year-over-year growth rates are low.

Not only are consumption levels low but unbalanced use of N:P:K also hinders crop

yield potential. Africa’s N:K ratio is nearly 7:1 compared to the world average level of

less than 4:1 and the US average of less than 3:1.

Several Barriers Impact Fertilizer Affordability and Accessibility in Africa


There are many challenges to moving fertilizer into the interior countries of Africa and

this results in higher costs for farmers, compared to many other regions of the world.

Port infrastructure in many African countries is underdeveloped, which constrains the

type of vessels that are used and can result in many hours required to offload product.

If the fertilizer is not shipped in bags, it must be bagged and loaded onto trucks for

delivery to the interior.

The farmer’s cost of fertilizer can become quite high when the product moves a long

distance on poor roads, across national borders and changes hands many times along

the supply chain. In addition, dealers’ limited ability to have the right product in storage

can jeopardize timely application by farmers. Improving the supply chain will require

significant investment over time but will be necessary to advance fertilizer usage, and

productivity, in Africa.

Opportunity to Increase Potash Use


When considering the agriculture potential in Africa, comparisons are often made to the

transformative growth experienced in many Southeast Asian countries. Africa has the

opportunity to increase cultivated land but the need to increase application rates

provides the most potential for greater potash use.

Potash application rates in Africa are approximately 2.5 kg/ha of K20 and less than one

million tonnes of KCl is consumed. If application rates were increased to 10 kg/ha,

which is almost half of the world average rate, potash consumption would increase to

more than 4 million tonnes. If rates approached the world average level, potash use

could increase to around 9 million tonnes. While we have previously indentified a

number of factors that could limit growth in the near term, these scenarios highlight the

longer-term potential of the African market.

MARKET ANALYSIS REPORT: 03.27.2014

Consumption Has Declined Since the Early 1990s

Trends

in

European

fertilizer

consumption

have

developed

on

a

geographical

divide.

In

Eastern

countries,

there

was

a

sharp

decline

in

the

early

1990s

as

primary

agriculture

production

transitioned

away

from

the

state-operated

model.

In

recent

years,

these

regions

have

seen

some

modest

increases

in

fertilizer

consumption

but

growth

has

been

uneven

following

fertilizer

market

volatility

at

the

close

of

the

last

decade.

In

Western

countries,

numerous

crop

production

support

policies

have

been

removed

or

modified

which

has

modestly

decreased

fertilizer

consumption.

In

addition,

a

more

managed

approach

to

manure

use

has

resulted

in

lower

fertilizer

use.

In this evolution, the N:K ratio gradu ally increased and more recently has jumped to high levels, creating an application imbalance that we believe is not sustainable.

31

Majority of Use on Cereals in Western Europe


Europe accounts for approximately 10 percent of global fertilizer use. France and

Germany are large agricultural producers and the biggest fertilizer consuming

countries. Poland has significant agriculture potential and has emerged as the third

largest consuming country in Europe. In addition, countries such as Romania and

Bulgaria have experienced large growth rates for fertilizer consumption.

Wheat and cereals are the main fertilizer-consuming crops, but forage and hay are also

important.

Area Decreasing With Yield Volatility Increasing


European crop production has been impacted by a downward trend in acreage and

relatively modest yield growth rates. Over the past decade, yields have become more

variable from year-to-year. The reduction in total fertilizer use and imbalanced

application rates are potential contributors to this increased variability. Europe is often

referred to as a mature market, but its recent crop production history suggests there is

room for improved agronomic practices.

Majority of Supplies Are From Domestic and FSU Producers


Belarus and Russia are major suppliers to the European potash market, delivering

product by ocean and rail. Together, they account for nearly 40 percent of total

shipments to Europe.

Germany is the single largest supplying country with approximately 55 percent of its

production delivered to the European market. Production from small mines in the UK

and Spain supply regional markets within Europe.

Expect Steady Consumption but with Upside Potential


Europe is a major consumer of potash but demand has been highly variable in recent

years, affected by volatile crop and fertilizer markets and difficult economic conditions

in many countries. Germany, France, Spain, Italy and the UK are the biggest

consumers of potash fertilizer, but Belgium, Norway, the Netherlands and Finland also

have large NPK export industries that use imported potash.

We expect the majority of potash consumption growth will occur in Eastern Europe due

to current under-application and the potential for agricultural development. Western

European demand is projected to be relatively stable, but we believe there is upside

potential given the current application imbalance and need to improve productivity.

Consumption Collapsed and Has Slowly Increased Since the Early 1990s


The economic and political collapse of the Soviet Union from 1989 to 1993 was

accompanied by the collapse of Russia’s collective farming system and its centrally

planned fertilizer application program. This resulted in a sharp reduction of fertilizer use

in the region and a surge in supply available for export. Not only did total consumption

fall, but the ratio of nitrogen to phosphate and potash usage became increasingly

unbalanced.

In recent years, fertilizer application rates have gradually increased as investment in

crop production and distribution push farmers to capture the benefits of strong markets.

However, there is still significant potential to increase total fertilizer usage and improve

the application balance.

Majority of Use on Cereals in Russia, Belarus and Ukraine


Wheat and coarse grains such as barley, rye and corn are the primary crops planted in

FSU countries. Together, they account for 60 percent of fertilizer consumption. Russia,

Belarus and Ukraine are major fertilizer producers and exporters and their domestic

markets combined account for 80 percent of total fertilizer use in the region.

The potential to increase acreage and productivity will continue to drive crop production

growth, and fertilizer use with it.

Major Shifts Have Occurred in Production and Consumption


Production and consumption of wheat and other coarse grains have gradually

recovered since the collapse of the Soviet Union. Crop acreage has leveled out but

yields started to improve during the past decade due to the emergence of some

corporate farms and modest improvements in fertilizer use. This recovery has allowed

countries such as Russia and Ukraine to become significant grain exporters during

years with favorable weather.

However, the low crop fertilization level makes the region vulnerable to low yields in

years with adverse weather, and over the past five years volatile weather has

contributed to large swings in output.

Opportunities for Acreage and Yield Growth


The FSU is one of the few regions of the world where higher-quality land could be

brought into cultivation. The major constraint is political uncertainty that could limit

investment in infrastructure and farm inputs required to develop this potential. The

USDA forecasts that the area of major crops will increase in the coming years, with

Russia and Ukraine accounting for most of that growth. Corn production in particular

has been gaining in popularity, particularly in Ukraine, due to its attractive profitability

and an expanding livestock sector.

There is also significant opportunity to improve on crop yields in the region. For

example, Russia’s wheat yields are about 25 percent below those achieved in the US.

We believe there is tremendous opportunity to close that yield gap, and improvements

in fertilization practices – increased application rates and proper nutrient balance – can

help achieve this.

Potash Consumption Is Well Below Recommended Levels


Balanced fertilization is critical for crop yields, as the plant nutrients interact to provide

benefits beyond those achieved from a single nutrient. In Russia, average potash

application rates on key crops such as barley, corn and wheat are significantly below

scientifically recommended levels. This nutrient imbalance severely limits yield

potential and provides a significant opportunity for growth in potash consumption.

As food demand grows and the agriculture sector modernizes, farmers in this region

are expected to be motivated to improve the nutrient balance on their key crops to

increase yields.

Expected Growth Driven by Acreage and Application Rate Expansion


The FSU accounts for 5 percent of world potash consumption. Both Russia and

Belarus are major potash producers and exporters, and consumption is growing in both

countries for use in direct application and NPK production. With about 57 percent of

total FSU potash consumption, Belarus is the largest consumer in the region, but

growth is expected to slow as nutrient application is approaching recommended levels.

Russia has the greatest potential for consumption growth, followed by Ukraine, due to

the potential for acreage expansion and increased application rates.

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