全球-农业-全球农业商业：播下成长的种子.docx

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1、EQUITIESAGRIBUSINESSJanuary 2019HSBC 0Global Research s:/ research.hsbc By: Alexandre Falcao, Santhosh Seshadn, Snharsha Pappu, Nicholas Paton and Saurabh JainGlobal Agribu独esSowing the seeds of growthVWe leverage our global expertise to identify potential outperformers in Agribusiness across EM and

2、 DM countriesWe remain bullish on fertilizers and see attractive valuations and near-term share price catalystsWe prefer Buy rated OCI, CF, NTR, and MOS in the fertilizer space; UPL in crop chemicalsDisclaimer & Disclosures: This report must be read with the disclosures and the analyst certification

3、s in the Disclosure appendix, and with the Disclaimer, which forms part of itNitrogenWe see a sustained recovery driven by capacity closures in China Recent surge in Chinese exports and potential lower input costs for marginal players should not derail the recoveryWe expect prices to rebound during

4、the spring application seasonShort-term volatility likely, but price trajectory pointing upwardsNitrogen prices have seen a sustained recovery over the last couple of years due to a combination of: i) supply rationalization in China; ii) rising costs for marginal producers in China and Europe; and i

5、ii) improving utilization rates globally (including new capacity additions) to meet incremental demand growth. In addition, supply side uncertainties stemming from US sanctions on Iran and unavailability of gas for Chinese producers further contributed to a surge in prices over the last few months.

6、We expect a seasonal rebound in Nitrogen prices during the spring application season (latelQ 2019 and early 2Q 2019) as pent-up demand emerges in key Northern Hemisphere regions; until then we see some price pressure likely to. On the other hand, timely buying along with prospects of higher demand f

7、rom additional corn acres adds further upside risks to prices.Urea on track to a sustained recovery over the medium termWe believe urea is on track for a sustained recovery indicated by substantially higher prices and improving margins for the industry, including marginal cost producers. We believe

8、that margins for Chinese high cost anthracite producers are improving from troughs despite a steep increase in the cost of production, driven by higher prices. Specifically, some large scale and costefficient players in China (and also globally) are reporting solid increase in margins.Estimated cash

9、 margins for Chinese anthracite producersSource: Bloomberg, CEIC, company reports, HSBCeThe improvement in margins is reflective of prices outgrowing COGS and indicates that the increase in price is more supply driven than just a factor of cost increases. In other words, we think the recovery is str

10、uctural and should continue over the medium term as supply and demand balances further, despite some volatility in input costs.Gross margins of key Chinese producersChina XLX China BlueChem China Coal YTHSource: Company reports, HSBCDeclining input costs likely not enough to derail the recoveryLower

11、 input costs more likely to enhance margins than cause excess supplyDeclining input costs in the latter half of 2018, particularly China coal prices, have raised concerns about a potential supply response from Chinese marginal producers. However, the price of anthracite coal, which is the primary fe

12、edstock in China, actually increased on average during the period (2H 2018 price +6% yoy vs -14% for thermal coal). For those expecting further coal cost declines, we believe that the supply side response to cost changes is constrained by the difficultly of bringing idled plants back online in a rel

13、atively short period.We acknowledge that lower gas costs in parts of Europe could incentivize producers to increase production; however, European producers are already operating at high utilization rates, which provides only limited room for additional volumes. The increase in volumes, if any, would

14、 likely cause short-term pressure, but not be significant enough to derail the recovery.Feedstock costs in China and EuropeUK NPB Gas (USD/Mmbtu)China Anthracite Coal (CNY/t) - RHSSource: BloombergCapacity (kt)Utilisation (%)Source: HIS, HSBCeHaving said that, input costs for Chinese producers are s

15、till at a multi-year high. Separately, the US Henry Hub gas price spiked suddenly in November 2018 due to storage issues and strong seasonal demand; however, the price subsequently retracted to below USD3.0/MMBtu. This ensures enough margin spread between US producers and other marginal producers. H

16、SBC oil and gas analysts expect the US Henry Hub gas price to slowly increase and assume a mid-cycle level of USD3.25/MMBtu by 2020. See Big Oils in 2019: Resilient and undervalued, 13 January 2019.A case study that reflects the true cost structure for gas producers in ChinaWhilst one would argue th

17、at gas prices in China have eased up in 2018, which may affect recovery in urea prices, gas prices are still above historical trends. Moreover, we believe the benchmark gas price does not give a complete picture of the cost structure of Chinese urea producers. This is because the benchmark is regula

18、ted by the government and gas allocation is usually prioritized for residential customers over industrial users during the peak demand season. Hence, by default, fertilizer companies operate at reduced operating rates during the peak season for gas demand.PetroChina, an O&G duopoly, does not see any

19、 reason to increase urea productionThe extent of natural gas shortages in China is reflected by the operating rates of PetroChina (857 HK, CP HKD5.13, Buy), a state-owned oil and gas duopoly in China and also the third largest urea player in China by capacity. According to company reports, PetroChin

20、a operated only at 20% of its urea nameplate capacity in 1H 2018 and 30% in 2017 as it is an integrated producer. If the companys cost structure is similar to that suggested by the benchmark prices, we do not see any economic rationale for PetroChina not operating at higher utilization rates.China L

21、NG market priceChina gas (CNY/therm)Production (kt)Utilisation as a % of nameplateSource: Company reportsAccording to PetroChina, its lower operating rates are primarily due to weak economics of production. Also, PetroChina does not see any reason to increase production, likely indicating the shorta

22、ge of natural gas, which is a structural issue in China.Source: Bloomberg,Recent acceleration in Chinese urea exports should not worry the investorsIn our view, the recent increase in Chinese exports is not primarily due to input cost declines but attributable to seasonality, Iran re-exporting throu

23、gh China to meet Indias demand (according to CRU), and increased availability of gas compared with the previous year.Iran reportedly supplied 25- 30% of Indias November tender volumes through ChinaTo elaborate further, domestic demand in China is usually weakest in the fourth quarter and has histori

24、cally seen an uptick in export activity, except in 2016 and 2017. In addition, Indias MMTC tender for 1.8mt of urea also provided a large opportunity for Chinese producers and Iranian producers re-exporting through China. Company and CRU reports suggest that 500-550kt of Iranian volumes have been ex

25、ported to India through China since Indias last tender in November, accounting for 25-30% of total volumes. Also, higher growth is a reflection of lower base effects as urea production and exports during 4Q 2017 and 1Q2018 were affected by acute natural gas shortages.Seasonality of Chinese exports -

26、 Historically 2H weighted (volumes in ktpa)20132012201120102009Source: CRUExpect higher shipments from China due to Iranian re-exportsExpect higher shipments from China due to Iranian re-exportsWe expect Chinese exports for 2018 to be down by 50% yoy. Given that India has announced another tender an

27、d reportedly made changes to the terms that may enable re-export of Iranian, according to CRU, it is likely that exports will continue to increase from China. However, over the course of 2019, we expect Chinese exports to taper down as domestic demand picks up. Further, the planned shutdowns along w

28、ith closures in 1H 2018 should more than offset any incremental rise in exports due to resumption of gas related closures. Hence, we think that Chinese exports in 2019 should be more or less in line with 2018 levels. Annual urea capacity closures (mt)Source: CRU, Company reports2010 2011 2012 2013 2

29、014 2015 2016 2017 1H18China urea production (mt) Exports (mt) - RHSSource: CRUA more streamlined approach to environmental regulations going forwardEnvironmental-related supply rationalization has been a widely discussed topic over the last couple of years. While regulatory controls have resulted i

30、n permanent capacity closures in China, some of the production restrictions so far have been based on sporadic inspections by Chinese authorities that led to sudden closures for a random period of time.Now, China is aiming to implement a more streamlined approach to achieve its environmental goals,

31、which is likely to benefit the efficient plants and penalize the non-performers instead of blanket restrictions on all the companies. Under the new norms, efficient companies are classified as Category A by Chinese authorities and would not be subject to production restrictions, companies that emit

32、acceptable levels of emissions would be subject to a cap on utilization rates, whilst the least efficient ones will be shut down permanently. We expect that Chinese producers will try to become more efficient, which warrants economic rationality to meet the incremental cost to achieve efficiency, le

33、ading to a more disciplined market in the long run.Ammonia likely to underperformWe believe that ammonia is likely to underperform in 2019 due to new supply additions of merchant grade ammonia in Indonesia (Indorama) and Russia (Eurochem), as well ramp of new plants in the US (Yara) and Brazil that

34、came online in 2018. Further, ammonia shipments in the US have been affected due to unfavorable weather preventing field applications.While ammonia could rebound in 1Q 2019 due to a possible catch up in the Spring season, there is also a possibility of demand destruction in the US if the Spring appl

35、ication window is impacted by cold/wet weather. In that case, we see higher demand for urea/UAN in the postemergence application season to make for the shortfall in nitrogen application similar to what has happened in 2018.In 2H 2019, we see prices declining at a faster rate than the usual seasonali

36、ty due to new supply additions and as global demand diminishes due to seasonality. While farmers could switch over to low-cost ammonia from urea/UAN, we believe the impact is likely limited as the new capacity additions are merchant grade and moreover direct application of ammonia on fields is limit

37、ed due to infrastructure constraints and regulations. That said, we expect the spread between urea and ammonia will likely widen in 2019.NitratesWe forecast nitrate prices based on intrinsic value of nitrogen content and historical premiums. While nitrate prices are generally less volatile than urea

38、, they track urea prices at a broader level on a content-adjusted basis. We forecast moderate premiums for nitrates in 2019 relative to historical levels. In Europe, an important market for nitrates, we forecast contraction of premiums given the suspension of countervailing duty on Russian imports.

39、We expect nitrates demand to be fairly good, driven by incremental demand in Europe and China due to environmental regulations.NPK price forecastsChanges in forecastsNew forecasts2018a1Q2019f2Q 2019f3Q 2019f4Q 2019f2019f2020fLong termNitrogenAmmonia - (FOB Black Sea)USD/t286310280255305288320340Urea

40、 (FOB Black Sea)USD/t250290265250285273285300Ammonia -(FOB US NOLA)USD/st317336308286331315336363Urea (FOB US NOLA)USD/st261299277263295284295308NitrateAN (France Spot)EUR/t275296285262311289299310CAN (Germany Spot)EUR/t202226209200228216238240UAN (France Spot)EUR/t179220195182213202220222Ammonia -(

41、FOB Black Sea)-4%-1 %Urea (FOB Black Sea)3%0%Ammonia -(FOB US NOLA)-6%-1 %Urea (FOB US NOLA)6%3%AN (France Spot) - EUR/t5%7%CAN (Germany Spot) - EUR/t3%7%UAN (France Spot) - EUR/t0%7%Source: CRU, HSBCeRisks to our nitrogen price forecasts: Upside risks include stronger than expected demand due to ad

42、ditional corn acres in the US, supply side uncertainties due to unplanned shutdowns, higher than expected energy costs. Downside risks include rapid decline in costs for marginal producers resulting in excess supply, higher than expected new capacity additions, potential demand destruction due to un

43、favorable weather.PhosphatesDAP prices should ease up in 2019 due to new supply, but still be substantially higher than 2017 lows Lower input costs (sulphur and ammonia) should support marginsA negative surprise could spring from China, but material downside risks seem modestExpect prices to ease up

44、 and then recoverIn 2019, watch out for a ramp up in supplyThere was almost a deficit in supply in 2018, leading to a sharp recovery in prices despite two new major projects coming online during the year, primarily driven by the shutdown of Mosaics plant city operation (-950ktpa P2O5) and a slower r

45、amp-up of new capacity. Heading into 2019, the key concern for the market appears to be the potential impact of these projects as they continue to ramp up.We acknowledge that the 2019e supply demand balance will likely be less tight than 2018. However, concerns related to material downside risk to p

46、rices due to the ramp-up of new capacity are overdone, in our view, given the significant amount of time it takes to bring new capacity and previously closed capacity to full utilization. Notice that, Maadens Waad Al Shamal DAP 1 plant took five years to reach above 80% operating utilization.Capacit

47、y (kt P2O5)Utilisation rateSource: Company reports, HSBC2013 2014 2015 2016 2017 2018 2019f2020f LT US Gulf (FOB) India (CFR)DAP price recovery (USD/t)Source: HSBCe, CRUHow the numbers stack up?For 2019, we have taken a conservative stance on operating rates for new capacity. For Maaden, we assume t

48、he new production plant will operate at c60% of capacity on average through 2019. This implies an incremental 550kt of P205 production from Maaden. We assume OCP w川 incrementally produce 530kt, implying a c90% utilization rate, including new capacity from debottlenecking to the tune of 550kt.2019 phosphate supply demand expectations (kt P2O5)Source: HSBCe, CRUIncremental capacity from OCP should be offset by the closure of Nutrient Redwater and Geismar facilities, which