Business Daily (Nairobi)
Allan Odhiambo
24 April 2008
The complaints locally and protests in other regions against biting inflation may have hit a crescendo, but consumers and market economists were yet to see and meet the worst.
Amid skyrocketing prices of food triggered by heightening costs of farm production, many may have hoped for quick intervention especially on the prices of fertiliser but latest developments in which the input is fast turning into the new "black gold" after oil is disturbing.
For close to a year now, Kenya and other nations have witnessed spiralling inflation thanks to a relentless climb in the cost of fertiliser and diesel to drive farm machinery.
In Kenya, three years ago, a 50 kilogramme bag of planting fertiliser , Diammonium Phosphate (DAP), was retailing at Sh900 before moving up to retail at Sh1,800 in September last year and now goes for Sh4,400 per bag. Similar rallies have been seen in the price of crude oil that hit all-time high of $118 per barrel this week.
Interestingly, the two commodities are highly interlinked: fertiliser is a by-product of oil and any sways on petroleum industry front shapes proceedings in the markets. Analysts, however, say apart from the 'normal sways' triggered by rising prices of crude, consumers face a new challenge on buying fertiliser following a steady demand for it in key markets contrary to earlier projections.
The Food and Agriculture Organisation (FAO) had last year predicted that world fertiliser supply between 2007 and 2012 is likely to outstrip demand balances.
"It is anticipated that world fertiliser supply and demand will increase by 3.1 per cent and 1.9 per cent respectively between 2007/08 and 2011/12.
World surplus is consequently expected to increase annually by 21.2 per cent over the same period to reach about 11 per cent of total demand in 2011/12," it said in a report titled Current World Fertiliser Trends and Outlook to 2012.
This forecast is, however, increasingly being challenged by unfolding scenarios world over where the appetite for the commodity seems to be growing at neck-break speed.
"There is an overall increase in demand for fertiliser worldwide as many nations seek to increase their farm production to cater for new ventures such as biofuels and we expect prices to keep rising," Agriculture Permanent Secretary, Romano Kiome told Business Daily.
With the clean fuel craze coupled with depleting fossil fuel reserves taking centre stage, many are now using fertilisers to grow biofuel crops to support the new ventures, causing the high pressure on global stocks of the input. Only last month, giant multinational firm, Royal Dutch Shell Plc, plunged into the biofuel craze when it announced a joint venture with Virent Energy Systems, Inc., (Virent (TM)) of Madison, Wisconsin USA, in research and development effort to convert plant sugars directly to gasoline and gasoline blend components, rather than ethanol.
The collaboration could herald the availability of new biofuels that can be used at high blend rates in standard gasoline engines. This could potentially eliminate the need for specialised infrastructure, new engine designs and blending equipment.
Virent's BioForming (TM) platform technology uses catalysts to convert plant sugars into hydrocarbon molecules like those produced at a petroleum refinery. Traditionally, sugars have been fermented into ethanol and distilled.
In the USA, some 55 new ethanol plants are currently being constructed, a development that could further strain fertiliser reserves in trying to produce raw material for the plants. According to the International Centre for Soil Fertility and Agricultural Development (IFDC), craze towards biofuels in the US has partly been triggered by a decision by the government to subsidise ethanol by 51 cents a gallon (3.8 litres) prompting large companies to contract corn from farmers who apply more fertiliser to maximise production.
IFDC said the emphasis on huge application of fertiliser to produce biofuel crops in the US is explained by the fact that even if all the current US corn production were converted to ethanol, it would supply only 27 per cent of the nation's current transportation fuel demand.
The tenacity of this sharp rise in demand for fertiliser to support new ventures on biofuels is duly captured by the massive scramble for market slot by leading producers of the commodity such as China, Canada and several states in the Middle-East region. Importantly, a large proportion of Kenya's fertiliser imports come from the Middle East, Romania, Ukraine, the USA, Europe and South Africa while its new sources of special fertilisers for horticulture are from India, China and Singapore.
A recent study by a leading Doha-based consultancy, showed that the United Arab Emirates (UAE) and other Gulf States including Saudi Arabia, Kuwait, Bahrain, Qatar and Oman are expected to invest billions of dollars to expand into their current fertiliser production ventures within the next few years to capitalise on the global demand.
According to Gulf Organisation for Industrial Consulting (GOIC), which offers policy advice to the six-member Gulf Co-operation Council (GCC), the investments would turn the cluster into a major production and export centre. Projections showed as at the end of 2006, the combined capital investment into the input by the GCC stood at $5.7 billion. This investment is expected to further grow by more that $5 billion with Saudi Arabia alone forking out about $3.5 billion.
Analysts, however, warned the entry of oil magnates into fertiliser business could pose a serious challenge of building another cartel.
A similar thirst for growth in the fertiliser business was witnessed recently when the world's biggest fertiliser enterprise, Potash Corp of Saskatchewan Inc, landed a major boost in market presence when it completed a 10.01 per cent purchase of Sinofert for US$126 million. The acquisition boosted the Canada-based Potash Corps's holding in Sinofert to 20 per cent having previously bought a 9.99 per cent stake in the company in 2007.
Industry statistics showed that Potash Corp is the world's largest fertiliser firm by capacity boasting of 23 per cent market of the world potash fertiliser production.
In China, similar expansion dreams are alive with indications that China BlueChemical Ltd, the fertiliser-making arm of the nation's top offshore oil company, China National Offshore Oil Corporation (CNOOC), is planning to make a series of acquisitions to increase its output as the nation eyed becoming the world leader of the commodity.
"China also has a task to increase its food production ventures to feed its people as it economy swells," Paul Gamba, a researcher at Egerton University's Tegemeo Institute told Business Daily.
The appetite for profitability stirred by the current strong demand has had implications even among leading producers such as China. It is contemplating slapping an export tariff of 135 per cent on phosphates and 100 per cent on urea nitrogen, with analysts warning that this could further drive up the prices of fertiliser since the Asian nation is a major producer. This scramble has triggered substantive price climbs with effects being felt even at the lowest level of consumer purchases.
It is expected Kenya's annual fertiliser import bill will hit Sh12 billion from an average of between Sh7.5 billion and Sh8.5 billion. On average, the country imports between 450,000 tonnes and 500,000 tonnes of fertiliser every year. Of the imports, cereals production consumes the bulk with 150,000 tonnes closely followed by horticulture that takes up 65,000 tonnes. The coffee and tea industries consume 40,000 tonnes and 30,000 tonnes respectively while the remainder is taken up by other small crops.
"The prices have more than doubled and everyone is feeling the pinch in the industry because fertiliser alone comprises nearly 10 per cent of the total production cost of coffee," Etienne Delbar of Socfinaf Coffee Limited told Business Daily. Pressed by the sharp rises in prices, players in key production sectors have called for Government intervention.
Dr Kiome, however, said the State's hands are tied on the request and would only intervene to see growers make affordable purchases of top-dresser fertiliser through the State-run National Cereals and Produce Board (NCPB).
"The only outright and viable intervention the State has offered and will continue offering is the affordable scheme through which NCPB makes bulk purchases and passes the commodity to growers without any additional costs," he said.
The parastatal is currently offering top-dressing Calcium Ammonium Nitrate (CAN) at Sh1,650 compared to market rates of between Sh1,800 and Sh2,000. Agriculture Minister William Ruto at the weekend said the State would allocate some Sh1.5 billion to NCPB to purchase the top dresser and sell it to growers.
The Kenya Tea Development Agency (KTDA) also makes bulk purchases for the more than 450,000 small-scale farmers affiliated to it.
Last week, a leading fertiliser dealer, Mea Limited, signed a Sh1 billion pact with Equity Bank to enable farmers, through their stockists, to have access to the commodity on credit terms. In the deal, a stockist is able to borrow as much as they need with the loans attracting a 15 per cent interest rate on a reducing balance.
Recommendations have also been made that Kenya use the by-products from its oil refinery in Mombasa and shipments from other locations to start manufacturing fertiliser.
However, the PS said the idea was not likely to be taken up any time soon because of flawed economies of scale.
"The venture sounds interesting but for purposes of economies of scale, one would be required to put up a plant with an output capacity of at least one million tonnes in order to maximise on returns. This might not work for Kenya because of our relatively lower market demand," said Dr Kiome.
The PS said the Government would also consider proposal to step up ventures through which various types of fertiliser would be blended locally to help cut down on cost of purchase.
Analysts said with the limitation on possible State intervention on pricing of the commodity due to the liberalised nature of the market, the only hope would be the entry of more players into the supply chain to check price climbs through stiffer competition.
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