WINNIPEG (Reuters) — Sinking crop prices and frenzied output growth by fertilizer producers have sparked a flurry of deal making worth nearly US$10 billion in the fragmented nitrogen fertilizer sector that may kick off consolidation in the largest of the three nutrient markets.
Illinois-based CF Industries Holdings Inc., the world’s third-largest nitrogen fertilizer producer, was involved in three of four deals in the past month, taking out two potential competitors and locking up sales in the United States, the world’s top corn-producing country.
“What CF is doing is classic corporate self-preservation in a world where there are well-financed people trying to get in to their core Midwest and U.S. Gulf Coast nitrogen market,” said Chris Damas, editor of the BCMI Report.
Unlike in the potash and phosphate industries dominated by a few players, the top 20 nitrogen companies account for just over one-third of global supply, according to consultancy CRU Group. CF’s share is less than four percent, it said.
On Aug. 12, farmer co-operative CHS Inc. ditched plans to spend $3 billion building a plant in North Dakota and agreed instead to pay $2.8 billion for a stake in CF’s nitrogen fertilizer unit, while securing a supply deal.
It follows an Aug. 6 announcement that CF would buy Netherlands-based rival OCI NV’s North American and European plants for $6 billion, to become the biggest publicly traded nitrogen player.
The deals increase CF’s market clout by removing two potential U.S. rival plants, even as Agrium Inc., Yara International, Koch Industries and others build new North American capacity.
CVR Partners LP said Aug. 10 that it would buy Rentech Nitrogen Partners LP for $533 million, creating North America’s fifth-largest nitrogen maker.
Potash Corp’s $8.6 billion takeover bid for German rival K+S AG has captured headlines this summer, a deal that would expand the reach of the world’s biggest fertilizer producer.
The incentive to cut deals in nitrogen fertilizer starts at the farmgate.
Falling grain prices have lightened farmers’ wallets, especially after corn plunged last week to a nearly 10-month low and spring wheat is at a five year low.
With lower crop receipts, farmers cannot afford to pay as much for fertilizer and other farm inputs, although they apply nitrogen more regularly than other nutrients.
Earlier this year, North American prices of urea, a popular form of nitrogen, slid to a four-year low of less than $300 per tonne.
“You’re in a down cycle, commodity prices are down, I think people might be seeing it as a prolonged period,” said CHS chief executive officer Carl Casale in an interview.
“(Nitrogen producers) see that as an opportunity to consolidate the industry (and) that would be driving a lot of public company activity.”
The International Fertilizer Industry Association forecasts global demand for nitrogen in 2014-15 at 112 million tonnes of nutrient, about three times phosphate demand and about four times the size of the potash market.
In the CHS deal, CF secures sales of up to 1.7 million tons annually, similar to its 2014 ammonia-supply deal with phosphate producer Mosaic Co., providing significant sales in uncertain times.
The moves come as global surpluses of urea and ammonia are expected to creep higher to nearly one-fifth of production by 2018, according to a May report by BMO Capital Markets.
That fragmented nature of the industry means it takes longer for producers to rein in output when times are tough.
“I think when companies buy smaller players, it benefits the bigger player,” said Dan Neiman, a partner with Neiman Funds Management, which owns CF shares.