Essential nutrients for optimal crop yields and quality

Yara Fertilizer Industry Handbook
31 May 2005
List of contents
Fertilizer industry overview
What is fertilizer? The global industry The European industry
Fertilizer industry dynamics

Ammonia Urea
Industry value drivers

Drivers of demand Drivers of supply Price relations Production economics
Yara Fertilizer Industry Handbook 2005 - Page: 2
Yara Fertilizer Industry Handbook

This handbook describes the fertilizer industry and in particular the nitrogen part which is the most relevant for Yara International. The document does not describe Yara or its strategy. For information on Yara specific issues please see the Capital Markets Day presentations. Fertilizers are essential plant nutrients that are applied to a crop to achieve optimal yield and quality. The following slides describe the value and characteristics of fertilizers in modern food production.
Plants need three main nutrients: Nitrogen, Phosphorus and Potassium
YIELD AND QUALITY
Nitrogen is the main driver of yield
Three main nutrients: Nitrogen, Phosphorus and Potassium

Nitrogen (N), the main constituent of protein, is essential for growth and development in plants. As nitrogen is one of the single most common nutrient that limits agricultural productivity, its value in modern food production is unquestionable. Supply of nitrogen determines a plants growth, vigour, colour and yield. Phosphorus (P) is vital for adequate root development and helps the plant resist drought. Phosphorus is also important for plant growth and development, such as the ripening of seed and fruit. Potassium (K) is central to the translocation of photosynthates within plants, and for high yielding crops. Potassium helps improve crop resistance to lodging, disease and drought. In addition to the three primary nutrients, the secondary nutrients sulphur, magnesium and calcium are required for optimum crop growth. Calcium is particularly essential for yield, quality and storage capacity of high value crops such as fruit and vegetables.
Plants need nutrients to grow

m Sodiu
Oxygen
Boron
Nutrient behaviour Nutrients have specific and essential functions in plant metabolism They cannot replace each other, and lack of any one nutrient limits crop growth
Soil conditions & other growth factors
YIELD
th Warm Light Water Nitrogen
The law of minimum

The law of minimum is often illustrated with a water barrel, with staves of different lengths. Such a barrel for illustration purposes could be thought of as a plant. The barrel`s capacity to hold water (or the plants capacity to reach maximum yield) is determined by the shortest stave. The yield of plants is frequently limited by shortage of nutrients or water. Once the limiting factor (constraint) has been corrected, yield will increase until the next limiting factor is encountered. Nutrients are classified into three sub-groups based on plant growth needs. These are: Macro or primary nutrients: nitrogen (N), phosphorus (P), potassium (K) Major or secondary nutrients: calcium (Ca), magnesium (Mg) and sulfur (S) Micro nutrients or trace elements: chlorine (Cl), iron (Fe), manganese (Mn), boron (B), selenium (Se), zinc (Zn), copper (Cu), molybdenum (Mo) etc. Yield responses to nitrogen are frequently observed, as nitrogen is often a limiting factor to crop production, but not the only factor. Balanced nutrition is used to obtain maximum yield and avoid shortages of nutrients.
Phosphorus
Potassium
Calcium
Major impacts on global agriculture from quantity to quality
Less driven by supply-side economics and stimulus of support policies More driven by demand and consumer food preferences Food quality characteristics can be fostered by farmers Profitable farming will shift from raw material to food value producers
Requires better agronomic practices
Source: McInerney, J (2002) The production of food: From quantity to quality. Quoted in Farming for Health: The future for agriculture by Welch, R. 30th IFA Enlarged Council Meeting, Santiago, Chile 1-3 December 2004
Improving human health is a key component of the future of agriculture globally

The World Health Organization in 2004 acknowledged that malnutrition, including undernutrition and nutritional deficiencies is a major cause of death and chronic diseases worldwide. Human beings require at least 50 known nutrients in sufficient amounts to lead healthy and productive lives. Since agriculture is the primary source of all micronutrients for human consumption, it may well mean that agricultural systems are failing to meet nutritional needs of the population. This implies that agriculture must change in ways that will provide for adequate nutrition for the global population i.e., quality agriculture must increasingly become a part of profitable farming enterprises from an economic perspective. The fertilizer industry can greatly contribute to the future of agriculture for health by developing suitable products that have a high content of plantavailable micronutrients adapted to specific crops, soils, climates and health needs.
Healthy food for plants
... yields healthy food for people
The value of fertilizers in modern food production is clear

The quality of the food is a natural concern for consumers. Mineral fertilizers are based on natural nutrients that plants need to realize their growth potential. Balanced nutrition, i.e., supplying the right nutrients in the right amounts, is essential for plants to give higher yields and better quality. Balanced nutrition is also essential for human beings. For this reason balanced fertilization of the crop plays an important role in supplying a healthy human diet. World food production depends upon supplementing plant nutrients obtained from the soil with mineral fertilizers. Fertilizers are now indispensable for ensuring sufficient food production and preventing decline in soil productivity through nutrient depletion. The rapid increase in the worlds population and the corresponding rise in consumption have rendered fertilizers an integral part of the food chain.
and economic gains via low cost production

Treatment Grain Revenue* yield (/ha) (t/ha) 2.1 235 Production cost (/ha) 593 -358 Profit (/ha) Production cost per ton of grain (/t) 282
No fertilizer
Mineral fertilizer 192 kg N/ha
9.3
1042
885**
157
95
* Assuming grain market price: 112 EUR/tonne (EU intervention price = 101 EUR/tonne) ** Cost increase due to intensive production inclusive purchase of N fertilizer Source: Winter wheat, long term trial, Broadbalk, Rothamsted (since 1856). Production cost: data from KTBL Germany
Fertilizers contribute to large economic gains for the farmer

The efficiency of mineral fertilizers has been well documented throughout history. Agriculture in the western hemisphere is intensive, which enables more production from a unit of land. Applying no fertilizer will usually result in financial losses for the farmer unless the land has been left uncultivated for many years. Applying an amount of 192 kg nitrogen per hectare, which is close to the agronomic optimum for winter wheat in Europe (see next page), makes it possible to produce wheat at a cost of less than EUR 100 per tonne and have an acceptable profit at todays price levels. Thus, prudent use of fertilizers enables intensive cultivation of arable land leading to low cost of production per unit of grain. Lower production costs for grain in turn translates into lower food prices for end consumers.
Profitability of investment in mineral fertilizers

Yield response (monetary value) to N fertilizer rate
Income /ha
The investment in nitrogen fertilizer is highly profitable for growers
1200 1000 800 600 400 200
=> Fertilizer investment: 96 /ha => Net return: 714 /ha
Net return is 7x the investment
0 0 50 100 150 200 250 300 Fertilizer application, kg N/ha
Source: Winter wheat yield data: Long term trial, Broadbalk, Rothamsted (since 1856).
Correct use of fertilizers may give more than 700% return on investment
At the optimum nitrogen rate of 192 kg N/ha (winter wheat in Europe), it is possible to produce 9.3 tonnes of grain per hectare. The fertilizer cost at this optimum nitrogen level is approximately 192 kg N/ha * 0.5 /kg N = 96 /ha With wheat prices of 112 /t, the farmer gets the following alternative revenue scenarios: Optimal nitrogen level: 9.30 t grain/ha * 112 = 1042 /ha No nitrogen fertilizer added: 2.07 t grain/ha * 112 = 232 /ha The difference in revenues is 810 /ha resulting from an input cost of 96 /ha, i.e., a return on investment of more than 700%.
Breakdown grain production costs

Example: Breakdown of winter wheat production costs for a 100-200 hectare arable farm
General overhead expenses 10% Rental Value 17%
Seed 5%
Sprays 13% Fertilizer 10%
Power & Machinery 26%
Labour 19%
Source: Farm Management Pocketbook John Nix 2004
Fertilizer cost is small compared to total grain production cost

Particularly in the developed world, the fertilizer cost is quite small compared to the total production cost of grain. This, in addition to the high return on investment of using fertilizer, explain why fertilizer is relatively price inelastic and less dependent on farm economy than other farm inputs.
Energy creation and fixation of carbon dioxide by the use of mineral fertilizer
Yield response (monetary value) to N fertilizer rate
Energy creation
140 120 100 GJ/ha grain 80 60 40 20 0 -20 -40
ton CO2/ha 25 20 15 10 5 0 -5
Energy balance
CO2 fixation
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CO2 balance
Without nitrogen
With nitrogen fertilizer
Without nitrogen
With nitrogen fertilizer
Source: Yara German field trials
Applying nitrogen mineral fertilizer produces energy and fixes CO2

The energy input, for production, distribution and application of fertilizer is around 8 GJ/ha, while 55GJ/ha more energy is produced due to higher grain yield. The energy benefit is 7 times higher than the cost. In addition, CO2 is removed from the atmosphere by plants. An extra 11 ton of CO2 per hectare is fixed in the biomass, while the emission in the production, distribution and application process is only 0.4 ton per hectare. Mineral fertilizer thus contributes to reducing CO2 emissions when the biomass is burned, and fossil energy is saved. In this example 170 kg/ha nitrogen fertilizer was applied in German field trials.
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Nitrogen the most important nutrient

Nutrient characteristics
Primary benefit Potassium (K) Phosphorus (P) Application Annual application not always done Annual application critical Industry structure Fewer suppliers, production discipline
17% 24%
Improve crop quality
Nitrogen (N)
59%
Increase crop size Most important and commonly lacking nutrient
Total 145.6 million nutrient tonnes
Industry more fragmented, under consolidation More volatile prices, but stable volume
Source: IFA statistics season 2003/2004
Among the major plant nutrients, nitrogen is the most important for higher crop yields
The fertilizer market is composed of three main nutrients nitrogen, phosphorous and potassium. Nitrogen is by far the largest nutrient, accounting for 60% of total consumption, and Yara is the leading producer of this nutrient. Phosphorus (phosphate) and potassium fertilizers are primarily applied to improve crop quality. Although balanced fertilization is recommended, annual application is not always done, as the soil absorbs and keeps these two nutrients for a longer period compared with nitrogen. There are fewer large suppliers of phosphate and potash fertilizers, as phosphate rock and potash mineral deposits are only available in certain regions of the world. When comparing phosphate with potash, the potash industry is the more consolidated one. Nitrogen is mainly used to increase the crop size or biomass, and must be applied every year. Nitrogen fertilizers are produced in many countries, reflecting the wide availability of key raw materials - natural gas and air, needed for its production on an industrial scale. The global nitrogen market is therefore less consolidated, but some regions such as Europe and the US have undergone significant restructuring of the nitrogen industry during the past years.
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Nitrates vs. urea

Nitrate is the most important fertilizer in Europe
Nitrogen in ammonium and nitrate forms are readily available to plants, while urea needs to be transformed
Plant uptake
Urea
Ammonium
Nitrate
Hydrolysis
Nitrification
Nitrate is the most important fertilizer in Europe

Ammonia (NH3) is the basis for all nitrogen fertilizers and it contains the highest amount of nitrogen (82%). Ammonia can be applied directly to the soil, but for several reasons, including environmental, it is common to further process ammonia into, e.g., urea or nitrates before application. If ammonia is applied directly to the soil, it will be converted to ammonium (NH4) and nitrate before plants can use it as a source of nitrogen. While ammonium and nitrate are readily available to plants, urea first needs to be transformed to ammonium and then to nitrate. The transformation process is dependent upon many environmental and biological factors. E.g., under low temperatures and low pH (as seen in Europe), urea transformation is slow and difficult to predict with resulting nitrogen and efficiency losses. Nitrates, in comparison, are readily absorbed by the plants with minimum losses. Therefore, nitrates are widely regarded as a quality nitrogen fertilizer for European agricultural conditions, which is reflected by their large market share.
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Fertilizer characteristics: Organic compared to Mineral fertilizer

Characteristics
Nutrient source Nutrient concentration Nutrient availability Quality
Organic fertilizer
Crop residues and animal manures Low concentration Variable
Mineral fertilizer
Nitrogen from the air and minerals from the soil High concentration
Immediately available for the crop Traceable and consistent
Often inconsistent
Organic fertilizer contains the same inorganic molecules as mineral fertilizer

Crops can be fed with mineral or organic fertilizers (manure), and in both cases the crop will utilize the same inorganic molecules. A complete nutrient program must take into account soil reserves, use of manure or fertilizers, and an accurate supplement of mineral fertilizers. Manures build up the organic content of soil and at the same time support beneficial micro flora (e.g., bacteria) to grow on plant roots. The efficiency of organic fertilizer is dependent on an appropriate bacteria content in the soil. The right bacteria break down the organic content in manures and supply them as nutrients for plant growth. But the quality and quantity of nutrient supplied to plants via this process is inconsistent and is very much dependent upon the vagaries of soil and climatic factors. Plant productivity achieved by supplying organic matter is low compared with mineral nutrients supplied in the form of fertilizers. Organic fertilizers or manures are often bulky making them difficult to handle. Transporting manures is expensive and therefore, their use is mostly limited to locations where they are produced. In contrast, mineral fertilizers offer concentrated, immediately available nutrients, with a consistent nutrient content. They can also be handled safely and transported relatively cheaply to any part of the world.
13
The basis for mineral fertilizer: Energy, ammonia and natural minerals
Nitrogen (N) from air Ammonia Natural gas

Natural minerals: Phosphorus (P) Potassium (K)
Finished products:
Urea, UAN Nitrates (CAN, AN) NPK Specialty fertilizers Industrial products
Industrial production of fertilizers involves several chemical processes

The basis for producing nitrogen fertilizers such as urea, nitrates and NPK is ammonia. Ammonia is produced in industrial scale by combining nitrogen in the air with hydrogen in natural gas, under high temperature and pressure and in the presence of catalysts. This process for producing ammonia is called the HaberBosch process. Phosphorus is produced from phosphate rock by digesting the latter with a strong acid. It is then combined with ammonia to form Di-ammonium phosphate (DAP) or Mono-ammonium phosphate (MAP) through a process called ammonization. Potassium is mined from salt deposits. Large deposits of potash is found in Canada and Russia, which are also the worlds major producers of this nutrient. Phosphate and potash are sold separately or combined with, e.g., nitrogen, to form NPK fertilizers. The side streams of the main production process (e.g. gases, nitrogen chemicals) are fully utilized by Yaras specialty fertilizer and industrial products businesses.
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List of contents

Ammonia Urea

The global industry

Due to the transportability of fertilizers, the industry is highly global meaning that the price of a standard fertilizer like urea is nearly the same everywhere when correcting for transportation costs. Consequently, it becomes important to focus on global issues and supply-demand balances rather than regional ones.
15
The fertilizer market in comparison
Fertilizers
70
Ethylene Agrochemicals and seeds Paper chemicals 14
60
40
USD billion
Source: Chemical Economic Handbook 2002, SRI, Phillips McDougall
The fertilizer market is large and global

The fertilizer market is a large, global market worth around USD 70 billion in terms of sales, in which Yara holds the leading position. This is almost twice as large as the global agrochemicals market. The fertilizer market is not only a significant market in terms of size, but is also an essential industry serving global food production. Grains are the largest end-market for fertilizers (~60%), followed by cash crops (~20-25%), such as vegetables, fruits, vines and flowers. In order to understand the fertilizer market, it is therefore necessary to understand both the grain market and the market for cash crops. In addition, fertilizer products are used in other industrial applications. Ammonia is used in the production of caprolactam, a key ingredient for the synthesis of nylon. Urea has several technical applications, the latest being its application for reduction of NOx gases from diesel trucks. Nitrate-based products are used in several environmental applications and technical grade ammonium nitrate is used as a civil explosive in the mining activities of coal and metal industries.
16
Consumption per nutrient
100 90
Million Tonnes Nutrient
80 70 60 50 40 30 20 10 0
1.7% per year
P K
2.7% per year
2.7% per year
2004E
2006E
Source: IFA
Nitrogen is the largest nutrient with an expected annual growth of 1.7% per year
The fertilizer markets will continue to grow, due to higher population and improved diet. In addition, industrial use will increase. Examples are bio energy and reduction of NOX emissions. The International Fertilizer Association (IFA) forecasts the fertilizer demand growth for nitrogen at 1.7% per year up until 2008. A higher growth rate of 2.7% a year is estimated for phosphate and potassium. The difference is mainly due to the fact that nitrogen historically has grown more than the other nutrients due to the immediate and significant benefits of this nutrient. It is expected that the others will catch up going forward. Note that the expected consumption growth of each finished nitrogen fertilizer product is different from the general nitrogen growth as some products are expected to grow more than others, e.g., for urea a higher growth rate is expected as this product is taking market share from other nitrogen products.
2008E
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
17
Nitrogen consumption per continent

60 50
Million Tonnes Nutrient
2.4% per year
40 30 20
Asia
Europe (EU 25) North America Latin America
0.6% per year 0.5% per year 3.3% per year
10 0 1993 1995 1997
1999
2001
2003
2005E 2007E
Source: IFA
Asia is the largest fertilizer market, but Latin America has the highest growth rate
Asian share of global fertilizer consumption is 54%, and still growing. Developments in Asia will continue to play a major role in how the global fertilizer market will develop. Demand in Latin America has been increasing quickly due to the strong development in the agricultural sector. But in volume terms, it is still at a fairly low level. Growth is expected to continue. Consumption in the mature markets of North America and Europe is stable, and forecasted to stay stable.
18
Key global fertilizer product categories

Nitrogen N
NPK 9% Other 30 % Urea 51 %
Potash K2O
Other 8%
AN/CAN 10 %
Phosphate P2O5
Other 34 % DAP/MAP 43 %
85 million tonnes
NPK 28 % MOP 64 %
23 million tonnes
NPK 23 % 33 million tonnes
Source: IFA statistics season 2002/2003
Key products for pricing of the nutrients nitrogen, phosphate and potash are urea, DAP and MOP
In order to follow price developments for nitrogen, phosphorus and potassium products, urea, DAP and MOP should be used. They have a large market share and are widely traded around the globe. Urea contains 46% nitrogen, and its market share is increasing. The majority of new nitrogen capacity in the world is in urea. DAP contains 46% phosphate, measured in P2O5 units, as well as 18% nitrogen. MAP is a similar product, the main difference being that the nitrogen content is only 11% MOP is potassium chloride containing 60% potash, measured in K2O units.
19
Nitrogen fertilizer demand 5 key countries

USA
Other 10% UAN 26% Urea 20% Nitrates (CAN/AN) 4% NPK 13%
France
Other 7% Urea 10% ABC 25% Nitrates (CAN/AN) 43% NPK 13%
China
Other 5%
UAN 27%
Ammonia 27%
Brazil
DAP/MAP 14%
NPK 8%
India
Other 11%
NPK 8% Nitrates (CAN/AN) 2%
Urea 60%
AS 16% NPK 5% Nitrates (CAN/AN) 18%
Urea 47%
Urea 81%
Source: IFA 2002/03
Countries show different preferences for use of nitrogen products - China and India predominantly use urea as main source of nitrogen
There is considerable difference in the product mix for different regions/countries in the world. Urea, the fastest growing nitrogen product, is particularly popular in warmer climates. UAN is mainly used in Europe and North America. Nitrates are mainly used in Europe. In China, urea is the most popular. China is also the only country in the world using ammonium bicarbonate (ABC) to any degree. ABC has 25% market share in this country.
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Fertilizer market by application

Wheat 18% Other 32%
Rice 17%
Cotton 3% Fruit&Vegetables 6% Other cereals 7%
Corn 17%
Source: FAO
The three large grain crops, wheat, rice and maize (corn) consume about half of all fertilizer used in agriculture
The fertilizer market is not only a significant market in terms of size, but also an essential industry serving global food production. Grain production is the most important agricultural activity in the world, with the global output exceeding two billion tonnes in 2004. To achieve this scale of production would not be possible without intensive agriculture and use of mineral fertilizers. Therefore, grains are naturally the largest end-market for fertilizers (~60%) this is followed by cash crops (~20-25%), such as vegetables, fruits, flowers and vines. However, in order to get a good understanding of the fertilizer market, it is necessary to understand both the grain market and the market for cash crops.
21
Fertilizer company comparison 2004 revenues*
Yara Mosaic** Potash K+S Agrium ICL Terra GrowHow (Kemira) 0 1

1.5 1.9 3.2 3.2 3.0 2.7 4.5
6.4
10
USD billion
* For companies reporting in EUR, revenues are based on average USD/EUR rate for the year 2004: 1.25 ** Mosaic pro forma figures for year ending 31 May 2004.
Yara is the largest fertilizer company measured by revenues

Other fertilizer-producing companies include: Sinochem (China), IFFCO (India), Eurochem (Russia), Phosagro (Russia), SAFCO (Saudi Arabia), Egyptian Fertilizer Company (EFC) and Arab Fertilizer and Chemicals Company (AFCCO) (Egypt), Uralkaly and TogliattiAzot (Russia), Cherkassy (Ukraine) and Koch (US)
22
Return on capital for chemical companies

Gross return on assets* 2002
Air Products Yara** BASF K+S DuPont Kemira Syngenta Agrium IMC PCS Dow 0 17.3 16.4 15.2 14.4 12.7 12.0 11.0 9.8 9.6 8.2 7.3 10 20 30
Yara** Agrium BASF Air Products K+S Kemira Syngenta Dow DuPont PCS IMC
0
2003
17.4
17.4 16.2 15.2 13.7 12.6 11.1 10.2 10.2 9.1 7.5 10 20 30
2004
BASF Yara** Agrium Air Products K+S PCS Kemira GrowHow DuPont Dow Syngenta Mosaic***
0 7.0 10 20 30 21.7
21.4
20.2 16.6 14.9 14.1 13.9 12.4 12.4 12.2
* Gross return on assets defined as EBITDA (excluding non recurring items) divided by Total assets (book value) ** Yara pro forma numbers *** Mosaic from 01 June 2003 to 31 May 2004, pro forma
Source: Company reports
Fertilizer industry performs at least as well as the chemical industry when comparing return on capital
Yaras primary financial goal is to deliver a good return on capital to its shareholders. Since year 2000 Yara has benchmarked its Gross return on assets against a defined group of chemical peers, including both leading fertilizer companies and other chemical companies. From the comparisons one can see that there is no systematic difference between fertilizer and other chemical companies, and there is also no systematic difference between nitrogen fertilizer companies and potash/phosphate fertilizer companies, although both nitrogen-focused Yara and Agrium have performed well during the period. Position within the industry is more important than the characteristics of the industry per se.
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Yara the leader in nitrogen fertilizers

Global no 1 in ammonia
Production capacity* (mill t)
6 5.1 4.7 4.1 4 3.0 4.1
Global no 1 in nitrates1
Production capacity (mill t)
6 4.6 4
Global no 1 in NPK complex fertilizer

Production capacity (mill t)
4 3.7
2.3 2
2.1
2.0 1.7 1.5
1.5
1.4
1.4
0
ra r ra ch S m PC Ya r iu Ko Te
0
ra n ir a M y ro Ya ss DS m Ac ka
0
* GP ir a n ro Ac ra Ya m
Ke
Ag
* Incl. companies shares of JVs Source: Fertecon
CAN and AN Source: British Sulphur, EFMA
Ch
er
* Not including Rossosh Source: Nitrex-Complex
Measured in terms of production capacity, Yara is the global no. 1 both in ammonia, nitrates and NPK
Yaras position gives it unique opportunities to reap economies of scale and spread best practices across a large network of similar plants, and forms part of the explanation for Yaras competitive returns.
Ke
Po
l ic
24
Diversification of fertilizer companies nitrogen product portfolios

Nitrogen product portfolio
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Ammonia Nitrates UAN Urea Ammonia Ammonia Ammonia Urea Urea Urea NPK 19.6 mill t 5.4 mill t Other Nitrates UAN UAN 5.4 mill t 6.7 mill t Nitrates
Nitrates
Yara
Agrium
PCS Nitrogen
Terra
Source: Annual reports of companies
Yara is the most diversified nitrogen fertilizer company

In 2004, Yara sold 19.8 million tonnes of N-based fertilizer products and 2.05 million tonnes of other non-nitrogen products. Yaras product portfolio is wellbalanced with NPKs accounting for 36% of sales volumes, nitrates 31% of sales volumes and urea 18% of sales volumes. Nitrates and NPK are more differentiated products than ammonia, urea and UAN. On average, nitrates and NPK command higher margins as they provide superior customer benefits. NPK can be tailored according to the needs of every climate, crop and soil making it the ideal fertilizer for demanding cash crops where the fertilizer quality makes a large difference. In addition, Yara provides fertilizers for all four types of application: 1. Dry fertilization 2. Fertigation (dissolvable fertilizer) 3. Liquid fertilizer 4. Foliar fertilization (absorption through leaves)
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List of contents

Ammonia Urea

The European industry

As Yara has approximately 50% of its fertilizer sales in Europe, this is a market of particular interest for Yara. However, the European market is still heavily influenced by the global supply-demand balance which is more important than regional issues.
26
European (EU 25) nitrogen fertilizer market
Nitrate the preferred fertilizer
Yara the leading player
NPK 19%
Urea 18%
Imports 22%
Yara 20%
Other 20% Nitrates (CAN/AN) 43%

Other Europe 58%
11.3 million tonnes of nitrogen
Source: EFMA 2003/2004 season
Nitrate is the preferred fertilizer in Europe with Yara being the leading supplier
Europe (EU25) consumes about 11.3 million tonnes of nitrogen, out of which 42% is in the form of nitrates (like CAN or AN). NPK fertilizers as a product category, occupies second place and urea, the third. Yara is the leading fertilizer company in Europe, with approximately 20% of the market. Yara is mainly active in West Europe, with a 24% market share. In West Europe the total market is 9.2 million tonnes.
27
Nitrate capacity and nitrate fertilizer consumption in West Europe

7,000 6,000
Capacity
5,000 kt nitrogen 4,000
Consumption
3,000 2,000 1,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: EFMA
Improved market balance in West Europe due to closure of excess capacity

The restructuring of the West European (EU 15) nitrate industry in the late 1990s has resulted in a significant reduction in excess nitrate capacity. The decline in capacity is stronger than the decline in consumption, leading to additional need for imports. As there is only a small number of fertilizer companies with a long-term focus in the European market, several plants owned by non-fertilizer firms that are poorly maintained could be candidates for closure in the years to come.
28
Net nitrogen imports to West Europe
2,500 2,000 kt nitrogen 1,500 1,000 500 0

19 99 20 00 20 01 20 02 20 03 20 04
Source: EFMA
Imports play an important role in meeting the fertilizer demand in Europe

Imports to West Europe have shown an increasing trend over the last decade, as capacity closures in West Europe have exceeded the decline in consumption. During last season (2003/04), imports increased due to a rebound in demand. Demand increased due to low grain stocks following the small 2002/03 crop, and subsequently higher grain prices. As the West European industry was already running at high utilization rates, the added volumes had to be imported. The 2004/05 season (not shown in graph) consumption shows the opposite development, as grain prices are lower due to last year's record harvest. The introduction of the CAP reform is also contributing to somewhat lower demand. Imports will be less, whereas the domestic industry will continue to run at a high utilization rate and gain market share from imports. As the fertilizer market is global, exporters will rather sell their product elsewhere than to undercut prices in West Europe.
19 94
19 95
19 96
19 97
19 98
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Yara the European low cost leader

Production cost index: 100 = European EFMA average excl. Yara Ammonia cost position Index
100 80 60 40 20 0 2000 2001 2002 2003
102 91 90 93
Nitrate cost position* Index Index

100
87 87 91 80
NPK cost position
100 80 60 40 20 0 2000 2001 2002 2003
100 90 89 85
80 60 40 20 0
2000 2001 2002 2003
Average cost Yaras European plants European average (excl. Yara)

* Nitrate cost increase due to ammonia price increase, and Yaras larger share of non-integrated plants
Source: EFMA
Yara benefits from a favorable cost position in its European home market for all its core products
Ammonia. Yara has established a stable cost position 5-10 percent below European competitors. The relative position is negatively influenced in 2003 by improvement in average other EFMA due to closure of least productive plants (IFI Cork). Yara had lower production in Sluiskil in 2003 due to turnaround and unscheduled stops. As Yaras gas costs are heavily linked to LSFO, the relatively high LSFO prices in 2003 compared to other oil products, had a negative effect. Nitrates. Also nitrate costs were affected by the fire in Sluiskil in 2003. The ammonia price increase affected the relative position as Yara has a relatively high share of non-integrated nitrate plants. This effect was strengthened by the productivity increase in competitors non-integrated plants. NPK. Increasing ammonia prices in 2003 made the own production of ammonia in Porsgrunn more valuable, and improved the relative cost position compared to non-integrated NPK plants. Contribution also came from productivity improvements.
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List of contents

Ammonia Urea


This section describes in more detail the competive forces and product flows of the main nitrogen products.
31
Nitrogen fertilizer industry fundamentals

Porters Five Forces Analysis
Substitutes: Low Organic fertilizers only relevant where land or wealth surplus
Buyer power: Moderate National/regional distributors/ coops Need security of supply Suppliers power: Low Raw materials readily available
Attractive cash flow through the cycle for industry leaders
Competition: Moderate to High Regional fragmentation (consolidation in progress) Limited differentiation Separate regional dynamics
Entry barriers: Moderate Basic technology available, but: Capital intensive Economies of scale required Low cost energy only in some regions Transportation costs
Industry leaders have attractive cash flows through the cycle

Basic technology for nitrogen fertilizer production is widely available and the industry is quite fragmented. This means that barriers to entry are low. However, to generate sufficient cash flows and remain profitable in the fertilizer business, the following are critical: Access to cheaper sources of natural gas (stranded gas locations) Proximity of production locations to ports for efficient logistics Ability to ship, distribute and sell products to customers globally Economies of scale in operations (production and distribution) Yara is the worlds biggest producer of fertilizer and has infrastructure points in 160 locations around the world. With sales to more than 120 countries, Yara also has a unique global distribution that is unmatched in the industry.
32
Potential industry concerns and associated mitigants

Weaknesses and risks
Over-investment at the top of the cycle Weak players/lack of focus
Mitigating factors
Industry participants more rational, private investments replacing state funds Spin-offs from chemical/energy companies followed by consolidation US gas prices could remain higher due to lack of pipeline capacity from Caribbean region and higher LNG costs WTO accession Operational excellence Increased management awareness of risk management
Spread between gas prices in the US and Europe
International trade restrictions Regulatory regimes Terrorism, accidents, country, customer and currency risk
Fertilizer industry is getting more consolidated and marketorientated

In the past, the fertilizer industry has been affected by state funds driving investments from a food security point of view rather than from a business point of view and by weak fertilizer companies that existed as part of governmentowned enterprises or conglomerates. As the state involvement is going down and conglomerates are cleaning up their portfolio, there is a trend towards consolidation and more profit orientation across the whole industry. This development is strengthened by WTO and EU enlargement which secures more and more equal terms for all industry players. Since 1999 there has been a significant spread between US and European gas prices due to little new US gas supply. Due to the lack of pipeline capacity into the US and new supply from the US Gulf, the forward market expects this trend to continue. Although European gas prices are expected to increase, there are more gas and pipelines coming into Europe, leading the forward markets to believe that a gap will be sustained.
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List of contents

Ammonia Urea

Ammonia
Ammonia is the key intermediate product in the production of all nitrogen fertilizers. A strong ammonia position and understanding of the ammonia market is key for a leading nitrogen fertilizer company.
34
Ammonia production
140 120 100 80 60 40 20 0
Total production
40 35
Million tonnes ammonia
10 largest producers
30 25 20 15 10 5 0
Indonesia Germany Pakistan Ukraine Canada China Russia Trinidad India USA
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1994-2003 average annual growth rate = 1.2%
Source: IFA 2003
China is the largest ammonia producer

Ammonia is the key intermediate for all nitrogen fertilizer products and large nitrogen-consuming countries are also large producers of ammonia. Ammonia is predominantly upgraded to other nitrogen products at its production site. Only 13% of the ammonia produced globally is traded. In 2003, ammonia production reached 132.7 million tonnes, an increase of 1.3% compared to the previous year. The trend from 1994 to 2003 shows a growth rate of 1.2% per year. Of total nitrogen produced, 78% is used as fertilizer, and 22% as non-fertilizer (CRU estimate). Of all the ammonia produced, 17% is consumed for nonfertilizer use directly (Fertecon estimate).
35
Ammonia trade
18 16 14
Total world trade
12 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
Yaras trade
Yara has close to one third of global ammonia trade

In 2003, world ammonia trade increased by 8% to reach 16.8 million tonnes There are four main categories of customers for traded ammonia. Firstly, the main phosphate fertilizers DAP and MAP (also some NPK's ) consists of nitrogen as well, ammonia is often imported, as the regions with phosphate reserves lack nitrogen capacity. Secondly, some of the nitrate capacity is also based on purchased ammonia. Thirdly, there is a substantial industrial market for imported ammonia. The fourth category, direct application on the field, is only common in USA. It is important to note that urea capacity is always integrated with ammonia , as urea requires CO2 which conveniently is a by-product in the ammonia process. Yaras leading position in ammonia trade gives it a good overview of the global supply / demand balance of ammonia and enables the company to make better business decisions.
36
Positions in global ammonia trade and shipping

Trade (cfr sales)*
5 4 3 2 1 0 4.5 2.3 1.8 Million mt
Tap strategic and higher value markets

1.6 1.4 1.1
Capture arbitrage opportunities through flexibility in transport and timing
Nitrochem
Yara
Trammo
Koch
Mitsui
PCS
Shipping capacity
300 250 200 150 100 50 0 264
Maritime storage capacity

600 500 400 300 200 100 0 506 332 191 180 151
1000 mt
106
102
96
80
1000 mt
Yara
Agrium
Pemex
* Total Yara deep sea trade 2004. When incl. cfr purchases, Yara has 5 million tonnes. Source: Fertecon. For shipping capacity: various brokers; For maritime storage: IFA
Yara is the clear global no. 1 not only in ammonia trade, but also in shipping capacity and storage.
This is important because it enables Yara to do trades and enter long-term agreements requiring access to an extensive global distribution network. Yaras ammonia shipping needs are covered with a balanced combination of 15 ships split on fully-owned ships, JVowned ships and long-term bare boat and time charters. Due to Yaras size in the ammonia market, the limited number of suppliers of ammonia shipping capacity and the special nature of ammonia relative to other gas liquids, Yara is able to have a high capacity utilization and extract significant cost synergies.
Terra
Koch
Yara
Nitrochem
Trammo
PCS
Mitsui
37
Global ammonia trade

10 largest importers
7 6
M illio n to n n e s a m m o n ia
10 largest exporters
7 6
M illio n to n n e s a m m o n ia
5 4 3 2 1 0 N e th e rla n d s T rin id a d S a u d i-A ra b ia In d o n e s ia U k ra in e Canada A lg e ria USA R u s s ia Q a ta r
5 4 3 2 1 0 B e lg iu m G e rm a n y T u rk e y USA T a iw a n F ra n c e S p a in In d ia M o ro c c o K o re a
Source: IFA 2003
Trinidad is the worlds largest ammonia exporter

The large ammonia exporters in the world have access to cheap natural gas, the key raw material for its production. Trinidad has large natural gas reserves and also lies in close proximity to the worlds largest importer of ammonia, the US. Trinidad has large stand-alone ammonia plants and excellent maritime facilities that cater to its export market. Yara owns two large ammonia production facilities in Trinidad. The countries in the Middle East also have some of the worlds largest reserves of natural gas. The Qafco fertilizer company in Qatar, also produces significant amounts (approximately 2 million tonnes) of ammonia, but Qafco owns the worlds largest ammonia-urea integrated fertilizer manufacturing sites (four plants in total) and hence, most of the ammonia produced in Qafco is upgraded into urea. Therefore, Qafco is a major exporter of urea and there is a relatively small surplus of ammonia left for exports. In USA, imported ammonia is used for both DAP/MAP production, for various industrial applications and directly as a nitrogen fertilizer. India uses its imported ammonia mostly to produce DAP.
38
Main ammonia flows

Million tonnes
1.3 0.8 1.8 0.5 3.7 1.9 0.4 0.7 0.6 1.0 0.5
Source: IFA 2003
79% of the ammonia trade happens on the specific routes shown in the map, mainly from countries with cheaper gas
The key centre for ammonia trade is Yuzhnyy in the Black Sea. This is the most liquid location, and where most spot trades take place. Russian and Ukrainian ammonia is sold wherever netbacks are the highest, and since they are key suppliers to USA, Europe and Mediterranean, relative pricing for the various locations West of Suez is very stable. Asia is almost in a balanced situation. If there is a deficit, imports from the Black Sea are necessary, and fob prices in Asia increase. If there is a surplus, Asian exporters have to compete West of Suez, and Asian fob price levels suffer.
39
List of contents

Ammonia Urea

Urea
Urea is the largest finished nitrogen fertilizer product and is traded globally. Even though many markets prefer other nitrogen fertilizers for better agronomic properties, urea is the commodity reference product with an important influence on most other nitrogen fertilizer prices.
40
Urea production
140 120
Total production
40 35
Million tonnes urea
10 largest producers
100
Million tonnes urea
30 25 20 15 10 5 Saudi-Arabia Bangladesh 0 Indonesia Pakistan Canada Ukraine China India USA Russia
80 60 40 20 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
1994-2003 annual average growth rate = 3.5%
Source: IFA 2003
Urea is the main nitrogen fertilizer product. Approximately 50% of all ammonia is upgraded into urea
Urea production is estimated at 115.3 million tonnes in 2003. During the years 1994-2003, urea production grew at 3.5% per year. The largest producers are also the largest consumers, namely China and India. Both countries are basically selfsufficient on nitrogen fertilizer. Most of the new nitrogen capacity in the world is urea, so it is natural that the production/consumption growth rates are higher for urea than for ammonia/total nitrogen. Lately, the difference has been quite large, since urea has taken market share, particularly from ammonium bicarbonate in China. In addition, a major share of the capacity shutdowns in high energy cost regions have been standalone ammonia plants. As urea has a high nitrogen content (46%), transport is relatively cheap. In addition, demand growth is to a large extent taking place in climates where urea is suitable. 90% of all urea is consumed as fertilizer, whereas the remaining 10% is used for technical applications (CRU estimate).
41
Urea trade
30
25
Million tonnes urea
20
15
10
0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Source: IFA 2003
Urea is a global fertilizer and is more traded than ammonia

Urea trade increased by 10% in 2003 to 28.3 million tonnes, which is 25% of all urea produced. Trade has increased, as regions without a lot of urea capacity, like Latin America and South-East Asia, have increased demand.
42
Urea trade
6 5
M illio n to n n e s u re a
6 5
M illio n to n n e s u re a
10 largest exporters
10 largest importers
4 3 2 1 0 S a u d i-A ra b ia U k ra in e Egypt In d o n e s ia R o m a n ia Canada C h in a R u s s ia Q a ta r USA
4 3 2 1 0 P h ilip p in e s T h a ila n d B ra z il A u s tra lia V ie tn a m M e x ic o T u rk e y USA Ita ly K o re a
Source: IFA 2003
Natural gas-rich regions generally tend to be big exporters of urea

The main urea exporters are gas rich countries/regions with small domestic markets. There are some exceptions though. China has a huge domestic capacity. Although the main purpose is to supply the domestic market, smaller deviations in the domestic balance creates large waves in the global market when the domestic surplus is exported and deficit is made up by imports. Other key exporters, that also have a substantial domestic market, tend to reduce their export over time. Indonesia is a good example. North America, Latin America and South-East Asia are the main importing regions
43
Main urea flows

Million tonnes
1.3 1.4 2.2 0.9 4.4 0.9 3.3 1.8 0.9 1.0 0.5 2.2 0.6
Source: IFA 2003
Trade pattern shown (22 million tonnes) represents 76% of global trade
There are two main hubs to follow in the urea trade market, Black Sea and Arab Gulf. These flows determine the global prices. Black Sea supplies Europe and Latin America, while Arab Gulf supplies North America and Asia/Oceania. All the other flows, of more regional nature, like Venezuela to USA, Indonesia to other Asian countries etc, are only interesting to the extent they affect the need for Black Sea/Arab Gulf material. As an example, if China reduces its export, the Arab Gulf is not able to supply Asia on its own. Black Sea urea will flow to Asia, and an upward price movement will take place. The relative pricing between Black Sea and Arab Gulf depends on where they compete on the marginal volume. If the main drive is from Latin America/Europe/Africa, Black Sea will lead. If it is Asia/North America, Arab Gulf will lead. It is wise to follow price quotations for both locations.
44
10 largest urea producers

7,000 6,000 5,000
Million tons urea
4,000 3,000 2,000 1,000 0 Sinopec IFFCO
Agrium
Kaltim
NFC
Pusri
CF
JV ownership included for Agrium, Yara and CF
Qafco
Yara
Source: CRU(2004) capacities
The largest urea producers in the world are found in China and India
Both China and India are large producers and consumers of urea as this fertilizer is considered highly suitable to its agricultural conditions. Both countries are basically self-sufficient on nitrogen fertilizer, with China exporting approximately 4 million tonnes of urea in 2004.
RCF
45
List of contents

Ammonia Urea


This section describes how the economic mechanisms of the fertilizer industry work and what determines fertilizer prices and company profits.
46
Nitrogen fertilizer revenue drivers

Drivers Effect on
US gas price Grain inventories/prices New urea capacity vs. closures Global urea demand vs. supply Urea price Market segmentation
Floor price for urea Urea demand Urea supply Urea price (above floor) Most other nitrogen fertilizer prices Value-added margins
Main revenue drivers are the raw material costs for swing producers and grain inventories/prices
Since 1999 the US gas price has established a floor price for the ammonia price due to US producers going in and out of the market. In general, when energy prices are relatively high and/or demand relatively low, there tends to be a supply economy where there is a price floor established that indirectly determine fertilizer prices. On the other hand, when fertilizer demand is high and/or energy prices are low, there is typically a demand economy driving fertilizer prices well above the minimum prices determined by energy costs. During such times, fertilizer prices can be very high as the customer benefits from fertilizer generally are much higher than production costs. What finally determines the urea price, which again drives other nitrogen fertilizer prices, is the fertilizer market balance where capacity utilization is the key factor. Both Yaras Downstream and Industrial segments offer (differentiated) products and services to different market segments. These segments are largely unaffected by energy prices and fertilizer prices and have margins driven by the ability to offer a superior product to targeted customer segments.
47
Nitrogen fertilizer cost drivers

Drivers Effect on
Oil product prices Manning Economies of scale
Gas cost in Europe Fixed cost Unit cost
Location and economies of scale greatly influence cost drivers

Yaras gas consumption in fully-owned plants is approximately 145 million MMBtu. With an average gas cost in fully-owned facilities around USD 4 per MMBtu, this means Yaras annual gas cost was close to NOK 4 billion at a NOK/USD rate of 6.90 in 2004. Other raw materials than gas/oil products are mainly P and K in addition to finished fertilizers for resale. Potential price changes for P and K going into NPK production are over time passed on to customers through changed NPK prices. Manning has a direct impact on fixed costs. For a company like Yara, continued focus on decreasing fixed costs and at the same time improving operational effectiveness to increase productivity is important to maintain competitiveness.
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49
Key value drivers 10-year history

Ammonia fob Caribbien (USD/t)
300 251 250 200 150 100 50 0 95 96 97 98 99 00 01 02 03 04 197 185 160 117 91 148 137 110 203 200 180 160 140 120 100 80 60 40 20 0
Urea prilled fob Black Sea (USD/t)

187 181 139 117 84 67 101 96 94 175 180 160 140 120 100 80 60 40 20 0
CAN cif Germany (USD/t)

167 163 146 124 110 86 103 119 111 165
95
96
97
98
99
00
01
02
03
04
95
96
97
98
99
00
01
02
03
04
US gas price Henry Hub (USD/MMBtu)

7 6 5 4 3 2 1 0 95 96 97 98 99 00 01 02 03 04 1.7 2.8 2.5 2.1 2.3 4.3 4.0 3.3 5.5 5.9
Oil Brent blend spot (USD/bbl)

45 38.2 40 35 28.4 28.4 30 24.4 24.8 25 20.7 19.1 17.8 20 17.0 12.6 15 10 5 0 95 96 97 98 99 00 01 02 03 04 10 9 8 7 6 5 4 3 2 1 0
NOK/USD exchange rate

8.8 9.0 6.3 6.5 7.1 7.5 7.8 8.0 7.1 6.7
95
96
97
98
99
00
01
02
03
04
Average prices 1995 - 2004
Source: International publications, CERA, Hydro, World Bank, Norges Bank
Fertilizer cyclicality is similar to oil

Fertilizer prices are cyclical just like any other commodity. The cyclicality is primarily caused by the lumpiness in supply additions resulting in periods of overcapacity and undercapacity. Comparing the 10 year price history of nitrogen fertilizer products in the top row with oil in the bottom row, one can see that the cyclicality is similar and to some extent correlated. This is not surprising as the main cost involved in producing ammonia and nitrogen fertilizer is feedstock in the form of oil and gas.
49
List of contents

Ammonia Urea

Drivers of demand
The main driver of demand for fertilizer is peoples demand for food which translates into demand for grain and other farm products.
50
Drivers for increased nitrogen consumption

Fertilizer consumption
Population growth Economic growth More meat consumption in developing countries Focus on diets rich in proteins More fruit and vegetables Reduce hunger Biofuels
Industrial consumption
Economic growth Environmental limits (e.g. reduction of NOx emissions)
Nitrogen growth is expected to be higher than global population growth

Population growth and economic growth are the main drivers for increased fertilizer consumption. Industrial consumption of nitrogen is mainly driven by economic growth and environmental legislation.
51
Increasing population and reduced land available for food production per capita
Almost no increase in farmable land is possible
P opula tion (billion)
0.5
10 8 6 4 2 0 1960 1970 1980 1990 2000 2010E 2020E Hectares/person Population
H e c ta r e s /pe r s on
0.4 0.3 0.2 0.1 0.0
Increased standard of living leads to growing protein consumption per person, requiring more grain for animal feed
The only solution is to increase agricultural productivity
Source: IFA, Worldmarkets.com
Per capita arable land available for cultivation is decreasing, while demand for food keeps growing
The Food and Agriculture Organization of the United Nations (FAO) confirms that a key challenge for agriculture is to increase the productivity. Key ways of doing this is replacing nutrients removed with the harvest, improving resource management, breeding new crop varieties and by expanding agricultural knowledge.
52
World cereal production Land saved through improved technology

1,800 1,600 1,400 Million hectares 1,200 1,000 800 600 400 200 0 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004
Source: FAO
Cereal production: 1961: 877 million tonnes 2004: 2,252 million tonnes Land spared
Land used
Since 1960, the use of land for cereal production has been quite stable, while total grain production has increased by 150%
The increase is due to improved technologies, such as better farm practices, superior seeds, use of pesticides, and increased use of fertilizers. The roughly 1 billion hectares land saved through the improved yield would not have been available for food production, and global starvation would have been the consequence.
53
Mineral fertilizer essential to sustain future yield increases

1 tonne of grain requires ~25kg nitrogen
4.5 Tonnes of cereals per hectare 4 3.5 3 2.5 2 1.5 1 0.5 0
1960 1970 1980 1990 2000 2010E 2020E
Mineral fertilizer
Increased production of mineral fertilizers necessary to meet future nutrient demand Limited potential of recycling organic material Nutrient reserves in the soil do not increase
Organic fertilizers Existing soil nutrients
Source: FAO, Worldmarkets.com, Yara
Mineral fertilizer essential to sustain future yield increases

In the quest to maintain increases in agricultural productivity, mineral fertilizer has a key role. While the nutrient reserves in the soil do not increase and recycling of organic material is not sufficient for additional growth, increased production of mineral fertilizer is what really can make a difference. Since 1960 the expanded use of mineral fertilizer is the major reason why global cereal yields have increased, and this trend is expected to continue.
54
To increase productivity is only possible with full nutrient replacement

Production without plant nutrition is mining the soil
Fertilizer increases yield by 3-4 times
Photo: Dr. Paul Seward, maize in Kenya
No nutrient replacement
Nutrient replacement with fertilizers
Fertilizers increase yield substantially and enable food production without depleting valuable soil nutrients
Trials conducted without replacing nutrients show that the productivity of the land is dramatically reduced. This not only leads to low farmer income and food shortages, but also contributes to erosion and destruction of agricultural land. Effects of soil mining are reduced soil fertility poor yield soil compaction reduced humus content increased erosion
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56
Global grain balance

Million tonnes
2,100 2,050 2,000 1,950 1,900 1,850 1,800 1,750 1,700 1995 1997 1999 2001 2003 2005E
Source: FAO, April 2005
Consumption
Production
Grain production exceeded grain consumption in 2004 for the first time since 1999
FAOs estimates global grain production to go down in 2005-2006 after the record crop in 2004. If consumption increases or stays flat, this will lead to a reduction in global grain inventories in 2006 which normally supports a healthy demand for fertilizers.
56
Grain inventory relative to maize (corn) price
800
4 3
Million tonnes
700
Maize (corn) price
USD/bu
600 2 500
Grain inventory
400
300 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
Source: FAO, Blue-Johnson
Grain inventories are linked to prices and influence fertilizer demand

There is a logical correlation between grain stocks and prices as prices go up when stocks go down.
57
Total calorie consumption

All products Animal products
135 130 125 Index (1990=100) 120 115 110 105 100 95 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
135 130
Total
Index (1990=100)
Total
125 120 115 110 105 100 95 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
No change in diet
No change in diet
Source: FAO
The increase in total calorie consumption is driven by both population growth and by change in diet
Total calorie consumption in 2002 was 22% higher than in 1990 ( 1.7% yearly growth ), of which 80% explained by population growth. Calorie consumption from animal products in 2002 was 33% higher than in 1990 ( 2.4% yearly growth ), of which only 56% explained by population. Diet change is nearly as important a driver for demand growth for animal products as population growth.
58
Calorie consumption per capita per day

3,400 3,200
Developed countries
3,000 Calories 2,800 2,600 2,400 2,200 2,000 1990 1992 1994 1996 1998 2000 2002
Source: FAO
Developing countries
Higher calorie consumption has positive effects on fertilizer demand

Improved standard of living following economic growth increases demand for food and fertilizer, mainly in the "developing countries. The category "developed countries" covers 1.3 billion people, while the remaining 5 billion people are in the category "developing countries". Consequently, changes in eating habits in the "developing countries" have substantially larger effects then for the "developed countries.
59
Animal products consumption per capita per day

Developed countries Developing countries
130 125 120 Index (1990=100) Index (1990=100) 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 115 110 105 100 95 90
150 140 130 120 110 100 90 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Source: FAO
Change in diet in developing countries increases demand for fertilizer in these regions beyond what could be expected from population growth
The diet in the developed countries has not changed significantly since 1990. In the developing countries, the calorie intake has increased, with the contribution coming from more meat being included in the diet. This means that the per capita consumption of animal food increased particularly strongly. Per capita consumption of meat has increased by 40% since 1990. As the growth rate for animal products has been higher than for the total per capita consumption, there has been a shift from vegetarian products to meat products as well. As a consequence, grain production now has to meet the growing demand for feed in those countries. Since the availability of new arable land is limited, higher grain production has to come from higher productivity (yield per unit area). To achieve higher productivity, increased use of fertilizers will be necessary.
60
Meat consumption per capita per day

45 40 35 kg/cap/year 30 25 20 15 10 5 0 2004E 2005F
Source: FAO
Total
Pig Poultry Bovine Other

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Global per capita consumption of meat is increasing

Pig meat and poultry is gaining popularity on a global basis. Meat consumption requires feed. To produce 1 tonne of poultry meat, feed corresponding to 2 tonnes of grain is needed. The multipliers are 4 for pig meat and 7 for bovine meat (beef). FAO estimates that meat consumption is increasing by 3% (1.2kg/person) this year, equally split on poultry, pig and bovine. The added nitrogen needed to support this change in diet is in the range of 400-800kt nitrogen, depending on the recycling efficiency of the manure, roughly corresponding to one new world scale nitrogen plant. It represents 0.5-1.0% consumption growth for nitrogen, or 1-2% for urea, if assuming only urea is used. Nitrogen required for meat production is in the range of 20-30% of total nitrogen fertilizer consumption
61
Chinas grain balance
Stocks
350 300
15 25 20
Net import
250 Million tonnes 200 150 100 50 0 2005F 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Million tonnes
10 5 0 -5 -10 -15 -20 2005F 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: FAO
Chinas grain stocks show a declining trend

China has been drawing on their grain stocks since 2000. At the same time, China has been a net exporter of grain, so the decline in stocks has probably been welcome. The stock level is now so low that this is not likely to continue. FAO expects China to be a net grain importer in 2005.
62
Chinas production and consumption of grain and soybeans
Grain
450 400 350 Million tonnes Million tonnes 300 250 200 150 100 50 0 03/04E 04/05F 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 45
Soybeans
Consumption Production
40 35 30 25 20 15 10 5 0 03/04E 04/05F 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03
Consumption
Production
Source: USDA
Soybean consumption in China shows a dramatic increase, while production has remained steady
Grain consumption in China has grown only modestly over the last decade, while production has decreased. Behind the numbers are an increase in maize (for animal feed), while rice and wheat consumption have lost popularity. Grain production rebounded last year. In addition to increased maize consumption, consumption of soybeans has increased dramatically, driven by demand for animal feed. Soybean production has been relatively stable during the last years. China has chosen to import their requirement instead.
63
China Fruits and Vegetables (area harvested)

25
million ha
000 ha
500
1000
1500
2000
2500
Vegetables
20
Watermelons Cabbages Cucumbers Tomatoes
15
Asparagus Eggplant 1991 2004
10
Onions
Fruits
5
Spinach Garlic Chillies&Pepper Lettuce
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Carrots
Source: FAO
Cultivation of high-value cash crops has increased dramatically in China during the past decade
China has previously not given priority to increasing the production of grain or oilseeds, although there is definitely increased attention to the grain/oilseed situation at the moment. However, China has chosen to use more and more land for higher value crops. Given limitations of land and abundance of labor, this is of great economic value to China, and a logical development. It also means increased demand for fertilizer, and creates a strong market for higher value fertilizer products like NPK in which Yara is the global leader.
64
Maize use and US ethanol production

Global use of maize 2003/04
700 600 500 Million tonnes 400 300 200 100 0 Food Industrial Feed
Source: IGC, CBOT
Biofuels are emerging as the next new thing in farming

The use of agricultural produce to obtain biofuels is showing an increasing trend. The International Grain Council (IGC) estimates that industrial use of coarse grains (mainly maize) reached 128 million tons in 2004/05, 13% of total coarse grain consumption. Growth has been particularly strong in Brazil and USA. In the US, FAO estimates that 17% of total maize production is used for ethanol production. Assuming average nitrogen application, this amounts to 0.75 million tonnes of nitrogen, or almost 1% of global nitrogen fertilizer consumption. In Brazil, sugarcane is used for ethanol production, and around 50% of the crop is used for this purpose.
65
List of contents

Ammonia Urea

Drivers of supply
The main driver of supply is the cost of natural gas which is the main raw material in the production of nitrogen fertilizer.
66
Nitrogen value chain
Raw material
Intermediate product
Finished products
Natural gas
Ammonia Nitric acid
Fertilizer Industrial
products
Natural gas major nitrogen cost driver

At current gas prices in the US, natural gas constitutes about 85% of ammonia production costs in the US. Ammonia is an intermediate product for all nitrogen fertilizer, while nitric acid is a second intermediate product for the production of, e.g., nitrates. Finished fertilizer products are urea, nitrates (CAN, AN), NPK and others. Industrial products range from high purity carbon dioxide, basic nitrogen chemicals to industrial applications of upgraded fertilizer products.
67
World gas prices USD/MMbtu, 2004 estimate
Alaska 1.5 1.5 Netherlands 4.4 US Henry Hub 5.9 Trinidad 1.6 0.9 Ukraine 1.6 Middle East 0.5-1.0 Indonesia 1.7 Russia
Source: Fertecon, CERA, Platts
New ammonia capacity will be focused in areas with cheap gas

Favorable locations for new ammonia capacity are pockets of stranded gas mostly located around the equator.
68
Cost structure for ammonia

Gas costs 350 300 USD / tonne 250 200 150 100 50 0 3 4 5 6 USD / MMBtu 7 8 Other 2004 ammonia price*
* Ammonia price: fob US Gulf barge, Cost structure: Production cash cost fob US Gulf barge Source: Blue Johnson & Associates.
Natural gas cost creates ammonia price floor

Due to the upward shift in natural gas prices in the USA in recent years, domestic producers have become the swing producers of ammonia. Therefore, the US gas price is one of the key factors determining ammonia prices as long as prices are supply-driven rather than demand-driven.
69
Cost structure for urea

Ammonia cost Other cash production cost 300 250 USD / tonne 200 150 100 50 0 3 4 5 6 USD / MMBtu 7 8 Process gas costs 2004 Urea price*
* Urea price: US Gulf granular fob. Cost structure: Production cash cost fob US Gulf barge Source: Blue Johnson & Associates.
Ammonia cost creates urea price floor

Ammonia prices also create a floor for the urea prices in a supply-driven market balance. Urea prices normally never go below this floor as a sufficiently large number of producers would then rather sell the ammonia at ammonia market prices.
70
Ammonia prices when US Gulf is swing producer

Example assumptions: US gas price: 7.0/MMBtu US cash cost: 36 * 7.0 + 28 = 280/metric tonne US terminal cost for import: 12/metric tonne cfr US Gulf: 268/metric tonne
258
Fr.+duty: 40 218
Freight: 50 268 Freight: 30 238
The marginal producers determine global ammonia price floor

In a supply-driven pricing environment, the region with the marginal producers determines the global ammonia prices. During the last four years the marginal or swing producers have been the producers in the US Gulf. Freight and duty costs between net import and export regions then determine prices in other geographies.
71
Urea prices when US Gulf is swing producer

Example assumptions: US gas price: 7.0/mmbtu US cash cost: 26 * 7.0 + 35 = 217/mt US terminal cost for import: 2/mt cfr US Gulf: 215/mt
180
Freight: 30 150 Diff: ~20
215 170 Freight: 45
Ammonia creates the price floor for urea

As there are anti-dumping duties on Russian and Ukrainian urea in the US, the main source of offshore imports is the Arab Gulf. The freight rate used is higher than the historic average, given today's tight freight market. Black Sea is normally priced lower than Arab Gulf, as they compete in Asia, where Black Sea has a freight disadvantage. Russia is the largest exporter to the European market. Instead of regarding US producers as swing producers on urea, it is more appropriate to regard the ammonia price plus the upgrading cash costs to urea as the urea floor price. Nevertheless, the result is about the same. Note that changing freight costs can change the geographical differences considerably over time.
72
Ammonia production in selected high energy cost regions

West Europe, USA, Mexico, Japan and Korea
45,000 40,000 35,000 kt ammonia 30,000 25,000 20,000 15,000 10,000 5,000 0 1997 1998 1999 2000 2001 2002 2003
Source: CRU
Major decline in ammonia production since 1997 in many countries

The higher price level of natural gas, particularly in North America, but also in regions where the gas price is mainly oil-linked, has led to shutdown of nitrogen capacity. In 2003, the countries included in the graph produced 10 million tonnes ammonia less than in 1997. 10 million tonnes represented 7.5% of global production in 2003. The highest cost producers are often referred to as swing producers. This is true, but it does not mean that when a plant is closed, it can be restarted at any time. Almost none of the closed plants have been restarted. So when demand outpaces new capacity, price effects tend to be felt fairly quickly.
73
Expected urea capacity growth estimates

Global urea capacity growth estimate* 2004 2005 2.3% (3.1%) 2.8% (3.4%) Driving regions China: 61% Qatar: 17% China: 51% Oman: 21% China: 53% Iran: 20% Egypt: 31% China: 31% Oman: 29% China: 23%
2006
5.4% (4.4%)
2007 2008
3.1% (3.5%) 2.0% (new)
Average urea consumption growth has been 3.7% since 1990, corresponding to a nitrogen growth of approximately 2%
* Excluding possible closures. Previous estimate presented at Yara Capital Markets Day in brackets () Source: Fertecon, update April 2005
Expected urea capacity growth roughly in line with historical consumption growth
Global urea production capacity in 2003 was approximately 135 million tonnes. In the period 2004 to 2008 the expected addition of new urea capacity varies between 2.0 and 5.4% according to Fertecon. With the exception of China, all new capacity is expected in the Middle East or in other areas with low-cost gas. The expected production growth (ignoring possible closures) seems to match reasonably well with the expected annual consumption growth of 2.5-3.5% with the exception of 2006. Note that in 2006, 53% of the capacity additions are in China. If you believe that the Chinese need the urea themselves (no new export), the 2006 supply additions may be not so important for the global supply-demand balance.
74
Global nitrogen capacity utilization

Urea capacity utilization
92% 90% 88% 86% 84% 82% 80% 78% 76% 74% 72% 70% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004E 2005E 2006E
CRU (British Sulphur)
Fertecon
Source: CRU (British Sulphur), Fertecon
Industry analysts expect no major changes in capacity utilization next few years
The reasonable match between expected consumption and production growth of urea is also reflected in the estimates for capacity utilization going forward by CRU and Fertecon. The estimates indicate a fairly flat development, but with a slight deterioration in the case of CRU.
75
List of contents

Ammonia Urea

Price relations
Based on the demand and supply drivers this section explores how prices in the end are determined.
76
Natural gas prices USA and Europe

Yearly average gas prices USD/MMBtu
7 6 5 4 3 2 1 0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: World Bank, Platts (average import price into EU from World Bank used up to 1999 )
US gas price (Henry Hub)
European gas price (Zeebrugge Hub)
Natural gas prices in the USA influence the floor prices of nitrogen fertilizer
The high gas price differential between US and Europe from 2003 continues in 2004. This supports good margins for Yara as Yara has costs partly linked to the lower line and (floor) prices resulting from the upper line.
77
Ammonia price and US production cost

350 300
Ammonia fob US Gulf
250 USD/tonne 200 150

US Gulf cash cost
100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Source: Blue-Johnson
High US gas prices set ammonia price floor at attractive level

Over the last six years, US natural gas prices have been the most important factor establishing the prices of ammonia. Since mid-2003 strong demand has raised ammonia prices above the floor, but margins above US cash costs have not reached the same level as in 1995-1996.
78
79
Urea price compared to production cost in US Gulf quarterly averages

300
250
Urea fob US Gulf (granular)
200
USD/tonne
Cash cost US Gulf*

150
100
50
0
06 06 3Q 05 05 04 05 03 03 02 02 02 02 03 03 04 04 04 05 06 4Q 1Q 2Q 2Q 3Q 4Q 1Q 1Q 3Q 2Q 4Q 1Q 3Q 4Q 2Q 3Q 1Q 2Q 4Q 06
* Future cash costs based on Henry Hub forward price for gas as of 29 April Source: Average of international publications (urea), World Bank (Henry Hub gas price), Blue-Johnson
Urea market has been demand-driven since mid 2003

The urea floor price mechanism is also valid for ammonia. For the first time since 1997 the urea market became demand-driven in mid 2003. The long supplydriven period is one reason why little new urea capacity was built in the early years of this decade. Even if the demand-supply balance should deteriorate, the high forward price for US natural gas and corresponding consequences for US cash costs indicate that urea prices could stay at a high level throughout 2006.
79
Potential nitrogen swing capacity in USA

20 18 Million tonnes ammonia 16 14 12 10 8 6 4 2 0 1999 2000 2001 2002 2003 2004
Source: IFA
US total ammonia capacity
US non-captive ammonia capacity
USA is the swing producer for nitrogen at higher natural gas prices
The remaining nitrogen swing capacity in the US is substantial despite several closures in recent years. Total global ammonia capacity is approximately 160 million tonnes, with the US constituting roughly 9% of the total (14.8 million tonnes). In addition to direct application. ammonia is mostly used to produce urea and UAN in the US: - For urea, the total US capacity in 2004 was 7.3 million tonnes. - UAN is a large product in USA with 10-11 million tonnes of capacity, excluding PCS Geismar.
80
Fertilizer and grain prices

USD/bushel corn 6
5 4 3 2 1 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Source: Blue-Johnson
USD/tonne urea 300

250 200 150 100
Corn Chicago cash Urea fob Arab Gulf
50 0
Correlation between long-term grain and fertilizer prices

Variations in grain price (corn or wheat) explain approximately 50% of the variations in the urea price, making grain prices one of the most important factors driving fertilizer prices. Some of the correlation may of course be spurious, like GDP growth, Chinese imports, strength of the USD etc. In 2004, fertilizer prices increased more than most grain prices. The demand development for fertilizer has recently been more linked to the grain inventories, particularly in the main consuming regions like China and India.
81
Ammonia and urea price

250
200 USD/tonne
Urea (fob Black Sea)
150
100
0.6 * Amm + 15
50
0 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05
Source: Average of international publications
There is an upgrading margin for converting ammonia into urea

While energy costs for the ammonia swing producers sets a price floor for ammonia, the ammonia price sets a floor for the urea price. If the urea price drops below this floor, more ammonia will be offered for sale, less urea will be sold, and the relationship will be restored. In a tight supply/demand scenario for nitrogen, the correlation is less, as urea plants run flat out. The supply/demand balance for excess ammonia (industrial, DAP/NPK and nitrates mainly) will determine the ammonia price, as it did during the mid 1990s.
82
Nitrate price in Europe and global urea price

800 700 USD per tonne nitrogen 600
CAN cfr Germany
500 400 300 200 100 0 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-02 Jan-02 Jan-03 Jan-04 Jan-05
Urea fob Middle East
Urea prices determine the price range for nitrates

There is a strong correlation between urea and nitrate prices, as they to some extent are substitutes. For agronomic reasons, farmers are willing to pay a higher price per unit nitrogen from nitrates than from urea. The correlation is stronger in the medium to long term than within a season. The nitrate margin above urea is to some extent also influenced by the market balance in the nitrate industry.
83
84
10-year grain/oilseed prices yearly averages

Wheat (HRW US Gulf)
USD/tonne
Rice (Thailand)
USD/tonne 350 300 250 200 150
220 200 180 160 140 120 100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Maize (US Gulf)

USD/tonne
USD/tonne 350 300 250 200 150 100
Soybeans (cif Rotterdam)
190 170 150 130 110 90 70 50

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
Source: World Bank
Low grain inventories keep prices at or above 10-year historical average levels
World stock remain at the second-lowest level in 30 years. USDA estimates show that despite record harvests in 2004, the world grain stocks will last only for 2.3 months. Note that all grain prices actually increased from 2003 to 2004. The decline in grain prices in 2004 may be attributed to favorable weather conditions for crops this year leading to record grain crop yield. Production (2043 million tonnes) is expected to meet slightly increased demand this year (FAO Forecast, December 2004) and no depletion of stocks is foreseen for this year.
84
85
10-year fertilizer prices monthly averages

Ammonia fob Caribbean
USD/tonne
300 250 200 150 100 50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
CAN cif Germany

USD/tonne 200 150 100
Urea prilled fob Black Sea

USD/tonne
50 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
300 250 200 150 100 50 0 1995 1997 1997 1998 1999 2000 2001 2002 2003 2004 2005
Fertilizer prices above historical averages

Spring 2005 nitrogen fertilizer prices are high within a 10-year perspective. However, input costs are also high due to record oil and gas prices. Therefore, current margins do not match the levels seen in 1995-1996.
85
List of contents

Ammonia Urea

Production economics
This section describes the cash costs associated with production of standard nitrogen products which is useful to know in supply-driven situations with pricing determined by the marginal (swing) producers.
86
Ammonia cash cost build-up example
Gas price: x Gas consumption: = + = Gas cost: Other prod. cost: Total cash cost
7 36 252 26 278
USD/MMBtu MMBtu/mt NH3 USD/mt NH3 USD/mt NH3 USD/mt NH3
36 MMBtu natural gas/tonne ammonia
Ammonia (NH3) (82% N)
Typical natural gas consumption for ammonia production
Source: Blue Johnson & Associates.
Natural gas costs the most important cost component

With a natural gas price of USD 7/MMBtu gas cost represents around 90% of the ammonia production cash costs. In this example, one dollar increase in gas cost gives USD 36 higher gas costs. Most of the other production costs are fixed costs and therefore subject to scale advantages. mt = metric tonne All cost estimates are fob plant cash costs excluding load-out, depreciation, corporate overhead and debt service for a US proxy plant located in Louisiana ( 1,300 metric tonnes per day capacity). In this example load-out barge is excluded.
87
Urea cash cost build up example

36 MMBtu natural gas/tonne ammonia
Ammonia price: x = + + = Ammonia use: Ammonia cost Process gas cost* Other prod. cost**: Total cash cost
278 0.58 161 36 22 219
USD/mt NH3 NH3/mt urea USD/mt urea USD/mt urea USD/mt urea USD/mt urea
Ammonia (NH3) (82% N) CO2
0.58 mt ammonia per tonne urea
Urea (46% N)
* Process gas cost is linked to natural gas price ** Including load-out Source: Blue Johnson & Associates.
Ammonia the main input in urea

Typically, it takes 0.58 tonne ammonia for each tonne urea. If we add the gas cost in ammonia (USD 146) and the additional process gas costs needed for the production of urea (5.2 MMBtu x USD 7/MMBtu = USD 36), natural gas represents around 83% of the total production cash cost. All cost estimates are fob plant cash costs excluding depreciation, corporate overhead and debt service for a US proxy plant located in Louisiana (1400 mt per day capacity).
88
Theoretical consumption factors
Ammonia (82% N)
P and K
Urea (46% N)
AN (33.5% N)
CAN (27% N)
NPK (15-15-15)*
* There are several NPK formulas. 15-15-15 is just an example
Consumption factors to compare price movements

As shown in the costing example for urea, the real ammonia consumption factor is above the theoretical consumption factor, which is based on N content. The difference varies between plants according to their energy efficiency. Using the theoretical consumption factors is easier when making calculations. If the N content for a product is known (46% N in urea), the ammonia consumption factor can easily be calculated by dividing the figure with the N content in ammonia (0.46/0.82 = 0.56). Based on this illustration, it is possible to follow relative variation in the various nitrogen prices. As an example, if ammonia becomes USD10/mt more expensive, the production cost of urea increases by 10 * 0.56 (0.46/0.82) = 5.6USD/mt. Similarly, if the urea price increases by USD10/mt, a price increase of 10 * (0.27/0.46) = USD5.9/mt of CAN would keep the relative pricing at the same level.
89
Useful sources of market information

News, price references and short term developments (1-2 months)
The Market Profercy Fertilizer Week Fertecon FMB Green Markets (USA) Beijing Orient Business (China) www.decyfer.com http://lists.altohiway.com (subscription needed) www.britishsulphur.com www.fertecon.com www.fmb-group.co.uk http://greenmarkets.pf.com www.boabc.com
Medium term (1 year) supply/demand and price analysis

Outlook, from The Market. Monthly publications for ammonia, urea and DAP Profercy medium term forecast
Longer term
Fertecon British sulphur (CRU)
Grain supply/demand and price

Food and Agriculture Organization of the UN International Grain Council Chicago Board of Trade www.fao.org www.igc.org.uk www.cbot.com www.fertilizer.org www.efma.org
Fertilizer industry associations

International Fertilizer Industry Association (IFA) European Fertilizers Manufacturers Association (EFMA)
90
More information can be found at
www.yara.com
91

Essential nutrients for optimal crop yields and quality

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Essential nutrients for optimal crop yields and quality

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Yara Fertilizer Industry Handbook

Fertilizer industry dynamics

Industry value drivers

Yara Fertilizer Industry Handbook 2005 - Page: 2

Yara Fertilizer Industry Handbook

Plants need three main nutrients: Nitrogen, Phosphorus and Potassium

YIELD AND QUALITY

Nitrogen is the main driver of yield

Yara Fertilizer Industry Handbook 2005 - Page: 3

Three main nutrients: Nitrogen, Phosphorus and Potassium

Plants need nutrients to grow

Soil conditions & other growth factors

th Warm Light Water Nitrogen

Yara Fertilizer Industry Handbook 2005 - Page: 4

The law of minimum

Major impacts on global agriculture from quantity to quality

Requires better agronomic practices

Yara Fertilizer Industry Handbook 2005 - Page: 5

Improving human health is a key component of the future of agriculture globally

Healthy food for plants

... yields healthy food for people

Yara Fertilizer Industry Handbook 2005 - Page: 6

The value of fertilizers in modern food production is clear

and economic gains via low cost production

Mineral fertilizer 192 kg N/ha

Yara Fertilizer Industry Handbook 2005 - Page: 7

Fertilizers contribute to large economic gains for the farmer

Profitability of investment in mineral fertilizers

The investment in nitrogen fertilizer is highly profitable for growers

1200 1000 800 600 400 200

=> Fertilizer investment: 96 /ha => Net return: 714 /ha

Net return is 7x the investment

0 0 50 100 150 200 250 300 Fertilizer application, kg N/ha

Yara Fertilizer Industry Handbook 2005 - Page: 8

Breakdown grain production costs

General overhead expenses 10% Rental Value 17%

Sprays 13% Fertilizer 10%

Power & Machinery 26%

Source: Farm Management Pocketbook John Nix 2004

Yara Fertilizer Industry Handbook 2005 - Page: 9

Fertilizer cost is small compared to total grain production cost

With nitrogen fertilizer

With nitrogen fertilizer

Source: Yara German field trials

Yara Fertilizer Industry Handbook 2005 - Page: 10

Applying nitrogen mineral fertilizer produces energy and fixes CO2

Nitrogen the most important nutrient

Improve crop quality

Increase crop size Most important and commonly lacking nutrient

Total 145.6 million nutrient tonnes

Source: IFA statistics season 2003/2004

Yara Fertilizer Industry Handbook 2005 - Page: 11

Nitrates vs. urea

Yara Fertilizer Industry Handbook 2005 - Page: 12

Nitrate is the most important fertilizer in Europe

Fertilizer characteristics: Organic compared to Mineral fertilizer

Immediately available for the crop Traceable and consistent

Yara Fertilizer Industry Handbook 2005 - Page: 13

Organic fertilizer contains the same inorganic molecules as mineral fertilizer

Nitrogen (N) from air Ammonia Natural gas

Yara Fertilizer Industry Handbook 2005 - Page: 14

Industrial production of fertilizers involves several chemical processes