Africa fertiliser Outlook: Ukraine crisis to result in significant downsides
Inorganic fertiliser use in Africa have been rising over the last few decades, but is still low compared with other parts of the world. Between 1980 and 1995, fertiliser consumption fluctuated around 1.0mn tonnes of nutrients per year.
However, after 1995 consumption began to climb substantially, reaching almost 1.6mn tonnes of nutrients in 2010. From 2006-2017 usage doubled.
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While the global average of application per hectare of cultivated land is 135kg (where about 50 per cent of the crop yield growth is attributable to fertiliser), in Sub-Saharan Africa (SSA) it stands at just 17kg per hectare (/ha) as of 2018, far below the 50kg/ha level that is considered adequate.
Smallholder farmers, who make up the majority of farmers in the region and who farm most of the land, frequently apply little or no inorganic fertiliser, as many farmers in SSA rely on livestock manure to maintain soil fertility. However, this has chemical limitations (one cow produces only about 15kg of nitrogen as manure each year, while a maize crop yielding about three tonne/ha requires about 100kg of nitrogen per hectare). Other forms of organic fertiliser also face various problems, including availability and logistical issues. Consequently, total levels of fertiliser use are insufficient to replace the soil nutrients that are mined each year through crop production.
Limited relative consumption in Africa
In SSA, five countries (Ethiopia, Kenya, Nigeria, South Africa and Zambia) account for almost two-thirds of consumption. In the Middle East and North Africa (MENA), three countries (Egypt, Iran and Morocco) account for 75 per cent of consumption.
There are numerous reasons why, broadly speaking, fertiliser demand is low in Africa. According to the Alliance for a Green Revolution in Africa, these are divided into three categories: lack of knowledge, lack of affordability and poor incentives.
Lack Of Knowledge: The vast majority of smallholders in SSA have little or no knowledge of soil nutrients and the potential of fertiliser to boost crop yields.
Many have no idea which types of fertilisers they should use on which soils and crops or what the correct rate, placement and time of application are.
This is the result of low education and literacy levels and weak agricultural extension (advisory) programmes, which governments cut when the structural adjustments programmes of the 1980s and 1990s forced them to reduce fiscal spending. Some countries, such as Ethiopia, have re-invested in their extension services, while external actors, such as NGOs and development projects, have set up their own programmes, but with mixed success.
Lack Of Financing: Smallholders usually have disposable cash for a few months after harvest time but have limited cash available during the lean season when they need to buy fertiliser and other inputs.
Owing to the real or perceived risk to smallholder farming, farmers often cannot get access to credit to buy fertiliser and other inputs from the traditional financial sector, and when they can get loans, rates average between 20-30 per cent per year.
Regional agro dealers face similar problems.
Weak Incentives: The effectiveness of fertiliser applications depends on many factors aside from the fertilisers themselves, and because of such risks and uncertainties, many farmers decide to use fertilisers only on crops for which they are confident they can make a reasonable profit, reducing overall use.
African fertilisers at a premium
Poor supply and distributions systems from port to farm mean that SSA fertiliser prices are almost double global averages and hinder consumption.
This supports illegal fertiliser trade across the region, with issues including cross-border smuggling of subsidised fertilisers as well as the sale of counterfeit fertilisers.
Moreover, international fertiliser companies often refrain from entering partnerships with local ministries to supply subsidised nutrients owing to frequent delays in payments, which reinforces the position of illegal fertiliser traders.
At the end of the supply chain, inadequate storage facilities mean that cost-effective amounts of fertiliser cannot be regularly purchased, resulting in substantial waste.
We believe that considerable improvements in physical and financial infrastructure remain to be made in many African countries before fertiliser consumption approaches developed market levels.
Although our Infrastructure team sees strong growth potential in transport infrastructure in SSA countries, this will unlikely improve the fertiliser trade in the coming years. Investors will remain cautious in their exposure to SSA infrastructure investment owing to the challenging operational environment, various macroeconomic headwinds, poor access to electricity and underdeveloped financial markets.
Movement regarding policy initiatives
To deal with the low levels of fertiliser use, African governments have created multiple plans in recent years. In 2003, the Comprehensive African Agricultural Development Plan called for a target of six per cent compound annual growth in agricultural productivity by 2015 and called on governments to allocate at least 10 per cent of their budgets to the agricultural sector. In 2006, African leaders adopted the 12-point Abuja Declaration on Fertiliser, which committed countries to increasing fertiliser use from the then-average of 8kg of fertiliser/ha in 2005 to 50kg/ha by 2015.
Since 2006 to now, overall fertiliser use in Africa (both total consumption and quantity per hectare) has increased, and the outlook is improving.
Over that time, Africa is the only continent that has had annual fertiliser consumption growth exceed 8 per cent. Some of the notable successes have been in improving government subsidy programmes, increasing private sector participation (including renewed external donor interest) and addressing some financing concerns.
However, other resolutions continue to see limited progress, including a lack of national level fertiliser policies and monitoring capabilities, regional procurement challenges, and limited intra-regional trade.
This has led to calls for the African Union Commission to convene an Abuja II. This would involve implementing initiatives to again increase fertiliser use levels, with the focus going beyond fertilisers to cover soil health, integrated soil fertility management and the importance of farming profitability.
Subsidies: More momentum after Abuja declaration Of the main reasons why many Abuja recommendations have not been met as of 2022 is poor government policy, notably the lack of suitable policies and laws, poor implementation and enforcement of laws that do exist, lengthy processes for licensing new fertilisers/commercial actors, and inefficient subsidies, which has been the main policy used by governments in SSA.
Fertiliser promotion programmes in Africa began in the 1970s and were characterised by large direct government expenditure. However, these programmes were expensive and governments lacked the capacity to implement them effectively. Consequently, many were eliminated in the 1990s as part of structural adjustment programmes.
Since Abuja 2006, subsidies have returned to an extent and remain relevant to most countries in SSA. As of 2022 most SSA countries have some type of subsidy programme in place, which includes allowing the private sector to import fertilisers and remove some of the bureaucratic burden from national governments. In some countries the government manages the subsidy programme, while in others the private sector manages the programme.
The type of programmes that governments have implemented vary significantly. Some governments are attempting to make subsidies market friendly by introducing at least some attributes of smart subsidies, while others have used input vouchers and still others use electronic transfer or e-wallet systems using mobile phones. Mozambique and Uganda are yet to implement large-scale subsidy programmes. Finally, government advisory services have revived in recent years in several countries, such as Ethiopia which has invested heavily in this area.
Steady harvests in 2021/22 to support near-term demand
Although the aforementioned structural factors will constrain long-term consumption in SSA, short-term consumption growth has outperformed, coming from a low base, with regional consumption growing by around 10 per cent annually over the past few years.
On the trade front, OCP Group - a Moroccan state-run phosphate monopoly - has seen its exports surge over 2016-2020. Destinations included Nigeria, Ethiopia and Kenya. For the full year 2019, OCP’s exports to Africa fell slightly year-on-year.
Nevertheless, overall phosphate imports to SSA grew by 7 per cent in 2019, and we expect the region’s broad trend of strong consumption growth to continue over the coming quarters, which will be aided in some parts by steady harvests in 2021/22, especially in Southern Africa. OCP also inked a US$3.7bn agreement with the Ethiopian state-owned firm Chemicals Industries Corporation in the last quarter of 2020 to build a landmark fertiliser facility by 2026 with the aim of turning Ethiopia into a net exporter by 2030.
In the long term, consultancy firm CRU predicts that Africa’s annual fertiliser consumption will reach 13.6mn tonnes of nutrients by 2030, from 7.6mn tonnes in 2017, an implied compound annual growth rate of around 4.8 per cent.
Production opportunities exist — new plants come online
Africa as a whole is a net fertiliser exporter and is projected to have a surplus of both nitrogen and phosphorus in 2022 (while running a deficit in potash).
This is mainly a result of major production facilities north of the Sahara, with production concentrated in six countries: Algeria, Libya, Egypt, Morocco, Nigeria, South Africa and Tunisia. By contrast, SSA imports 95 per cent of the fertiliser it consumes.
In SSA only a few corporations produce fertiliser; less than a few firms operate in any of the producing countries in the region.
However, this is not for lack of opportunity as Africa possesses considerable mineral and hydrocarbon reserves that could be used to produce fertiliser or to power the facilities and infrastructure needed for commercialisation.
Moreover, many fertiliser plants in SSA currently operate below capacity, hindered by severe infrastructure constraints, government intervention and scarcity of financial capital.
We hold a favourable view on fertiliser producers in the MENA region over the coming years, and production growth will improve in SSA as well given the number of various new projects coming online. As of 2022 there were 12 fertiliser manufacturing plants in SSA producing nitrogen- and phosphate-based fertiliser products (there are no potash manufacturing plants).
Also included in this category are plants producing lime supplements, micronutrients and organics. In March 2022, Dangote's new fertiliser factory was inaugurated outside Lagos and it joins Notore Chemicals Industries and Indorama Eleme Fertiliser & Chemicals in Nigeria to become the three main urea production plants in the region (Madagascar and Zimbabwe produce other nitrogen-based fertiliser), while phosphate plants are located in Mali, Senegal, Togo, Tanzania and Zimbabwe. Access to ample reserves of natural gas and phosphate rock at a cheap cost in comparison with competitors in North America, Asia and Eastern Europe underpins our expectations for solid performance from fertiliser companies based in the MENA region.
Plenty of available supply for Africa
We hold a more positive view on the near-term prospects for fertiliser production in SSA, especially for nitrogen-based fertilisers. Over the past few years, several companies have shown interest in establishing new complexes to produce ammonia or urea. More than a dozen projects in Nigeria, Ethiopia and elsewhere have been under study since 2010. Large greenfield projects are also under consideration in several countries, either as autonomous projects or in partnership with foreign entities in at least 11 North African and SSA countries. One project that stands out is the Dangote fertiliser project. Both plants are expected to be fully operational by the end of 2021 and will produce a combined 3mn tonnes of fertiliser. Combined with the country’s roughly 2mn tonnes of existing production, this would be enough for Nigeria to begin exporting nitrogen fertiliser.
We retain a generally positive outlook for Egypt’s fertiliser sector as initiatives aimed at boosting domestic production facilities will yield fruit over the coming years. In addition to steady government support for the sector driven by export potential, we see recently completed and ongoing projects driving greater output.
Recent investment has focused on nitrogen fertilisers, already the most-produced category as opposed to phosphate and potash. Some headline projects include the upcoming fertiliser complex in Cairo by El Nasr Co for Intermediate Chemicals and one by the German company Thyssenkrupp. Furthermore, in Q221, Stamicarbon announced a contract with Abu Qir Fertilisers Co to increase capacity of its Abu Qir 3 urea melt plant in Egypt, with work due to be completed in 2025. Phosphate fertiliser production also appears to be increasing, as exports have trended upwards in recent years, but with new investments focusing on nitrogen, we expect the production gap to widen over the coming years.
We do not expect fertiliser production growth to be matched by increased domestic demand. Egypt’s use of nitrogen fertiliser per area of farmland is high at over 340kg/ha in 2018. Furthermore, we forecast limited crop production growth in Egypt to 2025 as arable is limited. New African fertiliser processing or manufacturing facilities by market
In terms of phosphate fertiliser, Africa will see the largest increase globally of more than 20 per cent, adding 11mn tonnes of new potential supply a year over a five-year period (2017-2022) to reach 67mn tonnes by end of 2022 based on AfricaFertiliser projections. Pre-production work has also been done in several countries with large phosphate reserves, including Guinea Bissau, Mali, Togo and Uganda.
Overall, there are around 37 new fertiliser processing and manufacturing facilities in SSA that are either operational or expected to come online. A network of fertiliser blending plants process imported or locally produced fertiliser into balanced nitrogen, phosphorus and potassium blends throughout Africa.
Sustainability: Additional fertiliser use to reduce greenhouse gas emissions
In the context of Africa, an increase in fertiliser use will be a key driver towards improving sustainability and reducing the continent’s admittedly small carbon footprint. Low fertiliser use is leading to the depletion of soil nutrients in many parts of Africa, and some estimates argue that almost 100mn ha of land have already been degraded through soil erosion, leaching of nutrients and nutrient mining via harvests. Many observers believe that the continued low or imbalanced use of fertiliser will lead to negative environmental consequences along with reduced biodiversity. In particular, in places where fertiliser use is low, soils can’t sustain the yields required to meet food demands. Consequently, farmers need to cultivate a larger area for crops, which means large-scale deforestation, less biodiversity and greater volumes of greenhouse gases (GHGs). The deficit in food production also requires food imports, which in turn stimulates environmental degradation elsewhere.
Research by Vlek et al (2017) has shown that increasing the fertiliser use in Africa by 20 per cent would increase GHG emissions by only 0.37mn tonnes of CO2 equivalent emissions a year (a similar 20 per cent increase in South Asia would lead to an additional 6.5mn tonnes of CO2 emissions).
However, the increased use of fertiliser would raise yields of rice by 5 per cent, wheat by over one per cent and maize by 9.9 per cent, which would potentially permit 2mn ha of currently cultivated land to be set aside for reforestation, thus potentially sequestering between 7.7mn and 18.8mn tonnes of CO2 per year.
The research demonstrates that significantly increasing African fertiliser use could result in a considerable decline in carbon emissions, provided the excess land would be used for reforestation.
Covid-19: Limited impact
There has been relatively limited reporting on the impact of Covid-19 on Africa’s fertiliser markets, but most local observers have said that West Africa, which has been the focus of coverage, has seen relatively limited disruption so far as of the end of 2020. In particular, according to the West African Fertiliser Association (WAFA) and the International Fertiliser Development Centre, national governments in West Africa, in conjunction with WAFA, have deemed fertiliser an essential agro-commodity that move despite other restrictions in place. While port operations in some countries have been impacted by curfews, this has not resulted in major congestion.
By contrast, roads in the region have been operating at below normal rates, and curfews have added to delays. Cross-border trade is functional in general but with increased delays due to increased authorisation requirements. Finally, fertiliser shops are open for business and still deliver agro-inputs to farmers in all 15 Economic Community of West African States member states, with a few exceptions in regions and cities heavily affected by Covid-19.