A worker loading a bag of cement onto a truck at a plant in Xian, China. Nelson Ching/Bloomberg News
January 28, 2010
By ROBERT CYRAN and ANTONY CURRIE
Reuters
China needs fertilizer more than steel. If its industrialization follows the course of other nations, per capita demand for infrastructure like concrete and steel will peak long before meat consumption does.
This may explain why mergers and acquisitions activity in the agriculture sector has become so hot. For example, Vale, based in Brazil, just agreed to buy Bunge’s Brazilian fertilizer assets for $3.8 billion.
In the typical path of development, demand shoots up for everything, but industrial goods in particular benefit. Highways, power plants and ports are built, and require construction materials. As a result, companies build steel and cement plants to meet demand, and assembling these factories calls for a lot of their own product. China’s per capita production of cement and steel is already at levels higher than those of most industrialized countries.
Yet the revolution of the stomach moves at a slower pace. While steel production per capita in the United States peaked in the 1950s, demand for meat has grown consistently. Americans now eat 276 pounds of meat a year, an increase of 60 percent since the 1950s. Other developed countries show similar patterns.
China is eating more protein, but has far to go to catch up with the developed world. Per capita consumption of meat is less than 100 pounds, and this figure may be inflated. Raising more animals will require copious feed; one full steer requires around 3,000 pounds of feed. Growing this grain will increase demand for fertilizer substantially. China is already the biggest consumer of potash (a quarter of all global production) and the top producer of phosphate — and it imposed restrictive tariffs on exports in 2008.
While these trends appear abstract, they affect corporate behavior. The economic crisis sent commodity prices into a tailspin. While steel insiders cautiously slammed the brakes on merger activity, fertilizer companies went hog wild. Among the deals, brawls broke out among the fertilizer groups CF Industries, Terra Industries and Agrium.
While industry valuations are in line with the market — CF Industries trades at 14 times estimated earnings, for example — they deserve a premium. Phosphate and potash markets, in particular, have high barriers to entry, so it makes sense to buy rivals rather than build new facilities. As long as China’s taste for meat increases, fertilizer companies should continue to eat one another up.
For more independent financial commentary and analysis, visit www.breakingviews.com.
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