With demand for food grains increasing, global demand for fertilizer is expected to increase at a CAGR 10.6% from $134 billion in 2010 to $223 billion in 2015. To monetize this opportunity, agrochemical companies are expanding their production capacity.
Here are three agrochemical companies with expansion plans that might create opportunities for investors.
Acquisition for further expansion
Agrium Inc. (USA) (NYSE:AGU) currently operates 1,200 retail centers across the world, including 65 locations in Canada. The company currently has little presence in Canada–in order to expand its reach, Agrium is planning to acquire 90% of Viterra’s Canadian retail business. The deal will close after the second half of 2013, and will add 232 retail centers in Western Canada to Agrium’s assets.
This acquisition will have an EBITDA impact of $1.2 billion in 2014 on Agrium Inc. (USA) (NYSE:AGU)’s retail segment, rising from $1 billion in 2013. The company has a target of $1.3 billion EBITDA in 2015. As a result, Agrium’s retail segment is expected to generate revenue of $12.6 billion this year, up from $11.4 billion last year.
Agrium Inc. (USA) (NYSE:AGU)’s wholesale segment contributes around 60% in EBITDA, with potash being the main revenue driver. Potash recorded sales of $152 million in the first quarter of 2013. However, potash sales are expected to decline in the upcoming quarters. India, which is the key importer of Potash, recently reduced the existent subsidy on potash imports. This will lead to an increase in the acquisition costs for potash. A decline in potash sales to the tune of $110 million in the third quarter is expected from $152 million in the first quarter.
Credit: Agrium Inc. (USA) (NYSE:AGU)
Analyzing the demand stemming from the U.S., the situation looks rosy from a short-term perspective. Due to the drought situations in this region, which destroyed the majority of agricultural produce, the demand for fertilizers is expected to rise in the upcoming quarters. This will add incremental sales of $205 million in this quarter. However, from a long-term perspective, sales are likely to remain flat.
Cost synergies from expansion
CF Industries Holdings, Inc. (NYSE:CF) imports approximately 9 million tons of nitrogen fertilizer to keep up with demand. The company is the largest manufacturer of nitrogen in North America. To reduce its reliance on imports, the company is planning to expand the production of nitrogen fertilizer by 1.2 million tons in 2015 and 4.5 million tons by 2016 in North America.
The cost of nitrogen fertilizer is largely dependent upon natural-gas prices, which are currently low in North America. Demand for nitrogen fertilizer is growing at an annual rate of 2% globally. By increasing production, CF Industries Holdings, Inc. (NYSE:CF) will save approximately $190 per ton and will reduce imports by approximately 40% per year.