Summary
We believe the stage is set for a strong return of nutrient demand
towards end-2009 as Latam farmers regain their financial footing
and Asian food demand remains relatively unhurt by the global
downturn. Nitrogen stocks may rally in the near term following a
sharp urea price recovery. Potash remains our top pick for the long
term, but shares may lag in the coming quarters. Phosphate remains
our least preferred nutrient on lower supply visibility. Further drops in
soft commodity prices are a global risk to our thesis; profitability of
US corn is most vulnerable.

Fertiliser stocks not immune to global downturn
In this edition of The Fertile Crescent, we are updating the views we first presented in August 2008. The
fertiliser sector has not been immune to the recent global economic and financial turmoil. Demand for and use
of fertiliser dropped precipitously during Q4 2008, a trend we believe will continue in 2009. As soft
commodity prices fell, farmers became more cautious in their use of high-priced nutrients. The lack of credit
available to Brazilian farmers intensified this trend in Latin America. Volumes for nitrogen, phosphates and
potash have weakened, as have prices, with the exception of potash. The fertiliser stocks in our universe have
fallen by 30.6% to 67.4% over the past five months, following deflation of asset prices, investors shifting out of
commodity-linked companies and shortening investment horizons.
Risks abound...
Nitrogen fertiliser, most distressed in Q4 2008, should most outperform during H1 2009, in our view, but this is
an oil-price sensitive case. We expect potash fertiliser sector weakness in the next two to three quarters of
2009, as more limited use of this expensive nutrient extends the inventory destocking process. Phosphate
fertiliser industry supply/demand dynamics also carry significant recovery potential, but given likely inventory
markdowns during H1 2009 and low medium- to long-term visibility, it remains our least preferred nutrient.
According to our P&L models, Brazilian farmers have a greater profit buffer than their US counterparts, while
soybean offers fatter net margins than corn, which is currently below break-even levels for American growers.
…but prospects still positive
Despite the near-term challenges to nutrient demand, we think that the sector will experience a strong rebound
in demand towards year-end. This is relevant for phosphates, but especially for potash. Our farmer P&L
models show that Brazilian agriculture is fundamentally profitable. We believe that government aid and
adjustments to their new revenue and costs bases will help Latam farmers back on their feet. US farmers may

receive lower margins for their crops, but are in much better financial shape than their Brazilian counterparts,
with 2008 debt/equity of only 10%. Finally, HSBC believes Asian economies will cope well with the burdens
of a global downturn, and that demand for animal protein in this geography is more resilient than the market
thinks. All these indicate a strong return by farmers to the fertiliser markets towards the end of 2009.
Which are our preferred stock picks?
Assuming no further downslide in crude oil prices, one of our top stock picks would be Orascom Construction
Industries, as we think the share price has yet to react to the speedy recovery of urea prices and the structural
adjustments that are likely to result in the removal of Ukrainian urea product from global trade. We also like
Israel Chemicals and Arab Potash shares, which we think will rally later on in the year. Investors focusing only
on catching this upswing may look for an entry point between Q1 2009 and Q2 2009 results (May-August
2009). Up until this point, we think poor Q4 2008 and Q1 2009 results and a lack of newsflow will leave the
stocks in rangebound trading, though this could be an opportunity for long-term investors to build a position in
the names. Our target price implies a 121% potential return on Tekfen Holding, but we believe that mispricing
of the stock is a function of the company’s construction division as opposed to its fertiliser business.

Inventory destocking and farmer caution lead to expected
volume contraction of 0.9% in 2009
Inventory destocking and perceived risks to farmer profit margins have driven the fertiliser industry into a
period of high uncertainty and low short-term visibility. We estimate that weighted global fertiliser
volumes will fall by 0.9% in 2009, led by a 12.1% drop in potash, and weak growth in nitrogen and
phosphate demand, which we expect to be only 1.2% and 1.9% y-o-y, respectively. This contrasts with
historical growth rates of c3.0% for all three nutrients. An extreme example of the widespread drop in
demand is Latin America, dominated by Brazilian agriculture, where usage in December 2008 fell by a
significant 37%. Brazil continues to sit on very high inventories. Faced with declining volumes, fertiliser
makers worldwide are shutting down capacity in an attempt to rein in supply and limit downward
pressure on prices. This has been most prevalent and successful in the potash sector. In the nitrogen and
phosphate fertiliser sectors, the bulk of announcements for production cutbacks cited weak international
demand conditions as the reason, pointing to prices falling below costs. These two sectors are much less
consolidated relative to the potash fertiliser market, so producers have less control over price.

Brazilian farmer break-even calculations imply high profits, but
lack of credit and other factors lower margins in practice
We calculate that USD3.3/bushel (bu) and USD7.3/bu are the break-even price levels for Brazilian corn
and soybean farmers, respectively, which increases to USD3.9/bu and USD9.5/bu for US corn and
soybean growers, respectively. Currently, corn trades at USD3.8/bu and soybean at USD9.8/bu. This
difference is due to a c45% depreciation of the Brazilian real (BRL) versus the US dollar, which has
offset the decline in prices for soybean and corn, traded in US dollars. While credit concerns may lead to
lower Brazilian farmer profitability for most of 2009, we argue that the underlying profitability of
agriculture in Brazil should reassert itself once Brazilian government aid filters through and farmers
regain their financial footing. This sets the stage for a strong rebound in nutrient demand in 2010e.
US farmers have strong balance sheets
We think that US farmers can still weather this period of lower profitability reasonably well due to their
solid financial status. The USDA estimates that American farms had a collective debt-to-equity ratio of
10% in 2008, the lowest level in half a century. This financial strength should allow US agriculture to
weather any economic challenges in the coming years.
Commodity and currency prices a global risk to our thesis
Our models of US and Brazilian farmer profits show that the latter group should enjoy higher net margins
than the former in 2009, even when taking credit considerations into account. This is dependent on the BRL
staying at current levels, ideally above BRL2.0 to the US dollar. Soybean margins are stronger than corn: in
Brazil (pro-forma) the former carry c32% profit versus c22% for the latter; in the US, the levels are c12%
and c6%, respectively. This is another positive for Latam agriculture, which specialises in soy. Corn growers
are more vulnerable to further drops in commodity prices, especially in the US, where margins are below
our 10% breakeven threshold. Further weakening of commodity prices, especially corn, could cause farmers
to further tighten their belts, and the nutrient demand pick-up we forecast for end-2009 could fade.
Economic downturn has only moderate impact on food demand
Investors may be concerned that current economic distress could change consumers’ nutritional habits. If
there is less money to go around, perhaps consumption of ‘luxury’ animal protein will fall in Asia,
causing demand to drop for grain for animal feed for pigs, cattle and poultry, with a knock-on effect for
fertiliser demand. Although a drop in protein consumption was recorded during the Asian financial crisis
of 1997, we do not believe this will be the case in 2009. The economic contraction expected in Asia (with
the greatest impact on marginal food and fertiliser consumption) in 2008-09 should not be as large as in
1997-98, and in the intervening decade, prosperity and better diets have reached more people than ever
before. The higher proportion of Asians involved in the trend of increasing prosperity give Asia more
stability in the face of economic challenges. Asian demand for food should continue to be a driving force
for greater agricultural production, providing a strong underpinning for global fertiliser demand.
The case for nitrogen
The last two quarters of 2008 were difficult times for nitrogen fertiliser producers. On the back of weak
international demand and the fall in crude oil prices (R2 = 0.88), urea prices plummeted c80% during Q4 2008

to reach a low of USD185/t. The Baltic Dry Shipping Index was down 72% from its peak levels, probably
stemming from a panic in the market. This was, in our view, an unsustainable situation with official
announcements suggesting that a total of 11.8m tonnes of urea capacity (9.0% of global supply) has been taken
out of the market as prices are below production costs (USD350-520/t). Furthermore, industry sources suggest
that the absolute drop in urea supply may be closer to 26% of global supply, when accounting for lower
capacity utilisation rates and plant shutdowns in China, where up to 10m tonnes of capacity has been shut
down since Q3 2008.
Nonetheless, urea prices are up sharply, by close to 60% since the start of 2009 to USD300/t, from December
2008 lows of USD185/t. We believe the rise is sustainable and look for an average price of USD300/t for the
rest of 2009, which implies an oil price of USD50/bbl, in line with the futures market. The speed at which
demand has re-emerged has taken producers by surprise and may partly have been helped by the
Russia/Ukraine gas row, but HSBC believes that we are approaching a period of inventory rebuilding. India’s
pent-up import demand for its November planting season (Rabi) is likely to be the main driver throughout H1
2009. A major blow to the global nitrogen industry would be the removal of Indian fertiliser subsidies, though
there is still little visibility on the speed at which the subsidy will be entirely removed.
Owing to the fixed cost structures of Middle Eastern urea producers, Saudi Arabia Fertilizers Company
(Neutral (V), TP SAR110), Industries Qatar (Overweight (V), TP QAR108) and Orascom Construction
Industries (OCI, (Overweight (V), TP EGP305), cash margins should remain healthy at USD230/t over
2009, on average, and any increment in energy prices, or more likely, imposition of taxes on Chinese
exports of urea (15% of global trade) would represent upside to valuations. For investors looking at
nitrogen fertiliser exposure, our valuation on OCI offers the highest potential return (172.3%) among
HSBC’s coverage. Assuming constant oil prices, we think the market has yet to reflect short-term
developments (share price is down 22% y-t-d), namely the rise in urea prices, and also project wins in its
construction business.
The case for potash
We estimate that global potash volumes will fall 12% y-o-y in 2009. The main drivers of this movement
are inventory destocking and the economic shock in Latin America, where we expect volumes to fall by
27%. However, this should be offset by increased usage in China and India as growing domestic food
consumption stimulates agricultural production. Farmers almost ceased to apply potash to their crops in
Q4 2008, and we think usage rates will continue to be low throughout most of 2009. Our views on 2009
potash volumes are quite conservative; in its Q4 2008 results conference call, Potash Corp estimated 2009
volumes would approximate the 2008 market. The pace of growth in demand could rise sharply at end-
2009 and entering into 2010. This is likely to be the result of the exhaustion of existing supplier
inventories, a better economic outlook, and falling grain stocks, which should prompt farmers to raise
production and yield as commodity prices strengthen.

We had previously forecast a 2009 spot price of USD1,250/t, with China and India agreeing to a USD850/t
contract price. We are reducing our price estimates for potash to USD850/t spot, an India contract price of
USD775/t, and a Chinese contract price of USD750/t. Regarding negotiations for the China price contracts,
we believe that the contract price will increase by at least USD100/t to cUSD750/t, given undiminished
demand from these areas and the gap between current contract pricing of cUSD650/t and headline
cUSD1,000/t spot prices. This gives us a floor below which spot prices should not fall, in our view.
The changes to our price forecasts reflect our view that, while demand is dropping, potash producers will for
the most part succeed in maintaining volume and price discipline during 2009, preventing major pricing
slippage. We estimate that potash suppliers have so far cut 5.45mt of production in 2009. This is 11.4% of
our full-year volume demand estimate and 23% of our projection for first-half demand. Approximately 8m
more tonnes will need to be cut in 2009 in order to fully match supply with our demand forecast.
Greenfield, financing, and political risk now envelop the Russian potash sector, making it highly unlikely
that companies such as Uralkali, Silivint, or Eurochem will succeed in completing their announced
production capacity expansion plans on time, or even at all. Outside Russia and Canada, there are no
major potash deposits or production locations. If in the future Canadian manufacturers are unable to meet
demand at a time when Russian production is paralysed, large demand and supply gaps may develop.
Such a scenario would be extremely positive for pricing, and this is the possible train of events that
underpins our long-term bullish view on potash price levels.
Our conservative estimates currently show an over-supplied potash market. But we believe that
fundamentally firm demand trends, along with palpable risks to new Russian capacity and demonstrated
industry discipline, will result in the market resettling at supply and demand levels that are advantageous
to producers and therefore maintenance of high prices.
The case for phosphate
In the case of phosphate fertiliser, weak international demand has led to Indian DAP production running
at a loss, with costs of USD688/t versus spot export prices of USD350/t and a domestic retail DAP price
of USD220/t (capped by the government). India is the industry price-setter – it is the largest importer of
DAP fertiliser in the world (5.5m tonnes in 2008) and the most inefficient, as plants are non-integrated.
Weak international DAP prices have led to an increasing amount of plant shutdowns, even among lowcost
Middle East and North African plants which remain in-the-money, but were witnessing very weak
international market demand. As at 31 December 2008, we estimate official phosphate producing plant
shutdowns at 5.3% of global supply (2.05m tonnes), excluding supply taken out the market via lower
plant utilisation. Based on announced reductions, Mosaic estimates the US industry operated at less than
40% of capacity during the month of December 2008.
Following the sharp downturn of both ammonia and sulphur prices (together accounting for c15% of
Indian DAP production costs), we think the only case for strong DAP prices lies in demand recovery, an
imminent scenario, in addition to attractively priced new phosphate rock contracts. This would require
price discipline from the world’s top rock suppliers, but with no proven track record, we see a strong
likelihood that 2009 rock contracts will drop to a year average USD225/t. This is in comparison to
USD380-420/t contracts during Q4 2008.

While our analysis points to an attractive phosphate market recovery, there is a key concern for
phosphate-fertiliser exposed names. We think inventory costs present the main issue for phosphate
suppliers globally. China’s balance of phosphate fertiliser inventory has doubled y-o-y to RMB7.4bn as at
December 2008, on the back of the rise in export duties. In spite of our positive view on DAP fertiliser,
such high-cost inventory appears to be burdening producers and the size of inventory writedowns over the
coming three to six months may come as a negative surprise to the market. We may also see producers
continuing input purchases to average-down inventory costs, but nonetheless, we expect at least one
quarter of writedowns (Q4 2008).
Jordan Phosphate Mines (JPMC) is relatively better-positioned thanks to its in-house phosphate rock
supply at cUSD40/t, whereas phosphate rock costs non-integrated DAP producers contract prices of
USD350-420/t plus freight; JPMC is, however, exposed to high ammonia and sulphur prices. We expect
Q4 2008 results to be very disappointing on the back of poor sales volume, a significant 65% drop in
DAP prices q-o-q, in addition to a JOD32m inventory writedown.

目录

Summary 1
Fertiliser demand 8
The nitrogen market 19
The phosphate market 32
The potash market 39
Company profiles 53
Orascom Construction Industries
(OCI) 54
Israel Chemicals 58
Arab Potash Company 66
Tekfen Holding 73
Gubretas 79
Bagfas 87
Jordan Phosphate Mines (JPMC) 94
Industries Qatar (IQ) 98
Saudi Arabian Fertiliser Company103
China BlueChemical 108
Sinofert 112
Disclosure appendix 121
Disclaimer 124