Constraints and Opportunities for Fertilizer Use
Virtual Dialogue Summary, 10 December 2015
What is the market structure in Africa´s fertilizer market?
Africa’s fertilizer market features three main segments: North Africa comprising (Egypt, Morocco, Tunisia, Algeria and Libya), South Africa and Africa south of the Sahara (mainly Nigeria, Senegal, Ivory Coast, Togo, Gabon and Equatorial Guinea in West Africa and Ethiopia, Kenya, Tanzania, Zimbabwe, Zambia and Malawi in East and Southern Africa).
The operating features of these markets include extraction, production, importation and distribution of raw materials, intermediates and final fertilizer products. While raw materials have been discovered in a number of countries, only those countries with commercially extractable deposits are actively extracting the materials and manufacturing intermediate products. Numerous mineral deposits are small and currently cannot sustain large-scale “greenfield” production enterprises by the private sector.
The participants noted that countries active in natural gas extraction for more than three decades are in the North (Egypt, Algeria and Libya) and in the last decade in the West (Nigeria, Gabon, Equatorial Guinea). Most recently countries in the South (Angola, Mozambique, Madagascar) have begun extraction of natural gas. For phosphates, commercial extraction is actively being pursued in the North (Morocco, Tunisia and Egypt), in the West (Senegal, Togo) and in the South (South Africa, Tanzania and Zimbabwe). Potash salts are the least present in the continent and commercial deposits have been identified in DRC, Ethiopia and Nigeria. However no commercial extraction is taking place for the manufacture of muriate of potash (MOP).
The extraction of raw materials and production of intermediates go hand in hand in most producing countries. Ownership and operation of these extractive plants has all along been dominated by the state but the private sector has entered into joint ventures with governments in the most recent past. Another common feature is that these operations are being conducted at a single plant within each country in order to leverage economies of scale. A large-scale operation is key in lowering cost of production and maintaining international competitiveness.
The industries in the north produce surplus natural gas and phosphoric acid for export to Europe but industries in Sub-Sahara Africa are producing largely to meet domestic needs. There is potential for SSA to produce for export in the future. South Africa is a net importer of natural gas. The continent is importing all of the MOP to meet its needs.
In terms of final products, there are three main product categories produced in Africa: Urea; Nitrates and DAP/MAP (phosphate-based fertilizers). Urea is being produced in Nigeria, Egypt and most recently in Gabon. Nitrates are being manufactured in South Africa, Zimbabwe and Zambia. DAP and MAP are manufactured in the North (Morocco, Tunisia and Algeria), in the West (Senegal, Ivory Coast and Togo) and in the South (South Africa, Tanzania, Zimbabwe and Zambia). Production in Africa is not internationally competitive, as can be seen in Figure 1.
As pointed out by Dr. Máximo Torero, five countries control more than half of the world’s production capacity of urea (a nitrogen-based fertilizer), DAP/MAP (phosphate-based fertilizers), potash and NPK (Figure 2). In the case of potash, this concentration ratio was above 77 percent in 2008/09, with Canada and Russia explaining more than half of the global capacity. Basically the same countries (China, United States, India and Russia) control the majority of the production capacity of urea and DAP/MAP as well. This geographical pattern of fertilizer production is largely determined by the availability of raw material across the globe.
Imports of final products outcompete local products because local plants are small by international standards, costs are high, their technology is obsolete, and they are not energy efficient in terms of converting raw materials to final products. In addition, the capacity to move raw materials and intermediate products regionally is seriously hampered by the absence of infrastructure (ports and transport).
Figure 1: International Production of Selected Fertilizers
Source: Data on fertilizer nutrient consumption and imports from FAOSTAT database
Figure 2: Main Producers of Selected Fertilizers
Source: Worldwide Fertilizer Capacity Listings
The involvement of the state in fertilizer production is often driven by food security rather than business principles. African fertilizer industries in the north remain internationally competitive but industries in Africa south of the Sahara are only regionally competitive and for the foreseeable future will depend on imports representing nearly 95% of the fertilizer consumption (Figure 3). Although South Africa is internationally competitive, its reliance on imported final products is increasing and imports have provided more than half of its consumption needs in the last ten years.
Figure 3: The Percentage of Imported Fertilizer
Source: Data on fertilizer nutrient consumption and imports from FAOSTAT database
Since most of the fertilizer distributors are part of existing global chains (i.e. YARA), the domestic market is highly dependent on the global players, making it vulnerable to any global crisis. The global industry of fertilizer is also concentrated in few companies, with leads to collusion and control of prices and product in the absence of anti-trust global or regional legislation.
Domestic Supply and Demand
Given the limited scale of operation and direct state involvement in production and importation, single channels of distribution have been common but the differentiation of final users has given rise to multiple supply channels in most countries. The primary use of fertilizers is for grain crops (maize and wheat). Fertilizers are also commonly used on export crops such as sugar, tea, tobacco, flowers and coffee as well as commercial vegetables.
Commercial distributors and export crop companies supply commercial growers while government and NGOs supply smallholder producers. The active presence of parallel government distribution channels has resulted in some leakage of subsidized product into commercial growers causing disincentives for distributors of commercial fertilizer. Some experts suggest that the initial fixed cost of setting up the industry and underperforming infrastructure network are a barrier and lack of trust makes public-private partnerships unlikely.
Furthermore, on average, farmers in Africa south of the Sahara use about 14 kg of fertilizer nutrients per hectare of arable land compared to 92 kg/ha in Latin America and the Caribbean, 104 kg/ha in South Asia, and about 230 kg/ha in Southeast Asia. The application rates in Africa south of the Sahara are low even by comparison with the average for developing countries, 94 kg/ha. In absolute terms, fertilizer use in Africa south of the Sahara is about 2.3 million tons, compared to the global figure of 141 million tons. It should be noted that these figures include South Africa, which accounts for about 41% of the total for Africa south of the Sahara. If we exclude South Africa, the continent-wide average falls to 8.7 kg/ha.
What is the role of policy in Africa’s fertilizer market?
The region needs policies to incentivize both the demand and supply sides of the market. On the supply side, there is ongoing work from national and regional stakeholders on institutional policies across borders to facilitate resource mobilization, production and trade of fertilizers. Several blending facilities have lately started production in the region as well, in order to allow farmers get fertilizer products that conform to the soil and crops in their locations. On the demand side, policies can influence the optimum application rates per crop based on the soil type and quality and overall consumption levels through prices.
A legal framework has to be accompanying each of these policies in order to guarantee their success. Tariff and non-tariff barriers, for example import permits, roadblocks, border delays and fees need to be evaluated for both short and long-term impacts. Taxes (corporate and value-added) can also be used. Resource administration policies are also important, specifically land tenure issues such as registration and titling of plots and parcels.
For specific market development, any system of subsidies/transfers needs to be set up in a way that will not preclude entry by the private sector. Programs in Malawi and the e-voucher in Zambia have shown that well-implemented fertilizer subsidies for the farmers can contribute to food security. E-vouchers, even if they are still in a pilot stage allow farmers to discuss with the dealers the best inputs needed rather than having a pre-assigned set of fertilizers, highlighting the need for good soil maps.
However, it should be noted that input subsidies have different objectives than safety net programs for social protection. Input subsidies are designed to enhance productivity but these farmers might not have been necessarily the poorest farmers. The optimum subsidy should be developed under a short period of time, to promote use and access, but not create reliance of the farmer in the aid and crowd out the private sector. They should also be targeted, not only to the farmer’s situation, but to the crop and the soil structure in order to maximize their effect.
What are the constraints that exist?
It was noted that there is a lack of public-private dialogue on fertilizer policy and even less public-private investment in market development. As noted previously, participants noted several issues regarding the supply of fertilizer. In the realm of competiveness, the suppliers are too few, with a market underdeveloped and highly reliant on imports. Several factors affect the import supply of raw materials and final products including its high per unit freight cost and the limited capacity of ports that cannot accommodate the offloading of large vessels nor allow dockside bagging. The delivery logistics inland are also inefficient (poorly coordinated bagging, blending, distribution and warehousing and high transport cost due to poor competition in the trucking industry, the shortage of covered trucks, and lack of sufficient infrastructure). Networks are underdeveloped with outlets concentrated in urban centers and along the rails and the clients are dispersed. Distributors then need high operating margins to cover the distribution costs and risks. On the business side, tracking finances are costly and market information is poor given the lack of transparency which hinders the ability to forecast prices, stocks, inventories and costs.
From the demand side, there are weak profit incentives and low capacity to acquire and use fertilizers. There is high production and market risk and there is general unavailability of complementary inputs (hybrid seed). The output markets are also unstable and underdeveloped.
Farmers also lack knowledge on prices of inputs and market information, fertilizer and nutrient combination needs, which then results in incorrect and unprofitable use of fertilizers (if any at all). There is a lack of available information such as access to detailed soil maps and affordable credit services and viable insurance to mitigate risks. Without proper recommendations that can result in high yields and good profits, there are weak incentives for fertilizer use hence limited demand. It also leads to low nutrient use efficiency, high fertilizer cost, soil and environmental degradation, and reduced farmer’s confidence in those providing fertilizer and advice.
The upside of these issues is that communication campaigns can have high returns, as it was observed in some projects for Malawi, Zambia, and Zimbabwe. Innovative ways of distributing information have proven successful. For example, upward intergenerational transmission can be a way of bypassing older farmers illiteracy, transmitting information to the children of the household at school so they can communicate it to their parents.
Opportunities for Africa’s fertilizer markets
Richard Mkandawire (AFAP) noted that there is clear appetite for reforms among most governments in Africa since it has become evident that current fertilizer interventions are not helping the agricultural sector and the high level of public expenditures on fertilizers is unsustainable. It appears that governments are seeking alternative models to increase fertilizer use among smallholder famers and there is a movement towards private sector driven programs but there are still connectivity challenges.
The biggest opportunity lies in the fact that potential demand is growing due to growth in population which will mean increased demand for food and feed and better living standards. Also, countries in the region are experiencing the depletion of their natural resource base, which is decreasing per capita arable land and dwindling organic material and nutrient reserves in soils. In addition, certain countries are experiencing particular situations in market structures that allow for new prospects. Opportunities are arising in the technology field from new developments in bio-chemical industries (which is improving the quality of fertilizers while driving their prices down), but it will be needed to push for transparency and rigorous evaluation of the ongoing projects.
Dr Jones Govereh noted a few specific opportunities: For example, in Kenya, liberalization of imports/distribution and loosening of price controls will increases supply capacity and improves access in terms of price, time, place, quality and quantity. Nigeria, Ghana, and Gabon are experiencing new discoveries of oil and gas and other feedstock which enable large-scale investments in greenfield operations and export opportunities for surplus. Gabon is also developing Public-Private Joint ventures in production and operation of ports that hopefully will mean more efficient performance of input/outputs distribution. Zambia, Mozambique, Malawi and Zimbabwe are experimenting with smart subsidies that offer targeted social support to poor farmers to kick-start market development.
Regional Free Trade Areas like ECOWAS, EAC, SADC and COMESA and the Tripartite Free Trade Area (TFTA) can allow for regional operations and attract huge and long-run capital investments, by facilitating the commerce across borders. The affluence of growing opportunities in the region however, call for careful design and targeting of policies, with a clear understanding of medium and long term goals for market creation that are balanced with the enticement of short term goals through subsidies and tax breaks.