China needs fertilizer more than steel
China needs fertilizer more than steel. If the Middle Kingdom’s industrialization follows the course of other nations, per capita demand for infrastructure like concrete and steel will peak long before meat consumption.
This may explain why mergers and acquisitions activity in the agriculture sector has become so hot. For example, miner Vale 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 particularly 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 (1,300 kg and 500 kg, respectively) is already at levels higher than most industrialized countries’.
Yet the revolution of the stomach moves at a slower pace. While U.S. steel production per capita peaked in the 1950s, demand for meat has grown consistently. Americans now eat 276 lb (125 kg) per annum, an increase of 60 percent since the 1950s. Other developed countries show the same pattern.
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 lb (45 kg), and this figure may be inflated. Raising more animals will require copious feed — one full steer requires around 3,000 lb (1,360 kg). Growing this grain will increase demand for fertilizer substantially. China is already the biggest consumer of potash (a quarter of all global production) and top producer of phosphate — and it slapped restrictive tariffs on exports in 2008.
While these trends appear abstract, they affect corporate behavior. The economic meltdown sent commodity prices into a tailspin. While steel insiders cautiously slammed the brakes on M&A, fertilizer companies went hog wild. Among the deals, hostile brawls broke out among 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 each other up.