Ukraine war fallout benefits one of world’s biggest fertiliser groups

The fallout from Russia’s invasion of Ukraine has been catastrophic for European nitrogen fertiliser companies.

The soaring prices of the natural gas that is their feedstock forced them to cut output by more than two-thirds at times last year. The war also disrupted the supply of fertiliser from Russia, the biggest exporter in the world.

But for Morocco’s OCP Group, the world’s largest phosphate fertiliser company, 2022 brought record earnings thanks to higher prices and profit margins. In the first nine months of last year, operating profit reached $3.65bn, up from $1.99bn for the same period in 2021.

Nitrogen fertiliser is made from natural gas, but phosphate is a mined mineral usually combined with other nutrients to make fertiliser. OCP has exclusive access to the 70 per cent of global phosphate reserves that are located in Morocco. It is one of the five top exporters of fertiliser.

Mostafa Terrab, chair and chief executive, and the man credited with transforming the company from a lossmaking quasi-state agency exporting mainly phosphate rock to a leading fertiliser manufacturer, told the Financial Times the world needed more investment in the industry and that prices had been rising even before the war.

“It is due to a structural imbalance between demand and supply,” he said. “If you look at the past 20 years there has been very little investment in fertiliser production.”

A former telecoms regulator, Terrab was appointed to head OCP in 2006, when it was a minor player in the market. He spearheaded radical reform, converting it into a joint-stock company in 2008 with the state owning 95 per cent of the shares.

“The phosphate rock trade was going down in volume . . . and it was not very high margin,” said Terrab, adding: “The only growth in that value chain was in the finished fertiliser product. So the strategy was very simple, it was to invest in fertiliser production, but to do that we needed financing.”

The change to a joint-stock company allowed OCP to access international debt markets, with a bond issue to fund a $10bn capital spending plan.

Armed with the new money, in 2012 Terrab set about building an integrated industrial business with major investments in mining and fertiliser production and even a university to support R&D. The company also recently announced plans to invest $13bn in renewable energy and “green” hydrogen, produced with renewables. The aim is to be carbon neutral by 2040.

By 2021, OCP’s fertiliser capacity had quadrupled to 12mn tonnes and revenues were at $9.4bn, compared with $2.5bn in 2005.

In mid January, Moody’s assigned the company an investment grade credit rating for the first time, of Baa3. It said OCP benefited from trends in demand “driven by a growing global population and reducing arable land”.

Russia’s invasion of Ukraine sparked fears about food security, especially in Africa where many small farmers could no longer afford fertiliser. Prices have more than tripled since early 2020 and although they have eased in recent months, they remain “at historically elevated levels,” according to the World Bank.

This has placed crucial fertilisers “out of reach for most [African] farmers, putting the crop cycle and rural stability at risk,” said World Bank president, David Malpass in December.

Terrab argues that Africa holds the key to global food security because it has 60 per cent of the world’s unused arable land. Currently, however, he said, Africa did not produce or use enough fertiliser to fulfil its potential.

As well as in Morocco, there were phosphate reserves in Tunisia, Algeria, Egypt, Togo and Senegal, he said. Africa also had potash, another nutrient, and natural gas, he added.

“We [in Africa] should be totally self-sufficient, and even export,” he said. “The big opportunities are really in Africa. And that’s also if you look at the pent-up demand.”

One longstanding hurdle to increasing agricultural yields in African farms has been low fertiliser use — the continent has the lowest consumption in the world. In 2006, African leaders pledged to increase average use to 50kg per hectare by 2015 up from 7kg, but the target was missed and World Bank figures show that consumption was 22.5kg in 2020 compared with a global average of 146kg.

In the wake of the Ukraine war, OCP, which supplies 70 per cent of fertiliser in Africa, gave more than 500,000 tonnes to small holders in sub-Saharan countries, some of it free, the rest at a discount.

It plans to sell 4mn tonnes, or more than a quarter of its expected output, on the continent in 2023 under a program that includes training for farmers in co-operation with multilateral donors. Terrab insisted the company’s key strategy of developing customised fertilisers, tailored to specific African soils, was the way to cut prices and increase yields.

“It is cheaper to customise because we use less nutrients,” he said. “We don’t force farmers to buy what they don’t need.” OCP said its customised products had already increased yields for farmers in Ethiopia, Tanzania and Ghana.

Although only 25 per cent of OCPs sales are in Africa, the company views it as a key growth area and has created a dedicated subsidiary, OCP Africa, and special production units.

OCP started looking south in 2012, at a time when Moroccan businesses sought growth in sub Saharan states to expand beyond their limited domestic market. The strategy, encouraged by Mohammed VI, the monarch, helped build the kingdom’s soft power and influence in a region considered key to its primary foreign policy concern — to shore up international backing for its claim over the disputed territory of Western Sahara.

In 2017, the kingdom rejoined the African Union, 33 years after it had left in anger over the recognition of the Sahrawi Arab Democratic Republic, set up by the Polisario Front, which seeks independence. But Terrab insisted OCP was not a tool of foreign policy.

“When we decided to go to Africa as a corporation, we did not have a crystal ball and we did not know that Morocco was going to become interested in rejoining the AU,” he said. “But when his majesty embarked on his tours [of African countries], we would have been stupid not to mention or take advantage of the fact that we were already there.”