From Times Online
May 19, 2010
How to play China’s growth - buy fertiliser
Leo Lewis, Asia Business Correspondent
Investment managers from more than 400 of the world’s largest pension, hedge and sovereign wealth funds were told yesterday how to play the long-term growth of China, recurring water shortages and Beijing’s dread of social unrest: buy fertiliser.
The recommendation, made at a CLSA Securities forum in Shanghai, came amid rising concern over the immediate prospects of the Chinese economy and dismally performing stocks on both Hong Kong and mainland markets.
The past few days have seen new forecasts from analysts suggesting that, at least in the present cycle, Chinese growth has passed its peak and that the banking sector’s astronomical levels of new lending in 2009 may evolve into bad loan problems for companies and local governments.
But China’s need to feed its population, argued CLSA’s Simon Powell, will remain a constant and worsening environmental circumstances will only make it more difficult. Behind the glitter of growing cities and hum of factories, China still has to feed 20 per cent of the world’s population with only 7 per cent of its arable land and fresh water.
Realistically, and given Beijing’s absolute resolve to be self-sufficient, huge increases in fertiliser use are the only way to bridge the gap between demand and supply. That fact is already well appreciated in rural China. Since 1978, Chinese fertiliser use has risen sixfold and the country already uses 30 per cent of all fertiliser produced in the world. Even then, per hectare use is still less than half that of Germany or Japan, leaving vast scope for increase.
The presentation concluded with several stock ideas, including China Blue Chemical and Qinghai Salt Lake Potash.
Food consumption in China’s swelling cities has doubled since 2002 and shows little sign of slowing. The dietary taste for meat - and the large quantities of grain needed to feed livestock - is soaring. Even in rural China, food consumption has grown relentlessly at over 13 per cent per year for the past decade.
But even as rising wealth has increased the overall appetite, China’s famed economic growth is making the business of feeding everyone harder. Farmland has shrunk by 6 per cent since 1996 and industry, admitted China’s Ministry of Land recently, has left more than 10 per cent of total arable land contaminated. Large parts of the country are suffering desertification, over 150 Chinese cities have populations over one million and construction is encroaching on high-quality arable land. Months of drought have crippled farming in the south and water shortage is chronic.
“If the decline [in farmland] continues, the country’s grain safety and social stability will be endangered,” Mr Powell said. “China’s industrialisation targets are not yet complete and the country is only halfway to the urbanisation level it aspires to. Hence it will be difficult to prevent further reductions in China’s arable land-bank over the next three years or so.”
The effect, he added, would be significant rises in crop prices and mounting pressure and incentives for farmers to increase their yields dramatically. All three major forms of artificial fertiliser - nitrogen, potassium and phosphorous - will be in hot demand.
But added to that underlying demand will be the bigger structural efforts of Beijing to ensure food security: one of the central pillars of CLSA’s pitch. Generous subsidies are expected to remain firmly in place. Efforts to impose consolidation in the farming sector have already begun, implying larger farms and greater fertiliser use. In 2008 the National Development and Reform Commission announced six policies to boost agriculture: four were related to fertiliser.
