Minerals vs. Oil & Gas Exports

Iron and phosphate exports as alternatives to oil & gas?

A TV show, that I would not name, on July 27, 2016, deeply shocked me.  It involved few so called experts who claimed, without restraint that thanks to exports of phosphate and iron ore, Algeria would face and quite happily overcome the drop in the price of oil.  It is as if it is Minerals vs. Oil & Gas Exports.

Unconsciousness or demagogy, misleading both public opinion and policy makers of the country, like those who had promised the Government a the price of oil to get back to $70 a barrel between January and June 2016, whereas it on July 27, 2016 the WTI closed at $41.88 and the Brent at $43,84.

However for either phosphate or iron (raw or semi raw), exploitation would depend on such constraints as those related to the environment, internal strategic management, chemical content, etc. that would also determine all operating costs.   These are directly linked to the world economy growth and to the structure and the forthcoming fourth industrial revolution projected to gradually be put into place around 2017/2030.  Further to my previous contributions, attached herewith is my analysis as assisted by experts, which I hope will be of some use to the Government.

1 - Phosphate is a key component used in the composition of fertilizers which are of crucial importance for food security worldwide.  The reserves are in this  order, Morocco with 50,000 million tons (Mt), China – 3,700 Mt,  Algeria – 2200 Mt, Syria – 1800 Mt, South Africa – 1500 Mt, Russia – 1300 Mt, Jordan – 1300 Mt, Egypt – 1250 Mt, Australia – 1030 Mt, USA – 1,100 Mt, Saudi Arabia  - 950 Mt.

As far as production is concerned, it totalled in 2015, 223 Mt including China with 100 Mt, Morocco 30 Mt, USA 27.6 Mt, Egypt 5.5 Mt, Tunisia 4 Mt, Saudi Arabia 3.3 Mt, Israel 3.3 Mt, Australia 2.6 Mt, Viet Nam 2.6 Mt, Jordan 2.5 Mt and Algeria 2.6 Mt.

The price of raw phosphate was divided by three since its peak of 2008, and had fallen by 43,2% since 2011. The world price stabilized at around $115 (average monthly in 2015)  per metric ton.

According to the World Bank, the general trend and medium term of phosphate products prices would remain oriented downward whereby it will most probably be negotiated in 2020 at $80 to $85 a metric ton, of the Di-Ammonium Phosphate (DAP) at around $377.5 a tonne (vs. $464 to the month of April 2015) and the Tri-Sodium Phosphate (T.S.P.) to near $300 a ton against $380 today.

Then if we export three million tons of raw phosphate annually at an average price of $100 between 2017 and 2020, we would make a turnover of $300 million.  And because of related costs being very high (notably depreciation and wage costs) at minimum 40%, the net profit would be $180 million.

In the case of association with a partner from overseas under the rule of the 49 / 51%, net profit would be slightly more than $90 million.  For a hypothetical annual export averaging 30 million tonnes a year, provided opportunities and heavy investments were there, the net profit would not exceed $1 billion.

It is far from those profits from hydrocarbons.  Therefore, to increase the net profit, there is need to engage in highly capital-intensive processing units with heavy investment and profitability in the medium term depending on exported quantities.

Thus, in a competitive market as that of the EU, urea fertilizer sold for more than €350 a ton in 2014 and was on 2016/07/27 at €270 per tonne noting that the high volatility pricing of ammonia on the world market these past three years between €450 and €600 a ton.  This is between four to five times that of oil.

But large exportable quantities would require heavy investments and profitability relative average not before 2020 if the project was carried out by 2016.  Also it would mean partnership due to the fact that this sector is overseen by a few firms worldwide.

In addition, Algeria should solve the problem of the transfer price of the gas that cannot be aligned with that of the market and at the same time prevent any disputes.  In this context, I recommend, following many experts that all matters of petrochemicals is best to be attached to the Department of Energy / SONATRACH for more coherence and effectiveness, and even create a Secretariat of State for all petrochemical industries.

2 - For iron, global reserves were assessed according to international bodies to be 85,000 million tons.  Australia is in the lead with 24,000 Mt, followed by Russia with 14,000 Mt, Brazil with 12,000 Mt, China with 7,200 Mt, India with 5200 Mt, United States with 3500 Mt, Venezuela with 2,400 Mt, Ukraine 2,300 Mt, Canada 2,300 Mt and Sweden 2,200 Mt; Algeria is not cited in international statistics but according to Algerian data that could safely be quoted the exploitable deposits should be between 1,500 and 2,000 Mt*.

For production of iron, the whole world’s is of 3.32 billion tonnes, with by far China in the lead followed by Australia and Brazil.  It is estimated that there is about 75 to 80 years of world reserves of iron ore (at the current rate of exploitation).  China is the leader of the iron ore market as well, with 1.38 billion tonnes of ore extracted, with far behind Australia (824 Mt, Brazil, (428 Mt), India (129 Mt), and Russia (112 Mt).  The price of iron does fluctuate and it has been rated on July 27, 2016 at $56 per metric ton.

With reference to the statistics of the EU imports, these have evolved from €84.49 per metric tonne in January 2009, to €116.84 in January 2012, €83.77 in in January 2013, €96.27 in January 2014, €63.51 in January 2015, €48.23 in January 2016 and it is expected that to be between €50 to €58 between September and December 2016 and Canadian Scotiabank specializing in the evolution of the prices of materials provide in its note of economic situation on July 6, 2016, an international award between $48/50 between 2017/2018, depending on especially the recovery of the Chinese economy, Chinese steel mills absorbing 70% of global demand for iron ore, between 2014/2015

At $60 a ton, iron export of 3 million tons/year, would make $180 million sales and with 40% costs taken away would leave $108 million to share as per the rule of the 49 / 51%, giving Algeria less than $55 million.  And with 30 million tons a year of exports, net profit for Algeria would not exceed $600 million per year.

The exploitation of the Gara Djebilet railway will require major investments in power plants, transmission networks, rational use of water and sharp human resources training.

So only transformation to noble products could provide a greater added value to export.  Thus, the price of steel being very fluctuating amounted to $620 per tonne on July 22, 2016 against $580 dollars per tonne on July 19, 2016-and $449, during the last 12 months: so caution to be exercised not to repeat the negative experience of Al Hadjar.

Of the oligopolistic structure of the mining sector, at the global level, the only solution would be a partnership win / win with renowned firms that might not accept the restrictive rule of the 49 / 51% with its accompanying bureaucracy legacy.

In summary, Algeria needs a strategic vision within which its industrial policy (institutions, financial, tax, customs, federal lands, socio-educational system, the market of labour, land etc.) should fit and adapt to the new chains in perpetual evolution driven by innovation.

Dr. Abderrahmane Mebtoul, University Professor, Expert International,  ademmebtoul@gmail.com

Translation from French by Microsoft / FaroL  faro@farolco.onmicrosoft.com

Gara Jebilet opensky Mine