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Morocco – US: Fertiliser giant OCP faces challenges in North America

By Estelle Maussion
Posted on Monday, 11 January 2021 15:36

An OCP phosphate mine at Boucraa. REUTERS/Youssef Boudlal

The Moroccan fertiliser group, headed by Mostafa Terrab, is facing allegations of unfair competition by US-based producer Mosaic in an unprecedented dispute over the strategic North American market.

The United States, a country where the CEO of phosphate fertiliser giant OCP, Mostafa Terrab, once lived and studied, has been making the executive’s life difficult.

Since July 2020, the Moroccan group’s exports to the vital North American market have been at a standstill. OCP is one of the world’s top five producers alongside US-based Mosaic, Russia’s PhosAgro and two Chinese players, GPCG and YTH.

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OCP made the move after its US competitor Mosaic filed a petition with the US Department of Commerce and the US International Trade Commission requesting an investigation into unfair competitive practices. Mosaic, alleging that OCP receives subsidies, is demanding countervailing duties be imposed on Moroccan phosphate fertilisers.

Taken by surprise

The dispute – a first in OCP’s 100 years of operation and a rarity in the phosphate market – demonstrates the stiff competition in the sector. Influenced by US political considerations, the final outcome of this economic wrangling is expected in March 2021.

On the face of it, the case has gotten off to a bad start for OCP – which reported revenue of €4.9bn ($6bn) in 2019 – as the investigation took the company and much of the industry by surprise.

After opening at the end of June 2020 and being publicly disclosed by Mosaic – which reported revenue of $8.9bn in 2019 – and widely picked up by the media, the probe put the Moroccan group, along with Russia’s PhosAgro and EuroChem, also targeted, on the defensive.

After this rude awakening, and despite OCP’s reassuring statements as to its ability to make a convincing case against the imposition of duties, the preliminary investigation had an unfavourable outcome for OCP.

At the end of last November, confirming the US International Trade Commission’s initial analysis, the US Department of Commerce issued a decision in favour of a preliminary 23.5% duty on Moroccan fertiliser imports, much lower than the rate applicable to EuroChem (72.50%) but higher than the one applicable to PhosAgro (20.94%).

And, while it is hard to say what the final outcome of the investigation will be – with a decision expected by 25 March – there is a real possibility that the imposition of countervailing duties will be confirmed. Before the competition case was launched, the duty applied to OCP was less than 1%.

OCP upbeat but worried

While upbeat about its prospects – in OCP’s words: “We are persuaded that a thorough investigation will reveal that the petition is baseless” – the group is taking the matter seriously.

The moment the probe got under way, the company suspended its US exports. OCP also mobilised its teams to counter Mosaic’s hefty complaint, in which it accuses the Moroccan group of benefiting from preferential access to mining properties, government loans and guarantees, and tax exemptions and rebates.

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OCP is being represented by its longstanding legal representative, the law firm Covington & Burling. Its senior counsel, Stuart E. Eizenstat, a former senior official in several US administrations, was OCP’s official lobbyist from 2008 to 2015.

His colleague, Shara L. Aranoff, assisted Mohamed Belhoussain, OCP’s executive vice-president for sales, during the preliminary investigation in July 2020.

Three PR firms retained

Further attesting to the matter’s significance, in October the group headed by Terrab, who holds a degree from the Massachusetts Institute of Technology (MIT) and previously worked as an analyst at engineering company Bechtel, retained three PR firms (Cornerstone Government Affairs, FleishmanHillard and CCO) to defend its position.

OCP argues “[it= does not benefit from any government subsidy” and “phosphate fertiliser imports from Morocco do not harm the local US industry”.

In early December, FleishmanHillard’s agriculture specialist Tony Zagora launched a PR campaign to promote awareness about the OCP situation among the American public.

Called “Stand with US Farmers” and led by OCP North America chief executive officer Kerry McNamara, who has served as Terrab’s adviser since 2010, the campaign sounds the alarm on the consequences of limiting the supply of fertilisers and the potential increased costs that Mosaic’s complaint could trigger. The campaign’s website calls on people to sign a petition directed at the US congress.

OCP halted in its tracks

OCP is hard at work on the issue because Mosaic’s complaint has halted its activity into the US market, a crucial source of revenue. In 2016, OCRP created both OCP Africa and a US subsidiary.

Initially focused on market analysis and partnerships, OCP North America has expanded to include sales and marketing divisions. These internal changes went hand in hand with fast business growth: North America’s share of the company’s revenue increased from 12% in 2016 to 16% in 2018.

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The following year, the region accounted for 21% of the group’s exports, just behind South America (30%). The data regarding Morocco’s raw phosphate exports to the United States are even more telling: 1.3m tonnes (mt) in 2017, 1.8mt in 2018 and more than 2mt in 2019, representing around $1.9bn over a three-year period.

“Morocco is the biggest exporter of monoammonium phosphate/diammonium phosphate into the US, accounting for around 60% of the US imports, followed by Russia with around a 25% share in 2019,” Fitch Ratings wrote in July.

Mosaic, the big winner?

Is Mosaic the big winner and OCP the loser? Things are not so clear-cut in the run-up to the investigation’s final outcome. In the US, the withdrawal of Moroccan and Russian players has definitely proved a boon for domestic producers, including the leading firm, Mosaic, which has effectively taken back control of the US phosphate sector.

The US company – which did not respond to requests for comment – has rid itself of its most serious competitors, now replaced by others – Australia, Mexico and Saudi Arabia – that have production costs more in line with its own.

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Mosaic’s manoeuvring has also pushed up phosphate prices in a global environment marked by low prices since 2019. In the third quarter of 2020, i.e., after the preliminary investigation launched, US-produced phosphate fertiliser was selling for $20 and $40 more per tonne, respectively, than fertiliser in India and Brazil. One year earlier, US phosphate fertiliser was selling for $20 less than these two countries’ prices.

Despite this good news, Mosaic’s financial position is still precarious, as its cashflow from has almost been halved in four years. Its 2019 revenue showed no change from 2015 levels.

Global competition

OCP has responded to the setback through diversification. “The Moroccan group swiftly responded to and offset the suspension of its exports to the United States by increasing its exports to other countries, including Brazil and India,” said Mounir Halim, managing director of Afriqom, a consulting firm specialising in the African fertiliser market.

As a matter of fact, Brazil is a key market for Mosaic, which acquired Vale Fertilizantes in 2018 and invested in production and port infrastructure there. Though Mosaic has forced OCP out of its North American sphere of influence, it will nevertheless compete with it elsewhere.

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“Being shut out of a market is never a good thing, but OCP, as one of the world’s most competitive fertiliser producers, has plenty of alternatives,” said Glen Kurokawa, senior analyst at CRU.

Fitch Ratings emphasised OCP’s numerous advantages, such as its international footprint, position as the world’s leading phosphate fertiliser producer and low production costs, arguing that if the US ultimately imposes countervailing duties, the measure would have a limited impact on the group’s performance and no effect on its rating.

Once the final outcome of the investigation is known, OCP’s return to the US market will be determined by a calculation: can the group maintain adequate margins despite the cost of potential import duties?

Unknown political variables

In addition to these economic considerations, there are unknown political variables. For one, the arrival US President-Elect Joe Biden in office and the recent diplomatic rapprochement between Morocco and the US are likely to have an impact on the ongoing investigation.

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While experts say that such investigations are purely administrative and that there is generally little difference between preliminary and final decisions, the reality is that Mosaic – whose lobbying activities are performed by Ballard Partners, a firm headed by Brian Ballard, a major donor of President Donald Trump – has overwhelmingly played the protectionist card. The US company has repeated over and over that 3,500 jobs are at stake in the country.

Will these arguments have as much impact when Biden takes office? On 10 December, he nominated attorney Katherine Tai as US trade representative. While some have been quick to praise her “diplomatic skills” and “pragmatism”, her backers also underlined that she is determined to “ge[t] wins for American workers”. OCP is now factoring these new variables into its complex US equation.