Coming Up To The Boil

Chris Lawson, CRU, UK, examines an Asian fertilizer market going haywire on sharp price increases.

After bottoming out in 2020, fertilizer prices have increased sharply through 2021. Downstream markets such as urea, phosphate fertilizers and potash have all bounced to levels not seen in a decade, and the raw materials ammonia, phosphate rock and sulfur have all followed. This article explains the specific reasons for the price rises and the outlook for the coming year. It will draw on developments in the Asian market, which has been at the epicentre of the market volatility.

Agricultural commodity markets support strong demand

The key driver for fertilizer prices has been rising grains and oilseeds markets. Despite some weakness over June (typically a volatile month), agricultural commodity prices have boomed throughout 2H20 and 2021. This is mainly owing to import demand from China, where exceptionally high pork prices – triggered by the lesser acknowledged pandemic of the African swine flu – has pushed grain prices sharply higher. Global stocks have been drawn down, unfavourable weather has spurred on supply concerns and demand has been insatiable. Fertilizer markets have long been able to ride the tailwinds of agricultural markets, and 2021 is no exception.

Nitrogen market remains hot despite new supply Phosphate price spread a gaping chasm

The world has ample nitrogen supply, and this supply is being added to, mainly through West Africa and the Commonwealth of Independent States (CIS). But demand has been exceptionally strong and short-term supply constraints have seen the market ratchet higher. China remains the marginal exporter, and its own domestic demand pull and rising coal prices have seen its market tighten significantly, elaborated on further in this piece. Furthermore, India has been slow to ramp up its new capacity, while other new projects have also been delayed.

The February deep freeze in the US further hindered global supply in an already delicate market. Indian and Chinese market dynamics, again elaborated upon later in this article, will support the market over the coming months, but a new wave of supply should see the price bubble burst in 2022. This new supply includes Asia, with new plants in China, India and Brunei all set to commission over 2021 and 2022, significantly altering the balance of the market.

Phosphate prices plunged to new decade low levels through 2019, and producers started 2020 with extremely tight margins. But markets have rebounded beyond expectations and are now tracking beyond decade highs. Like nitrogen, demand has been extraordinary. But trade flows have been rerouted following successful countervailing duties issued by the US government against Morocco and Russia last year. Supply has also been constrained by low 2020 prices, COVID-19 lockdowns, technical issues and a lack of raw materials – all issues evident throughout Asia. The perfect storm of fundamentals has seen prices spring higher. However, the end may be near, with China Figure 1. Phosphate price spreads have opened to new extremes. Source: CRU Fertilizer Week. ramping up production and the market seemingly loosening. Price spreads between east and west markets have never been so wide. This may cause some short-term pain for the Asian markets – but the producers are slowly but surely responding, and prices will correct. Figure 2. Belaruskali alone accounts for around a fifth of global MOP production and exports. Data from CRU Potassium Chloride Market Outlook. Note: all data refers to 2020.

Potash markets subject to geopolitical tensions

Potash markets are famed for being controlled and unsurprising. But 2021 has been the ultimate exception to this. Geopolitics, strong demand, tight supply and

producer strategy have all played their part in sharp price rises.

Belarus, which is responsible for close to 25% of global muriate of potash (MOP) exports and a key supplier to Asia, is now subject to sanctions following the grounding of a Ryanair flight earlier this year. However, these sanctions excluded the most important grade of potash exported from the country.

Elsewhere, Mosaic has been forced to curtail production, while Nutrien is belatedly lifting its. India has signed two different annual potash contracts, but suppliers have been unsuccessful in attempting to draw the hand of China’s buyer consortium in reagreeing its annual prices.

Despite Belarusian sanctions being limper than anticipated, prices are expected to continue appreciating over 2021. But potash buyers should not fear tight longer-term supply, given the number of major projects in the pipeline over the medium and long term.

Sulfur supply tight on reduced refi nery activity

Sulfur markets have been characterised by remarkable rises throughout 1Q21. But 2Q21 price changes have been remarkably unremarkable, despite volatility across all other fertilizer markets.

Refinery curtailments throughout 2020 tightened sulfur supply, and this carried over to 2021 as demand picked up. Industrial demand, another key sink for the sulfur market, has also increased more than anticipated.

While further increases in phosphate prices and a drawdown in sulfur stocks hold some hope for producers looking to push prices higher, new supply on the horizon is set to spoil the party. A wave of new refinery projects is set to arrive throughout 2H21, with the full price impact set to hit the market in 2022.

Indian government slow to respond to dynamic markets

Indian farmers benefited from favourable weather and subsidy support in 2020. And, despite the COVID-19 gloom, 2020 was a much-improved year for fertilizer companies.

However, 2021 is a different story. Demand has remained strong, but the government has been slow to respond to higher international prices. Importers and producers have faced unfavourable economics and have been unable to respond to these market signals due to rigid sourcing and subsidy structures. As a result, the market is entering 2H21 short of material, with inventories drawn down.

Producers in India have suffered from sharp rises in raw material prices. The Indian market is now in a precarious position – if subsidy or pricing mechanisms are not changed soon, some states will risk exhausting fertilizer inventory and supply. The drama will undoubtedly continue over the coming year.

Chinese government looks to infl uence exports as domestic market tightens

China has arguably been the catalyst behind the fertilizer price rebound. Its insatiable demand for corn and soybeans has underpinned agricultural commodity prices. This has also boosted domestic fertilizer demand, which for nitrogen and phosphate fertilizer has decreased over the past 5 years.

The strong domestic demand in China has corresponded with supply issues across nitrogen and phosphate (China is the largest producer of both commodities). This has tightened the market significantly, and domestic prices have risen beyond decade highs as a result. With a tight market and appreciating prices, the

Figure 3. Delayed sulfur supply growth enters market in 2H21. Data from CRU Sulphur Market Outlook.

Chinese government has stepped in to improve availability.

Rumours of the reimposition of export taxes – a mechanism designed to improve local supply – have swirled around the Chinese fertilizer market since February. However, China’s National Development and Reform Commission (NDRC) and the Ministry of Finance have not formally discussed the matter. No tax changes will be imposed without serious discussion within government beforehand.

In 2008, China imposed a combined export tax on fertilizers as high as 185%, including urea and phosphates, and it failed to put a brake on price increases. Fertilizers climbed to new records. To reimpose an export duty on fertilizers would likely have the opposite of the desired impact, triggering further price rises outside China amid a perceived scarcity of product.

Rather than taxes, the government has looked to influence the export volumes of state-owned enterprises (SOEs). The NDRC held a meeting on 29 June with large SOEs and related associations at which participants verbally agreed to guarantee fertilizer supply to the domestic market as a priority and constrain export volumes.

It remains to be seen how effective this strategy will be, but CRU does expect a pull-back in exports of fertilizer through 3Q21 because of this action. While it may provide some relief to the Chinese domestic market, it will keep international markets tight.

Other Asian countries pay up to serve strong demand

The narrative of strong demand has been commonplace throughout other Asian markets. Demand in Indonesia and Malaysia has been bolstered by high palm oil prices. Thailand and Vietnam have gained from favourable rice markets. Bangladesh and Pakistan have been scrambling for imports to cover increasingly low inventory levels.

The strength of demand in Asian markets will become increasingly important in determining the global fertilizer balance, and 2021 has been the perfect reminder of that.

When will the Asian fertilizer price bubble burst?

Asia is going to have to ‘fork out’ for fertilizer for at least another few months. While some domestic actions in India (government support through higher subsidies) and China (farmer subsidies and directives to keep exports low) may provide some relief to farmers, international markets are likely to remain tight. Asia is not immune to this.

Note

Figure 4. Most of China’s domestic fertilizer prices have reached highs not seen in over a decade. Data from CRU. This article was written in July 2021.