Fertilizer International 501 Mar- Apr 2021
31 March 2021
What’s driving the fertilizer price rally?
Editorial
What’s driving the fertilizer price rally?
Fertilizer markets are rallying to an extent not seen in almost a decade. This is primarily being driven by strong demand fundamentals, with crop prices moving to their highest point since 2013. But low pipeline inventories and supply disruptions have also played a part. In this guest editorial, CRU’s Chris Lawson explains what’s driving this rally and highlights the key supporting factors.
Where are we right now?
Before analysing the current rally, let’s put current prices in their proper context. My first observation would be that our most recently assessed prices are not remarkably high compared to historical levels.
It’s true that some fertilizer commodities and raw materials are at five- or ten-year highs. These include diammonium phosphate (DAP Tampa f.o.b.), granular urea (f.o.b. Middle East) and ammonia (f.o.b. Black Sea), which have hit levels not seen since December 2011, May 2013 and April 2015, respectively.
Sulphur (f.o.b. Middle East), too, has reached its highest price since November 2017, with muriate of potash (MOP cfr Brazil) also at a peak last seen in October 2019.
While these steep price trajectories have fuelled speculation that 2021 could be a ‘new 2008’, we believe this is highly unlikely – although the fundamentals suggest prices could remain elevated through most of 2021.
Tight grain and oilseed markets
This fertilizer price rally is demand driven. Crop prices have soared over the past six months, supported by a tighter global balance. This has bolstered crop prices and is likely to persist through 2021.
Global grain and oilseed market tightness has been intensified by China’s corn import spree. Chinese demand for corn is accelerating as it rebuilds its swine herd, after its decimation by the African Swine Fever (ASF) outbreak in 2018.
This has triggered a sharp rise in Chinese corn imports, primarily from the United States and Ukraine. These imports are expected to leap again in 2021 – and are likely exceed 20 million tonnes.
Favourable affordability and falling inventories
During the second half of 2020, as crop prices increased while fertilizer prices did not, affordability moved to its most favourable level since our index started in 2003. Although fertilizer prices have spiked subsequently, they remain affordable and consequently we see very little chance of demand destruction. Especially as farmers around the world are benefitting from both high agricultural commodity prices and government payments to counter Covid-19 impacts.
Strong demand has also drawn down fertilizer inventories rapidly. Market players across markets in the US, Brazil and China have all told us that pipeline inventories were drawn down quickly through 2020.
Short-term supply squeeze
Have production disruptions also played a role in market tightness? That’s certainly the case in the phosphates market. Producers in this segment pulled back at the end of 2019, due to very low prices, causing the market to tighten. Subsequently, Covid-19 lockdowns in India and China disrupted production, technical issues in Saudi Arabia reduced production and exports, and continued unrest in Tunisia hampered output and sales. Nevertheless, the phosphate production outlook for 2021 is more favourable, with producers ready to respond rapidly to higher prices.
The ammonia market has also tightened quickly, due in-part to supply outages. Prolonged low ammonia prices through 2020 eventually forced Nutrien’s hand, prompting the indefinite idling of one of its four ammonia plants in Trinidad towards the end of last year. Gas curtailments have also prompted more recent supply disruptions on the island. Elsewhere, production cuts and interruptions at other ammonia plants in Europe and Japan are also lending price support. Cumulatively, these developments have shown that, having been uncharacteristically stagnant in recent years, ammonia is still a market where prices can escalate quickly.
In contrast, there have been few supply issues for either urea or potash. Indeed, the focus for these two markets is on the timing of impending capacity additions – and, in particular, when these will tip the market balance back into oversupply.
Rally likely to subside
In general, fertilizer producers will be able to take advantage of current higher prices, due to their ability to raise utilisation rates above current levels. There is ample capacity out there, in our view, with more projected to be added during 2021 and beyond.
It is therefore highly unlikely that the wider industry will be squeezed for supply, as happened during the 2007 rally. Instead, capacity will respond to high prices and bring the market back into balance. The most important question is when.
So, while this is very much a demand driven rally, the industry has more than enough capacity to respond. Sure, the market is in for a wild ride over the coming months, as seasonal buying comes and goes. Nevertheless, the current price rally is a ‘shot in the arm’ – one that the industry has been seeking for some time.
