Fertilizer Prices Dip on Weak Demand

10 January 2005 00:01  [Source: ICB Americas]

A weak fall planting season, coupled with high feedstock prices, has put the brakes on ammonia and phosphate fertilizer prices. No rebound is anticipated until at least the spring planting season. However, potash prices continue to exhibit some strength following Canpotex’s agreement with China in early November.

US Gulf ammonia prices recently fell to the $240 per metric ton level, a $100 decline in little more than a month. “We were expecting a decline to about $275 per ton, comparable to a year-end 2004 sale of a Trinidad cargo to South Africa,” says Donald Carson, analyst with Merrill Lynch. “We believe this downward trend could continue in the near term, as river terminal storage tanks are relatively full from the weak fall application season, two of Mosaic’s DAP [diammonium phosphate] plants are idled and the peak spring consumption season does not commence for two more months.”

Mosaic Company, the result of a merger between IMC Global and Cargill Crop Nutrition, recently idled phosphate production at its 1.25 million metric ton Green Bay, Fla., phosphate plant because of low margins. “Phosphate margins are at unacceptably low levels, in part because ammonia prices remain near record highs,” says Fritz Corrigan, president and CEO of Mosaic. “As sales for the spring season begin and once margins recover, we expect to return this plant to production. During this downtime, we will use the opportunity to improve this facility, including performing routine maintenance.”

“We see Mosaic’s idled plant in Green Bay as an inventory correction action, rather than a permanent capacity rationalization, which could generate a sustained improvement in margins,” notes Mr. Carson.

Elsewhere in the fertilizer business, Agrium and Unocal recently settled all claims against each other pertaining to the sale of natural gas to Agrium’s nitrogen plant in Kenai, Alaska, and Unocal’s original sale of that plant to Agrium in 2000. The companies fell into a protracted legal battle because of Unocal’s difficulties in supplying the plant with natural gas.

As part of the settlement, Unocal will supply the Kenai facility with 34 billion cubic feet of gas until October 31, 2005, on the same price basis as the companies’ current gas supply agreement. The gas will enable the fertilizer plant to run at an average rate of 66 percent through October 31, 2005, a rate that can be augmented through gas purchases from third parties in 2005.

Agrium will receive $47 million as compensation for the reduced gas deliveries and environmental and other liabilities, and Unocal will settle all earn-out claims between the companies for $22 million. Agrium says its savings will be $58 million to the end of 2004, and the overall settlement “represents a total positive impact” of $105 million. This is in addition to $50 million that Agrium received from Unocal in 2004 in conjunction with a ruling by an arbitration panel.

After failing to source new supplies of affordable natural gas, Agrium has decided to shutter the Kenai plant on November 1.

While nitrogen and phosphate producers wrestle with weak demand and high feedstock costs, potash producers have recently secured a large price increase and are currently working on another for February. In addition, the largest producer, Potash Corp. of Saskatchewan (PCS), and maybe others, have added or are considering adding capacity.

In November, Canpotex, the offshore sales association for Saskatchewan potash producers, and Sinochem, China’s largest potash importer, agreed on a deal for Sinochem to purchase 2.1 million metric tons of potash, including 1.5 million tons of red standard grade potash, 300,000 tons of granular grade potash and 300,000 tons of white standard grade potash, for 2005.

The contract includes a 10 percent additional-volume option and provides a price increase of $40 per ton over last year’s contract price for red standard grade potash. White standard grade potash will see a $43 per ton increase over last year, while granular product will be priced at $10 per ton above the red standard price. This marks the first time Sinochem has ever purchased granular product. The total volume of 2.1 million metric tons is a 27 percent increase over 2004. If the option is exercised on the red standard product, it would represent a 36 percent increase.

Since Sinochem purchases product delivered to Vancouver and is responsible for all freight charges, the price increases reflect a higher realized price for potash, rather than an offset against ocean freight. Following the deal, Sinochem wrapped up similar $40 per ton increases with suppliers from the former Soviet Union, Israel and Jordan.

With potash prices and volumes near record highs, PCS has added a fourth shift at its mine in Allan, Saskatchewan, Canada. The company added a fourth shift to its Lanigan, Saskatchewan, mine in June. The additional shifts should result in an additional 1.2 million metric tons of potash in 2005, according to David Silver, analyst with JPMorgan. In addition, “other Canadian miners may soon announce more modest debottleneckings,” says Mr. Silver.

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