OUTLOOK '08: Fertilizer price rises set to continue

24 December 2007 14:18  [Source: ICIS news]

By Stephen Mitchell

 

LONDON (ICIS news)--“There has never been a year like it.” This comment from one seasoned fertilizer trader sums up 2007 in a nutshell. Prices have repeatedly set new record highs through the year and have reached levels many, frankly, thought were impossible.

 

The conditions that pushed prices up in 2007 remain the same going into 2008: low grain stocks; surging demand for food; rising biofuels production; and record high crop prices.

 

Asked where prices would go in 2008, most producers were reluctant to forecast further increases. “We are in uncharted territory,” said one phosphate supplier. “We will just have to see how things go.” 

 

Things seem set to go very well. A glance back to the start of 2007 shows the following progress on prices through the year:

 

In all cases, these are the highest prices ever seen for fertilizer commodities.

 

$/tonne FOB	Jan 2007	Dec 2007	change
Urea Yuzhny	258	390-400	+50%
DAP Tampa	260	610-620	+135%
MOP Vancouver	170	280-300	+70%
Ammonia Yuzhny	275	400	+45%
Sulphur Mid East	50	490-500	+900%

 

No-one is forecasting lower prices in the first half of 2008. Some producers, notably of potash, have already announced big increases to take place in 2008. Canadian suppliers, for example, have posted $80/short ton increases on all grades of MOP (potassium chloride) from 1 March.

 

In 2007, ICIS pricing estimates that prices for urea have averaged $307/tonne FOB (free on board) Yuzhny.

 

In contrast, average prices for 2000-2004 were about $121/tonne FOB. Ukrainian producers estimate that natural gas price increases announced for January will raise the average breakeven cost of their urea to $220-230/tonne FOB.

 

Nitrogen prices are volatile and will fluctuate, but urea is unlikely to fall below $300/tonne FOB Yuzhny during 2008.

 

India has become the largest urea importer in the world, overtaking the US in 2007, and will import even more in 2008. The country’s demand for urea is growing by at 5-8% a year, adding 1.5m tonnes/year to requirements.

 

Domestic production is stagnant, hamstrung by a lack of feedstock and tinkering by successive governments.

 

All the increased requirement in 2008 will have to be met by imports, meaning that shipments to India will rise to well over 7m tonnes in 2008.

 

High crop prices will lead to increased plantings in all the main producers in 2008. EU farmers will plant an extra 2-2.5m hectares of arable land, adding around 1m tonnes to fertilizer demand in the coming year.

 

Brazilian and Argentine farmers are also raising production. Urea imports in Brazil look to have reached 2.4m tonnes in 2007 – the highest ever – and will probably rise again in 2008.

 

The burgeoning demand for urea in 2007 has been met mainly by increased exports from China. These will likely expand further in 2008.

 

Apart from this, the only major supply expansion will come from Oman, where the 1.2m tonne/year SUICI plant is due on-stream in the first quarter of 2008.

 

Another year of tight supply is in prospect for urea, and other sectors of the nitrogen market are showing similar trends.

 

Ammonia prices are ending the year at historically high levels, with FOB Yuzhny levels moving up almost $150/tonne to $400/tonne over the past few weeks, four times the level seen just five years ago. Strong US demand and higher gas prices in Ukraine and northwest Europe have combined to give a firm undertone to the ammonia market.

 

A price of $400/tonne FOB Yuzhny is a historical high but may not be the peak. Suppliers say this price is still relatively cheap compared to other nitrogen fertilizers and expect further increases in the New Year.

 

We expect ammonia prices to remain very strong in 2008, averaging around $355/tonne FOB Yuzhny, almost $90/tonne higher than in 2007.

 

There are structural factors behind the price increase, which will have a significant impact on ammonia trade for years to come. This is the increased cost of production for most European ammonia producers due to rising natural gas and oil costs.

 

In Ukraine, the new price for natural gas supplied from Russia of $179.50/’000 cubic metres (cbm) DAF (delivered to frontier) will not only remove some supply from the market but will lift the floor level for ammonia to over $300/tonne FOB Yuzhny in 2008, compared to $230-232/tonne FOB last summer.

 

The Yuzhny FOB price is the benchmark for most other markets and, despite the declining export volumes, will still set the trend in other areas.

 

Encouraged by the high Yuzhny prices, Middle East producers are asking up to $450/tonne CFR for spot business, in the hope of dragging contract levels up as well.

 

US buyers are digesting increases of around $100/tonne for January, with prices settling in the $460s/tonne CFR. Further increases are likely as January progresses.

 

New capacity is expected to come on stream in Iran in Q1 (Razi III, 670,000 tonnes/year), unless further delays are incurred. This will bring the Asian market more into balance, but is unlikely to have a negative impact on prices.

 

Also, more ammonia will become available in the Mediterranean in the second half of the year, with the scheduled start up of the EBIC plant in Egypt (660,000 tonnes/year).

 

Phosphate prices have seen the most spectacular rises of any in 2007.

 

DAP (diammonium phosphate) and MAP (monammonium phosphate) prices have seen record price increases in 2007, with further rises forecast for 2008.

 

Market fundamentals in the key areas of the US and Europe means consumption is high.

 

Healthy demand in the US has curtailed export availability from key producers, and exports have been unspectacular in 2007. Even so, export prices have risen dramatically to $610-620/tonne FOB Tampa currently.

 

India and Pakistan will enter the market for further DAP and MAP imports in the first quarter of 2008, providing fresh impetus to a firm market, with further price hikes likely for US, Russian and Jordanian producers. European demand will remain firm through the early part of 2008, underpinning North African prices.

 

Price hikes to $700/tonne FOB are forecast into mid-2008.

 

With prices at such record highs, the market remains in uncharted territory, and it is difficult to predict how much further prices will rise, the only limit being the ability of farmers to pay, in turn dependent on crop prices.

 

Raw material prices are having a major impact on some fertilizer producers going into 2008. Phosphate rock prices have trebled and sulphur prices and, more importantly, availability are starting to cause concern.

 

The global sulphur market has seen record breaking increases in 2007, with prices eclipsing all previous highs and continuing to rise as the year draws to a close.

 

The benchmark monthly sulphur price set by UAE producer Adnoc has risen $306/tonne this year from $54/tonne FOB Ruwais in January to $360/tonne FOB in December. Spot prices in the Middle East are now at $500/tonne FOB.

 

The market has been driven by strong demand from the major market – China - due to low stock levels, logistical problems which delayed shipments from Canada, and a need for more sulphur to feed rapidly growing phosphates production.

 

Additionally, the market has lost 700-800,000 tonnes of supply in 2007 due to lower gas production in Canada and delays to new capacity in the Middle East and FSU coming on-stream.

 

Looking ahead to 2008, expectations are the market will remain tight and prices continue to set new highs, at least for the first half of the year. Little extra production is due on line during 2008. No decline in demand from China and India is envisaged either.

 

First half and first quarter 2008 prices are currently under discussion and there are clear indications that sulphur will remain a seller’s market.

 

In North Africa, Adnoc has agreed a first half price in the $430s/tonne CFR, up from $170/tonne in the second half of 2007. Meanwhile, Adnoc has agreed prices reflecting $500-510/tonne CFR for China, up from around $230-240/tonne CFR in the fourth quarter of 2007.

 

Having tried to resist price increases initially, buyers are now more concerned to secure potash than to haggle about price.

 

Producers worldwide are allocating potash to buyers. A shortage of MOP has seen prices surge over the past year.

 

The loss of 1m tonnes of production in Russia due to a flooded mine during 2006 has yet to be made up. Producers worldwide have announced a raft of expansions but these will only take effect from 2009-2010 onwards.

 

Until then, the market will remain very firm, driven by continued strong demand and a supply deficit.

 

First quarter 2008 prices in southeast Asia have been agreed at $425-500/tonne CFR by various suppliers, up from around $400/tonne CFR in December, but prices are expected to move up again for second quarter deliveries. Meanwhile, January delivieries to Brazil are priced in the low-$400s/tonne CFR but numbers are already being reassessed for February shipments.

 

Chinese and Indian buyers are facing large price increases for 2008 contracts, particularly in China where buyers have enjoyed prices well below other markets this year. Increases of at least $100/tonne have been tabled by suppliers.

 

Producers are in no rush to settle contracts, however, their arguments for substantial increases gain more strength the longer negotiations go on and prices increase elsewhere.

 

Antonella Harrison, Mike Nash and Rebecca Clarke contributed to this article

By: Stephen Mitchell
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