Fertilizer market is a shadow of its former self

What a difference a year makes

11 June 2009 00:00  [Source: ICB]

An entirely changed fertilizer market faces delegates at this year's IFA meeting

A YEAR ago senior figures within the business were citing the rampant price rises of all fertilizers as a function of a well performing free market, where price was determined by supply and demand.

Grain stocks were at historically low levels, world population was expanding and there had been relative underinvestment in fertilizer capacity to meet demand. But since then a dramatic and unforeseen rise in prices has reversed spectacularly, although the demand-side fundamentals broadly remain the same.

Unsurprisingly, the mood at this year's International Fertilizer Industry Association conference in Shanghai from May 25-27, was somber. In marked contrast to last year - when farmers, traders and producers were enjoying super profits from high crop and fertilizer prices - this year's delegates, when not bemoaning the almost complete lack of business being done, spoke of 2008 as a blip or anomaly and that normal fertilizer buying patterns would eventually return.

Part of the decline was undoubtedly outside the realm of free markets. Several key fertilizer-consuming regions, including Australia, Turkey and Argentina, witnessed some of the worst droughts in living memory in 2008. Argentina is expected to have its lowest wheat crop in 100 years in 2009. Phosphate application in Turkey in 2008 was one-quarter of the previous year. But agriculture is always vulnerable to the vagaries of the weather.

Ill-advised and politically-motivated government interference in agricultural policy has also had a part to play. Argentina suffered more than most in 2008, following the government's repeated attempts to implement a punitive export tax on various crop commodities. The result has been a bitter struggle between the government and farmers. A series of protests and strike action followed that led many in the fertilizer industry to speculate that no major volumes would be imported this year.

The global financial credit crunch and demand destruction as a result of the high prices have been the major restraining factors on fertilizer consumption. This, coupled with the rapid descent in fertilizer prices meant that producers, dealers, retailers and importers worldwide were suddenly left holding onto stocks, which were worth considerably less than they had paid for them. Inventory writedowns resulted in losses. The retailers' response has been to destock, rather than buy more product from producers. Facing an uncertain business climate, farmers have simply cut back on fertilizer use, notably of phosphates and potash. The result is that fertilizer deliveries have slowed, with product moving on an as-needed basis.

On the supply side, the inevitable result has been consolidation throughout the supply chain. Take China for example. In 2006, China proudly proclaimed itself nominally self-sufficient in phosphate fertilizers. Imports have plummeted and up until last year, China was a major source of export supply to India and Latin America.

A year later, the industry is in a much more precarious position. Over public capital expenditure on capacity means China has excess phosphate capacity. Utilization rates are low, and a lack of export opportunities outside India - not helped by China's ad hoc export tax policy on fertilizers - has led several to claim that there will be a considerable number of mergers, as smaller, less efficient producers go to the wall.

Ironically, an arbitrage window of US exports to China has opened, with prices having fallen so low. Meanwhile, Chinese producers say they will cut operating rates rather than sell at a loss. And this phenomenon is not limited to China. As one seasoned US fertilizer trader said in Shanghai: "You can only fuel growth through acquisition in a mature market - the fertilizer market is going to get a lot smaller as a result."

Short term, producers will attempt to halt the slide in prices by cutting supply. In Shanghai, one major North African phosphate producer confirmed it had cut production, while a Chinese major said it would cut output to 60% of capacity and many expected US production to fall through June and July.

As the conference ended, there were some signs of recovery, as agricultural production economics and crop prices were beginning to support some investment in fertilizers, sources said.

However, credit lines need to open up. This is nowhere more apparent than in Brazil, where a lack of an official financing program and too great an emphasis on servicing existing debt is hindering fertilizer demand, forcing farmers to use more of their own capital, where they have it.

Mike Nash is senior editor manager with ICIS, working for The Market fertilizer publication and specializing in the phosphates sector.

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By: Mike Nash
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