FocusGlobal urea market weakens on combined factors

27 August 2009 21:08  [Source: ICIS news]

By Carl Roache

LONDON (ICIS news)--The global urea market has turned more bearish on the back of several factors including uncertain demand and lower production costs, markets sources said on Thursday.

Reduced natural gas costs in the Ukraine, uncertain Asian demand and falling crop prices in the US have combined to see urea prices come under pressure during the second half of August. 

Market sources report that Ukrainian fertilizer producers will benefit from lower natural gas costs as from 1 September following a new government initiative.

The exact reduction was not clear as market reports vary.

However, a decrease of around 15% delivered to site was most commonly reported.

Reduced gas costs mean lower urea production costs, which could see breakeven levels for urea production fall to $215-225/tonne (€151-158/tonne) FOB (free on board) depending on the plant.

“With the gas prices in Yuzhny falling this will certainly impact [prices]. It means some plants will offer urea at lower prices,” explained an Asian trader.

“My feeling is that the prices will be under pressure for sure,” said an Egyptian urea producer.

“The Ukrainians have lower cash costs of production, so we will see the price ideas of traders around the floor level.”

Added to this, the Indian and Pakistan demand outlook is bleaker.

The Saudi Arabian government has agreed to provide $100m to Pakistan in credits to fund urea purchases.

This amount would cover the purchase of about 350,000 tonnes of urea at current prices and is likely to satisfy Pakistan’s urea needs for the balance of the year.

This is significant news as Pakistan has recently been an active buyer of urea from numerous origins including China, the Black Sea and other parts of the Arabian Gulf.

In addition, Indian market sources have started to forecast a fall in urea demand for 2009-10 due to the lack of rain in parts of the country. About 20% of the rice area has not been planted due to lack of rain, local sources said.

Sources estimate that urea demand could fall by 10% this year, equivalent to about 2.5m tonnes.

A Black Sea urea trader/distributor said urea prices would not see any sharp price rises without notable demand from India and Pakistan.

“At the moment, people are waiting on Brazil, but Brazil will not be able on its own, to keep the price up,” the source added.

Following a sustained period of strength in June and July, the US market is showing signs of weakness.

Falling crop prices and slumping natural gas costs are weighing heavily on urea market sentiment.

At the beginning of May, corn prices were around $4.05/bushel, but have subsequently fallen to around $3.20/bushel.

On top of this, US natural gas recently traded at seven-year low of $2.70/MMBtu, adding to the bearish tone.

Global urea prices have already started to fall on the back of this wave of bearish news.

Black Sea urea traded this week at $235-238/tonne FOB, down from price levels of $242-248/tonne FOB last week.

This week, Egyptian urea was purchased at $258/tonne FOB for September shipment.

Egyptian urea was purchased as high as $282/tonne FOB for August shipment.

As an importer of urea, US market prices are also following international prices downward.

Barges of granular urea dropped to $270s/short ton FOB Nola (New Orleans) for September loading this week, whereas prices were above $290/short ton FOB Nola earlier in August.

“The US has to rely on overseas production,” explained a US trader/distributor.

“We are stuck with the world market so if that comes down it affects the [US] barge prices.”

European buyers were also expecting lower urea prices on the horizon.

“I think a decrease in the price will come again,” said a European trader/distributor.

($1 = €0.70)

Additional reporting by Steve Mitchell

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By: Carl Roache
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