INSIGHT: Urea prices could correct after recent spike?

06 October 2010 16:44  [Source: ICIS news]

By Carl Roache

UK wheat harvest gears up after Russia export banLONDON (ICIS)--The tone of the global urea market has weakened following a period of sustained strength, but it remains unclear whether this is a momentary blip or the start of a prolonged trough.

On the whole, urea prices have increased steadily since June, with sharp rises seen during much of September.

Black Sea urea hit a year-low price of $218/tonne (€157/tonne) FOB (free on board) Yuzhny at the end of May, but then climbed gradually.

At the start of September, urea was priced at $278-285/tonne FOB Yuzhny, and then surged to $340/tonne FOB during the second half of the month.

This represented an increase of more than 55% in less than four months.

Other origins enjoyed similarly impressive rises, not least Egypt, which saw prices climb from $245/tonne FOB at the end of May to a peak of $395/tonne FOB in the second half of September. At the start of September, Egyptian urea was priced around $340/tonne FOB, which illustrates the price spike witnessed there last month.

However, over the past week it has become clear that some of the steam has come out of the urea market.

Black Sea and Baltic producers are under pressure to lower offers, as traders look for prices more in line with end market levels.

Recent sales made in end markets like Turkey and Brazil suggest prices nearer the mid-$320s/tonne FOB, down from previous indications around $340/tonne FOB.

Egyptian urea indications have dipped lower. The most recent sale was last week at $380/tonne FOB, down from a peak of $395/tonne FOB achieved a week earlier.

“The whole situation is under pressure. Buyers want confidence from the market and they want to be sure that the pressure will stop,” said an Egyptian seller, explaining the current reluctance among buyers.

“They are afraid of prices collapsing and they are cautious.”

Another seller echoed these sentiments, adding: “The buying mood is not so good.”

Similarly the US market has seen prices fall, with granular urea barge indications declining $10/short ton last week.

Are global urea prices at the start of a correction which will wipe out much of the recent gains?

References to 2008 - when prices spiked and then collapsed - have been common in the market over the past few weeks.

Rising crop prices played an important part in the recent urea prices rises, as it gave importers/farmers the confidence to purchase urea at higher prices.

Extreme drought saw Russian Prime Minister Vladimir Putin announce a ban on grain export in mid-August, which will last through to autumn 2011.

International crop prices reacted to the news, climbing sharply.

In mid-August, corn was priced around $4.1/bushel for the front month. By mid-September, it had climbed above $5/bushel.

Other crops, such as wheat, also saw rises during this period.

However, as September drew to a close, the crop markets turned more bearish on US stocks data.

On 30 September, the US Department of Agriculture (USDA) published its latest Grain Stocks report, which showed a sharp build in crop stocks.

US corn inventories were assessed up 2% to 1.7bn bushels, soybeans up 9% to 151m bushels, and wheat up 11% to 2.5bn bushels.

Subsequently, corn prices fell and are currently priced around $4.8/bushel for December.

Are urea prices set to follow crop prices downward?

While certainly a major contributor, crop prices were not the only driver in the recent urea price surge.

Yara’s increases to nitrate prices in Europe played a part in spurring urea demand and supporting higher urea prices.

The supply/demand balance played a major part in the recent price development.

Europe, the US and Brazil were all active buyers during September, which spurred prices.

This supply/demand situation is likely to be the key driver in future price movements.

In terms of demand, the outlook is healthy.

Last week, Indian state buying agency MMTC booked 680,000 tonnes of urea for shipment through to mid-November.

One of the Indian state agencies is expected to announce another tender during October.

Turkish buyers are re-emerging and Brazilian buyers need urea for second half October/beginning November loading.

In terms of supply, the high export tax regime will exclude Chinese urea exports until mid-October.

The Black Sea, Baltic and Arabian Gulf have a healthy raft of commitments for October shipment.

These factors should prevent a major price correction taking place, certainly in the short to medium term.

Nonetheless, buyers are aware that the market has turned and prices could edge down in the coming weeks as producers come under more pressure to sell.

“Until November I can see the market will be a bit weaker. It will not collapse, it will just be softer,” said an Egyptian supplier.

“We believe the price will bounce back as we approach the third week of October. The demand will come back to the market,” an Arabian Gulf producer said.

“People do not want to take the risk at the moment.”

A US trader/distributor added: “I think the price will probably trend down more.”

(Urea is a nitrogen fertilizer. Yuzhny, Ukraine, is a major port in the Black Sea.)

($1 = €0.72)

For more on urea visit ICIS pricing fertilizers
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By: Carl Roache
+44 20 8652 3214

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