INSIGHT: Phosphate fertilizers will rise on firm fundamentals

09 February 2011 17:27  [Source: ICIS news]

By: Mike Nash

LONDON (ICIS)--The phosphate fertilizer market may currently be flat but fundamentals are firm, underpinned by limited supply for shipment in February, the imminent re-emergence of India as a major import destination and strong crop prices internationally.

In advance of India coming to the table there has been increased buying interest from southeast Asia and Latin American markets - the former partly due to a lack of Chinese material because of an effective export ban and the latter due to expectations that prices will firm further in the coming weeks.

It is difficult to argue for any downside. The key Tampa reference price has languished at $595-600/tonne FOB (free on board) in recent weeks on low sales volumes, mainly to Latin America. But it has begun to edge higher with a sale of US diammonium phosphate (DAP) at $605/tonne FOB for 45,000 tonnes to Australia for February shipment.

This is completely in line with the Phosphate Chemical Export Association (PhosChem) strategy of setting new Tampa prices on successive sales. PhosChem will not risk demand destruction by pushing prices too high.

“I won’t go for higher prices yet, I’ll keep it steady for now as I don’t want to risk demand destruction but come March I’ll start to push it up,” said one highly experienced trader.

In the background lurk contract negotiations with India - by far the largest import market internationally and so important that a symbiotic relationship exists between buyers and sellers. Both sides need each other and both sides know it. The question is: who is in the more powerful position in 2011-12?

The answer is actually pretty straightforward. Sellers hold the upper hand. Why? Because India needs at least another 8m tonnes of DAP imports in 2011-12. In fact it probably needs more, assuming a modest rate of demand growth of 5%.

Various government bodies in India have tried to talk down India’s needs - by suggesting, for example, that there will be greater use of other fertilizers such as single superphosphate (SSP) and blended product.

While it is true that India aims for more diverse and balanced fertilizer use, it is also apparent that exactly the same strategy was adopted last year when government agencies tried to talk down Indian DAP import requirements to around 4.5m tonnes. In the event, imports soared to 8m tonnes.

Demand for the rabi season in India is expected to be very healthy, meaning India will not have as much stock as it originally forecast. And politically that is bad news for the government. Potential fertilizer shortages in the country are the equivalent of a political scandal. The government simply can’t afford to risk running short.

For now the market is still waiting for India to make its move. So how will the market pan out?

Effectively, India sets the low end of the spot range, because it is a subsidised market which means that it can only import at a maximum price. In 2010 that was $500/tonne CFR (cost and freight).

Late last year the government, in a pretty transparent attempt to influence negotiations early, reduced the subsidy available, meaning that the most importers could pay was $450/tonne CFR.

This is completely contrary to market direction and sentiment. Allowing for freight it equates to $380/tonne FOB Tampa, effectively $220/tonne below the market spot level. Meanwhile, PhosChem continues to pile on the pressure by selling spot tonnes at ever higher prices.

It is apparent that some compromise will be found. Several numbers are being mooted and PhosChem, which effectively sets the price for all other suppliers, is rumoured to be meeting Indian officials in Europe imminently to discuss pricing. Sellers are reportedly indicating $575-590/tonne CFR, which nets back to $500/tonne FOB Tampa.

That is still a major discount to the spot market, but PhosChem knows it cannot expect India to pay the spot rate due to the subsidy and India’s immense buying power. This still represents good business, and PhosChem will ship another 2m tonnes as part of its three-year contract.

The question then becomes: what happens to the spot market? In 2010 (the first year India bought under its new nutrient-based subsidy regime) prices were agreed fairly quickly and spot prices rebounded rapidly to pre-contract levels.

This time round the difference between the contract price and spot levels will be much higher.

“So what is PhosChem going to do: push the price up in $5/tonne increments or $20/tonne increments?” asks one trader rhetorically.

It is the $64,000 question. If history is anything to go by, PhosChem will play it carefully, anxious not to choke off demand in other key markets.

Market participants also have long memories - with the market crash of 2008 still fresh in their minds. Fertilizer prices boomed due to firm crop pricing and market speculation, but the market dived in the wake of the financial crisis and many importers and traders were left with high-priced fertilizer stocks that have only recently been worked through the system.

There are still a few variables that could negatively impact pricing. Last week, the US domestic market showed some weaker prices, with DAP barge prices slipping $5/short ton to $535-542/short ton FOB Nola (New Orleans) due to slow demand as a result of poor weather. However, this is expected to be a blip and activity will pick up.

Looking at the supply side, nearly all producers are fully sold out through February and several until the second quarter.

Another bullish factor is the situation in Tunisia, where the state producer, Groupe Chimique Tunisien (GCT), a major DAP exporter with 110,000 tonnes/month of supply, has confirmed that it ceased DAP production last week at Gabes and is not offering any product at present.

The disruption is due to localised civil unrest which is hampering phosphate rock supplies from Gafsa in the southwest of the country.

Looking forward, a major pull on US DAP in the domestic system in March, coinciding with the start of exports to India, will underpin a firm market, providing a platform from which spot prices will rise.

The situation in Tunisia will also firm the market, with concerns about supply in Europe and Latin America. With China out of the market in southeast Asia, supply options will also be thin.

Looking further forward, there are estimates that Saudi Arabia’s new 3.2m tonne/year DAP Ma’aden plant may provide 1m tonnes of DAP to the export market in 2011. However, it is likely that increased demand in India, coupled with fewer exports out of China, will soak up this additional supply quite easily.

As one seasoned trader keenly observed: “2011 will be like 2010 all over again but just at higher prices.”

($1 = €0.73)

For more on DAP visit ICIS pricing fertilizers
To discuss issues facing the chemical industry go to ICIS connect

By: Mike Nash
+44 20 8652 3214

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