OUTLOOK ’12: Fertilizer market gloomy into 2012 on weak demand

23 December 2011 12:29  [Source: ICIS news]

Fertilizer outlook gloomy on weak demand LONDON (ICIS)--Global fertilizer markets are ending the year in a bearish mood on the back of weak demand exacerbated by economic uncertainty, and the outlook for the first quarter of 2012 looks set to remain gloomy.

Markets have generally been firm this year, with prices showing their highest levels since the peak of 2008, but this led to some fears that a re-run of the market crashes seen that year could be on the cards again, particularly with rising economic uncertainty.

The worsening eurozone crisis and broader economic slowdowns seen in developed countries worldwide has destroyed some European demand, and also had a knock-on effect on international currencies, decreasing purchasing power for major fertilizer users in markets such as Latin America and southern Asia.

Hesitant buyers, particularly in the US, have adopted conservative purchasing behaviour, more akin to the post-crisis behaviour seen in 2009, opting to buy on a hand-to-mouth basis.

Fertilizer demand is expected to return, but buyers are not likely to step back in strongly until February and therefore prices will remain under pressure until then.

According to the International Fertilizer Industry Association (IFA), forecasts for demand levels in 2012/2013 are highly speculative at present due to the depressed economic context in many developed countries.

However, global agricultural commodity prices remain attractive, driven by a disappointing US harvest and robust food, fuel and feed demand.

Consequently, global fertilizer demand is still expected to grow by around 2.3% to 182.2m tonnes next year. But IFA notes there is a downside risk as the economic downturn may impact fertilizer demand in the first half of 2012.

This year has been a volatile one for urea, and global prices are on a downward trend as 2011 draws to a close.

The early part of the year saw demand returning to pre-crisis levels. This, along with increased demand expectations from Pakistan – which failed to become self sufficient in urea production – contributed to a stark run-up in urea prices during the second quarter. From April-June, Yuzhny prices rose from $315/tonne FOB (free on board) to $510/tonne FOB.

The third quarter was pocked with volatility as prices would correct downwards to around $460/tonne FOB and then move up to the $500/tonne FOB mark, followed by subsequent downward price corrections.

Moving into the fourth quarter of the year, a lack of demand has seen urea prices slide. Benchmark Yuzhny prices are currently at $315-330/tonne (€243-254/tonne) FOB, down $170/tonne since the start of October and some $60/tonne lower than this point last year.

Looking ahead, we do not expect prices to drop to the post-crisis low of $205/tonne FOB seen in December 2008, but the short term prospects for price improvement do not look favourable. Effectively, northern hemisphere spring demand will play the largest role in price determination late in the first quarter of 2012 and into the second.

But by the end of 2012, an expected additional 4m tonnes of annual granular urea capacity is due to come online and the market will be oversupplied, which will no doubt help keep prices at lower levels than seen over the past year.

Qatar Fertilizer Co (Qafco) is scheduled to start up its 1.3m tonne/year Qafco V urea plant in January 2012, and then a second 1.3m tonne/year Qafco VI plant in the fourth quarter of 2012. Additionally, in Algeria, Sorfert is due to start up a 1.1-1.2m tonne/year plant in the first quarter of 2012, and MOPCO in Egypt is due to start two 660,000 tonne/year plants in the second half of the year. Additional capacity is also due on-stream in Vietnam and Venezuela.

While there may be some delays to these projects, it is clear that the urea market looks to be moving into an oversupply situation over the next year or so.

The phosphates market has also bowed to the downward pressure exerted by an absence of demand towards the year end and the prospect of end-users delaying buying until as late as February.

The benchmark US Gulf export price tumbled to $520-540/tonne FOB Tampa, down $110/tonne at the high end on peak 2011 prices.

Prices had been supported through most of the fourth quarter contract bookings and spot sales into a cooling Indian market and emerging demand in Latin America. But the momentum has not gathered or spread to Southeast Asia or Europe, both of which have showed little interest to buy.

Spot sales have become scant and cargo sizes have shrunk to reflect hand-to-mouth importing against increasing financial woes centred on Europe’s sovereign debt crisis.

Russian suppliers have exploited late and low demand in Europe with small volume sales but with a $50/tonne drop on prices achieved at the beginning of December.

North African prices have been slower to decline but only by virtue of the civil unrest in Tunisia halting production and shipping, taking GCT product out of the market for the final six weeks of the year.

Moving into the first quarter of 2012, the outlook is gloomy with further price reductions on the cards.

India, which represents 50% of the market, is out of the spot market until the spring and DAP contracts due to be re-negotiated in March could be under pressure if there is no prior uptick.

A strong return in demand will be the main driver to supporting and then lifting prices. Buyers in Europe, Brazil and Southeast Asia will be pressed to purchase early in the New Year in preparation for the spring application. But unless large volume cargoes are booked, the decline will only be slowed.

The US Gulf export price is likely to weaken until end-users in the domestic market decide prices are low enough to lend confidence to buying. But farmers could delay until late February and suppliers will come under further pressure to drop prices and cut production.

Sentiment in the ammonia market is bearish as the end of the year approaches on the back of weak agricultural and industrial demand, and the floor does not appear to have been reached yet.

This is in contrast to a market that has been strong over the course of the year with strong demand and tight supply. Production shortfalls in Trinidad, lower production in Australia and the UK due to technical issues and reduced availability from Russia and Europe due to higher downstream production exacerbated a delicate supply/demand balance and saw prices rise.

Prices reached a high of $650/tonne FOB Yuzhny in October this year, which then prompted a price of $705/tonne CFR (cost and freight) Tampa for November. These prices had not been seen since the latter half of 2008.

However, over the past month or so the seasonal downturn in agricultural demand has combined with a reduced demand from the industrial sector because of global economic uncertainty to push prices downwards.

Yuzhny price indications are in the $440-460/tonne FOB range at present, and there are expectations a floor might be reached at around $400/tonne FOB. Prices were around $400/tonne FOB this time last year, thus all the gains seen over the course of this year have been practically wiped out.

East of Suez, prices have also corrected downwards but were slower to react than Yuzhny which prompted some Yuzhny cargoes to move east. Last business out of the Middle East was at $460/tonne FOB, down around $130/tonne from previous spot business, but still around $60/tonne higher than last year.

In the short term, Russian and Ukrainian producers are considering cutting production in January in order to balance the market and stabilise prices. Meanwhile, refill demand for the spring application season in the US should emerge in February which will lend support to the market even if industrial demand has not recovered by then.

Looking further forward into 2012, the ammonia market looks like it will remain fairly tightly balanced and that any unexpected disruption would result in tight market conditions and see higher prices again.

Between 1.58m and 1.72m tonnes of merchant ammonia capacity are due to start production over the next year. But at the same time, around 1.3m tonnes of merchant availability will be lost to captive downstream urea and phosphates production and there will be another 500,000 tonnes of increased requirements from existing buyers.

It is likely that some of these projects on the supply and demand side will end up being delayed. But essentially, the additional demand coming on stream over the next year will absorb the extra supply, and should lead to a relatively firm market.

The global sulphur market in 2011 was balanced-to-firm. Healthy demand and relatively tight supply were reflected by prices that remained above last year’s and historical levels.

In the largest supply market, Canada, contract prices this year ranged in $180-240/tonne FOB Vancouver, up significantly from the 2010 range of $50-165/tonne FOB. As for the biggest import market, China, the CFR prices fell in the $170-250/tonne range, rising from $85-205/tonne CFR in 2010.

Abu Dhabi National Oil Co’s (Adnoc’s) 2011 monthly prices ranged from $165-225/tonne FOB. Albeit cited as unrealistic at times, the range was in a higher range compared to 2010’s of $65-210/tonne FOB.

On the supply side, global elemental sulphur production was forecast at 51.1m tonnes, up 3.3% on 2010. Supply has been relatively short due to delays in new sulphur production projects and depleting inventories in the top three sulphur production regions: Canada, Russia and Kazakhstan.

The earthquake and tsunami that took place in Japan in March wiped out 6% of its production to an estimated 1.78m tonnes.

Global demand for sulphur was supported by sustained demand in fertilizers. Some new demand also materialised from metal leaching projects, although many were slated for delays.

China’s sulphur imports in 2011 were estimated at 9.5m tonnes, down 5% on 2010. The reduction was due to increased domestic supply and an inhibitory fertilizer tax policy, designed to retain fertilizers within China.

Under next year’s policy, NP (nitrogen phosphates fertilizer) and TSP (triple super phosphates) will be subjected to stricter tax policy (a low tax of 7% from June-September but at 82% for the remaining months). The new policy may reduce China’s import needs for feedstock sulphur.

On the flip side, sulphur itself is subjected to a lowered 1% import tax tariff under new import tax policies on fertilizers.

Tunisia, another major importer, bought an estimated 1.2m tonnes of sulphur, down nearly 43% from last year, because of sustained political uncertainty that caused disruptions in phosphates production at GCT.

The sulphur market will enter the New Year with slow sulphur contract negotiations due to huge price difference between the buy and sell sides, undermined by falling fertilizer prices and hence weak buyer confidence.

Suppliers maintain that supply will be tight next year. GazpromExport in Russia expected a 10% reduction in export availability due to stronger domestic demand. Saudi Arabia will also be delivering more sulphur to the Ma’aden phosphates project that will reduce its offshore availability.

Going forward to 2012, the sulphur market will be under the shadow of uncertain demand in Tunisia, comfortable stocks across China, Brazil, Morocco and India, and a shaky economic outlook. Pricing will remain volatile based on a tight-to-balanced scenario.

The current economic uncertainty and oversupply situation is likely to halt the increase in potash prices in 2012. Easing crop prices, and uncertainty surrounding the world’s biggest markets, India and China, are other possible dampeners.

While K+S, Uralkali and Agrium have announced big expansion plans, BHP is investing in new potash mines in Canada. BHP will soon be able to sell directly to buyers, bypassing distributor Canpotex, in a move that will free up the market but also add to the supply glut.

The deteriorating macroeconomic situation is another big concern. Uralkali’s Chief Executive Officer Vladislav Baumgertner has acknowledged fears over tight credit in Europe. He does not expect prices to rise in the first quarter of 2012 due to instability across all markets. Baumgertner sees spot prices changing only after contracts with India and China are signed in April-May.

But analysts believe there is no room for prices to increase. In a report released in mid-December 2011, UBS said "purchasing sluggishness" will result in lower prices. UBS has cut its expectation for average prices during 2012 by $40/tonne to $460/tonne, in line with the prices in 2011.

Spot prices gained about 20-30% in 2011 despite India declaring a self-imposed “potash buying holiday” from April to August 2011. Indian buyers, however, ended up contracting 5.5m tonnes of MOP in 2011-12 at a price of $490/tonne CFR in the second and third quarters and at $530/tonne CFR in the last quarter.

Producers see flat growth in India since farmers are switching to urea, which is cheaper. Muriate of potash (MOP) costs Indian rupees (Rs) 11,300/tonne ($214/tonne), while urea is priced at Rs5,310/tonne ($100.50/tonne) because it is still subsidised by the government. Indian buyers believe the damage could be worse if prices are not lowered.

China is another concern. Inventory levels, at around 2.5m tonnes, are much higher than usual, indicating that China may import less potash in 2012 than 2011.

Signs of a possible slowdown in the market are already showing. Germany’s K+S has lowered its earnings outlook. It now expects earnings before interest and taxes excluding some hedging transactions, to rise to €950m – 1bn in 2012, compared to an earlier forecast of €1.05bn.

PotashCorp has announced that it will close two mines for 14 weeks, while Uralkali will produce less potash next year to prop up prices. Uralkali has reduced its production forecast for 2012 by 7% to 10.5m-11m, compared with 11.8m tonnes earlier.

But the key question is whether producers will bite the bullet and lower prices, or will they react by shutting down production. Whatever the strategy, 2012 is likely to be a tougher year for business.

($1 = €0.77, Rs52.82)

Freda Gordon, Lauren Williamson, Karen Thomas and Deepika Thapliyal contributed to this article

By: Rebecca Clarke
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