OUTLOOK ‘13: Slow demand growth may weigh on fertilizer markets

21 December 2012 14:21  [Source: ICIS news]

By Rebecca Clarke

LONDON (ICIS)--Global fertilizer markets have been relatively flat through 2012, which has impacted sales activity and seen prices put under pressure, particularly in the second half of the year. 

Lacklustre demand from key import markets for most fertilizer products has seen stocks build and fresh business delayed, and phosphates and potash producers have opted to cut back operating rates moving into 2013 in a bid to balance supply and demand and put a floor to prices.

The slowdown has been attributed to uncertain economic conditions, exchange rate variation and unfavourable weather that has affected crop planting

Adding to the bearish sentiment, the International Fertilizer Industry Association (IFA) expects world fertilizer demand to increase by less than 1.5% in 2013, despite strong market fundamentals in agriculture.

Corn prices currently stand above $7/bushel (€5.32/bushel) and there are expectations that US farmers could plant as many as 97m acres of corn in 2013.

At the same time, capacity expansions for nitrogen and phosphates are likely to exacerbate the slow demand growth.

The global urea market is ending the year looking relatively firm for the short term, although the upside is looking stronger for granular urea than for prilled on the back of reduced supply coming from key granular supplier Egypt.

Egyptian urea prices are currently in the $450s/tonne FOB (free on board), compared with $370-390/tonne FOB this time last year. Meanwhile, benchmark Yuzhny prilled prices are at $370-385/tonne FOB, compared with $315-330/tonne FOB in late December 2011.

Moving into January 2013, granular prices are expected to remain firm as gas supply curtailments that have hampered Egyptian production over the past month are expected to remain in place through January. Egyptian producer commitments to the domestic market have been increased for 2013, which will also limit export availability. There have been discussions with the government that a $100/tonne export tax could also be introduced, but there is no confirmation of this.

Granular demand is also limited in the first quarter, given a delay in the start-up of the new Sorfert Algeria plant. Production is expected to be ramped up during the first three months of the year, with exports to start in March.

On the prilled side, commitments to India ex-Yuzhny and outstanding requirements from Turkey for the first quarter are likely to support Yuzhny prices over the next month or so. There are also indications that major markets India and Pakistan may look to tender by late January to cover urea shortfalls for the rabi season. There are expectations that India might need to buy another 500,000-700,000 tonnes before the end of March, which should provide some support to prilled prices.

Looking further ahead into 2013, the Chinese export tax policy for urea was announced this week, with a decrease in the low-export tax window rate to 2%, in line with expectations. This has prompted early speculation that Chinese exports could increase again next year. However, others counter that the level of exports will depend on pricing during the low tax window.

IFA expects that urea demand will remain relatively firm in the fertilizer sector in 2013. However, supply growth is expected to exceed the projected increase in demand. Demand is expected to increase by 2.3% in 2013, but would need to rise by 4-5% to absorb the incremental supply due to come from Algeria, the UAE and sustained production from new facilities in Qatar. This supply surplus is likely to put pressure on pricing through 2013, assuming the start-ups of these units.

The phosphates market is under pressure as the year comes to an end because of weak demand and the scenario is unlikely to change much moving into 2013.

The market has remained relatively static over the past year, with demand declining in 2012 from major markets India and China, while remaining flat in other demand regions. This lacklustre demand translated into lower production and exports for phosphate products, while domestic deliveries have fared better.

IFA estimates that world phosphates consumption decreased by 1.5% during 2012. In 2013, demand is expected to increase moderately, but supply additions are still likely to outpace demand.

Diammonium phosphate (DAP) pricing has moved in the $495-580/tonne range for the benchmark FOB US Gulf price. But values have been under pressure for most of the second half of the year, currently standing at $495-500/tonne FOB compared with $520-540/tonne FOB this time last year. With demand looking weak through the first quarter there are expectations that prices could come under further downward pressure.

Demand looks set to remain lacklustre over the move into the new year, given high stock levels in major markets. India has enough stock until the end of the rabi season. As of the end of March 2013, there are estimates the country’s stocks will be 2m tonnes for DAP and 3m tonnes for nitrogen phosphorous potassium (NPK). This is expected to delay negotiations for new DAP contracts for 2013 and also phosphoric acid negotiations for the first quarter.

DAP contracts in India were agreed at $580/tonne CFR (cost & freight) for 2012-2013, but current offers into India are at $540/tonne CFR and finding little interest, underlining the lack of demand. Contract deliveries have been delayed and some cancelled.

In a bid to try to balance supply and demand and find a floor to prices, production cuts are being planned for the first quarter of 2013. Russian producer PhosAgro has announced plans to decrease production of DAP/monoammonium phosphate (MAP) in the first quarter of 2013 by 17% compared to the same period of this year. DAP/MAP production totalled 558,800 tonnes in January-March 2012, so Q1 2013 production is expected to be around 464,000 tonnes.

OCP Morocco is carrying out rolling turnarounds until the end of 2012 and, with stocks still building, there are expectations that further cutbacks will take place during January-March, although this has yet to be announced.

US producers are expected to look to build inventory levels rather than cut production in a bid to reduce supply on the international market and limit the downside in prices. Indeed, data from The Fertilizer Institute showed that US DAP/MAP stocks increased in November. Closing inventories were 36% and 27% higher respectively compared with October, while producer disappearance was significantly reduced.

Looking further into 2013, China issued its new tax export policy for 2013 which is expected to stimulate the Chinese DAP market. The low tax window has been extended for an extra month and the rate has dropped from 7% to 5% during the off-season for DAP and MAP. The more relaxed policy could potentially see more phosphates exported from China next year, which would put pressure on prices globally.

During the low export tax window from June to September 2012, China exported 2,507,380 tonnes of DAP, down by 64,520 tonnes from the same period last year. The export volume is generally stable during the low export tax window and the extra month in 2013 could result in an extra 600,000-700,000 tonnes in the exports total.

An improving demand/supply balance, reduced industrial requirements in Asia and the traditional seasonal slowdown in the vast US and Indian markets saw the benchmark Black Sea ammonia price slip to $600/tonne FOB in late 2012, but the outlook for early 2013 still appears to favour producers.

With only the delayed Sorfert Algeria ammonia plant due to increase merchant ammonia availability next year, the demand/supply balance is expected to remain tight and prices are set to remain firm, especially if production issues in Trinidad and the Middle East resurface in 2013.

Months of steady upward gains created by strong demand from Asian buyers, who normally source from the Gulf, saw prices peak at $650/tonne FOB Yuzhny in October, which generated a price of $720/tonne CFR Tampa for November loadings in the US Gulf.

The tight supply situation was exacerbated by significant natural gas curtailments in Trinidad that have been in place most of the year, routine plant turnarounds at major ammonia units in the Middle East and Ukraine, and natural gas restrictions in North Africa.

However, that upward momentum finally started to reverse in the final few weeks of 2012 as the seasonal downturn in agricultural demand combined with a reduced demand from the industrial sector in Asia because high production costs forced prices downwards.

East of Suez, little fresh spot business has so far been seen for January loadings as Middle East supplies are still very tight due to production problems and producers have been unable to offer spot cargoes as they strive to meet contract commitments.

However, this snug availability is expected to ease in coming months if all ammonia plants are run at full rates and reduced output is maintained at downstream acrylonitrile, caprolactam and nitric acid units in Asia.

Production rates at several industrial plants have been reduced or have been completely shut down because current prices in downstream markets remain weak and are insufficient to cover high production costs.

In December, Korea’s Namhae finalised annual supply contracts with SABIC for 150,000 tonnes, Yara for 150,000 tonnes, and Mitsubishi for 70,000 tonnes. Meanwhile, SFC is understood to have signed supply contracts with SABIC for 200,000-250,000 tonnes, Yara for 200,000-250,000 tonnes, Mitsui for 200,000-250,000 tonnes and Mitsubishi for 50,000-100,000 tonnes.

SFC’s ammonia requirements for 2013 are expected to total 950,000 tonnes, although some of that tonnage will be carried over from this year given reduced consumption in recent months. 

These substantial supply commitments illustrate the growing need for ammonia from industrial users and will further limit spot availability in 2013 and should support higher prices throughout the year. In the shorter term, refill demand from US farmers for the spring application season should appear in late January/early February and further underpin current price levels.

The international sulphur market in 2012 was balanced-to-weak despite the overall global deficit in supply, with pressure from the softer phosphate fertilizer market as well as macroeconomic uncertainty. Weaker demand was reflected by prices that remained below last year’s levels.

In the largest supply market, Canada, contract prices this year ranged $180-205/tonne FOB Vancouver, down on the 2011 range of $180-240/tonne FOB Vancouver. As for China, the largest import market, spot prices fell in the $165-225/tonne CFR range, compared with $170-250/tonne in 2011. Meanwhile, Abu Dhabi National Oil Company’s (Adnoc’s) 2012 monthly prices ranged $165-215/tonne FOB Ruwais, reflecting a $10/tonne decrease on the high end of the 2011 range of $165-225/tonne FOB.

On the supply side, global elemental sulphur production in 2012 is forecast at around 55m tonnes, up on 2011 production of around 52m tonnes.

Global tightness of sulphur has been counterbalanced by a slowdown in demand. In 2013 the overall balance is also expected to be a deficit, albeit a smaller one compared with 2012. Block sulphur inventories in Kazakhstan continue to be depleted, currently estimated at 5m tonnes, with the expectation this will be gone by 2014. However, sulphur inventory in Canada is estimated at around 10m tonnes, with no clarity on expected remelt volumes in the next few years.

Sulphur demand came under pressure due to a weaker fertilizer market as well as softer macroeconomic factors, which also put pressure on the industrial demand sectors. Additional sulphur demand from the nickel leaching industry saw mixed developments as the Goro project in New Caledonia halted its operations.

In China, the new export tariff for DAP/MAP in 2013 may encourage sulphur consumption in China. However, there is concern the one-month extension may lead to increased competition in key markets for DAP/MAP and the potential for lower prices. This could have a detrimental impact on sulphur.

The sulphur market will enter 2013 with some changes to the structure of contracts in Saudi Arabia. Aramco Trading will no longer be holding quarterly price negotiations with customers, following the decision to move to posting a monthly price for all markets. There has also been a change to the Russian sulphur contract structure. Gazprom Export (GPE) is reported to have allocated volumes for a one year basis to Austrofin and Transammonia, for the North African and Brazilian markets.

Prices for first quarter/first half 2013 contracts in all markets are expected to see decreases due to the downturn in pricing over recent months and somewhat uncertain outlook. Some buyers are holding adequate inventories and are in no hurry to enter into negotiations.

Suppliers maintain that supply will be tight next year. During the winter months there is a risk factor for Russian and Canadian exports, although no unusual disruptions have been reported to date. Saudi Arabia will continue to deliver sulphur to the Ma’aden phosphates project – reducing its offshore availability.

Going into 2013, the sulphur market will be under the shadow of uncertain demand in industrial and fertilizer sectors, comfortable stocks across China, Brazil, North Africa and India, and a shaky economic outlook. Pricing is expected to remain volatile, fluctuating in a range similar to 2012 levels.

The potash market remains bearish as risk-averse buyers avoid concluding fresh business at the end of the year. Uncertainty about market direction has aggravated the situation, and buyers are keen to end the year with minimum inventory levels.

The bearishness in the market moving into 2013 is attributed to delays in new contract signings in China and India, which account for 25% of global annual consumption. Elsewhere, buyers in spot markets have also deferred purchases as they look towards China and India to get clarity on market direction.

Fresh Indian contracts are now likely to be signed in late December/early January ahead of China’s contracts. The expectation is that Indian buyers may decide on an agreement earlier to get the first-mover advantage. However, talks may be delayed to March or April if both parties fail to reach an agreement, which would further dampen global market sentiment.

Typically, Indian contract prices are at a premium to China. The last Indian contract was agreed at an average price of $500/tonne CFR compared with the Chinese price of $470/tonne CFR. Suppliers were heard to be targeting $450/tonne CFR, while importers are targeting around $420/tonne CFR.

Annual potash shipments to India in 2013 are likely to be lower than previous years, at 3m-3.5m tonnes, compared with the usual 6m tonnes. Demand for potash in India has been hit as farmers have switched to urea, which is less expensive.

Meanwhile, the general expectation is that China may agree a price of around $400/tonne CFR for new contracts, down $70/tonne from its earlier contract price since domestic prices are below that level. Buyers are insisting on lower prices as Chinese MOP (muriate of potash) stocks are believed to be around 4m tonnes, compared with the usual 3m tonnes at this time of the year. Stocks are likely to be sufficient until March next year.

There are also indications that China may switch to spot purchases because of the volatility in MOP prices. The change may even happen next year, according to a media report that quoted a Uralkali official. The comments are an indication that suppliers are finding it difficult to negotiate fresh contracts in the country given the uncertainty about prices.

In addition, domestic Chinese MOP production capacity is expected to increase by more than 1.1m tonnes in 2013, which could further pressure prices.

Given the lack of demand, suppliers are undertaking measures to support prices. While Potash Corporation of Saskatchewan (PotashCorp) has announced several mine shutdowns, Uralkali has moved to cut production by 50% through the first quarter and said that it will stop rail deliveries to China from 1 January 2013.

Uralkali says it will cut production by 50% to 2m tonnes in December-March as demand has failed to pick up. Uralkali expects to sell about 1.6m tonnes of potash in the first quarter of 2013, while full-year 2012 sales are estimated at 9.3m tonnes.

In Canada, PotashCorp is undergoing several mine shutdowns between December and February 2013 in a bit to balance supply and demand.

But suppliers do expect demand to rebound in 2013. Global shipments are likely to reach 57m-58m tonnes in 2013 compared with 50-52m tonnes estimated for this year as China and India will return to the market, according to PotashCorp.

($1 = €0.76)

Meena Chauhan, Richard Ewing, Sylvia Traganida, Deepika Thapliyal and Gabriela Wheeler also contributed to this article

By: Rebecca Clarke
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