OUTLOOK '11: Fertilizer demand set for strong growth

Source: ICIS News

2010/12/24

By Mike Nash

LONDON (ICIS)--The international fertilizer market is entering 2011 in a seemingly strong position, and the sector is expected to see further growth as demand levels appear to be returning to pre-recession levels and prices of all products are on the up and significantly higher than a year ago.

According to the International Fertilizer Industry Association (IFA), fertilizer production and sales have risen strongly this year, up 13% and 7% respectively in 2010 from the depressed levels in 2009.

Consumption is forecast to grow a further 4.7% in 2010/11 and by another 3.8% in 2011/12, with nutrient application levels expected to be back to pre-recession levels in 2011/12.

IFA said it expected the fertilizer industry to invest $80bn (€61m) in new production capacity between 2011-2015, having already spent $40bn since 2008.

However, despite the current positive signals in the market, IFA also warned of rising agricultural commodity and food prices and a possible repeat of the food crisis of 2007/08.

This year proved to be a strong one in terms of urea prices, which hit levels not seen since October 2008.

For example, Black Sea urea prices hit a peak of $391/tonne FOB (free on board) Yuzhny in early December, up from around $270/tonne FOB at the start of the year.

As 2010 draws to a close, strong grain prices, a healthy demand outlook and a more prohibitive Chinese export regime suggests prices will firm during the first quarter of 2011.

A shortage of urea during the first quarter of 2011 looks possible due to the absence of Chinese urea from the international market.

“Nearly 1m tonnes were shipped in January and February 2010 from China. If this is out, it will be very difficult for the buyers. If Pakistan or India tender, they cannot rely on Chinese urea,” said one trader.

Accordingly, Arabian Gulf, Egyptian and Black Sea urea may well be pulled in to plug supply gaps in Asia. This will tighten supply and ensure that international prices stay on a firm footing.

An Arabian Gulf seller said: “The market is firming and supply is tight. The Chinese will be out until the end of June.”

“In January it is going to firm because of supply tightness,” the seller added.

In particular, granular urea could be set for a run-up, with US and European buying expected to be strong.

High grain prices have been playing a significant part in the increased confidence of buyers. Currently, corn futures for March are around $5.9/bushel, up from around $4.2/bushel at the start of 2010.

However, the outlook for 2011 is not purely positive. Global urea demand has been forecast to increase around 3.8% per year, but additional capacity is also due on stream in several countries including Qatar and Algeria, which will reduce the potential for price rises as the year progresses.

In the phosphates market, the US market looks set to support prices until India returns in February to agree 2011-12 diammonium phosphate (DAP) contracts, probably for another 8m tonnes.

Most producers, with the exception of Group Chimique Tunisien (GCT), are pretty much sold out for January. The key Tampa DAP price in the US has ended the year on a firm footing at $590-600/tonne FOB on small trades into Central America. While this price is not achievable elsewhere, US producers are under no pressure to sell in deepsea markets yet. Jordanian, Mexican and Russian producers are sold out for January.

While official confirmation could not be made, market sources said that Russian producer PhosAgro would not ship around 250,000 tonnes of DAP to India under contract in the first quarter, thanks to an exit clause in the existing contract which allows it to enjoy higher netbacks in deepsea spot markets.

Sources said this product had been mostly lifted by two traders for shipment to the US and Latin America, with reports of product also being offered in Thailand. PhosAgro said it is sold out for January.

The consequence of this is that India will have even less product come the end rabi, precipitating an early return to the import market in 2011. India has bid at $450/tonne CFR (cost and freight) for 2011-12 contracts but most sources have described the price as ludicrously low.

“There’s no way it will settle at this price,” said one seasoned trader.

“I think the Indians are embarrassed that the price is so unworkable,” said another.

India represents 50% of the DAP market trade so it has tremendous buying power, but $450/tonne CFR equates to $390/tonne FOB Tampa, over $200/tonne below current market values. Contracts for 2010-11 were agreed at $500/tonne CFR.

How India settles its contracts will be crucial in determining how the phosphate business pans out in the first quarter. But the general consensus is that sellers are in a far stronger position for the first quarter than at this time last year, when demand was still recovering from the financial crash in late 2008.

With demand from India re-emerging in February and the US domestic market kicking in, plus a lack of Chinese DAP available for export until June thanks to a new export tax regime that effectively bans exports for the first part of the year, the outlook was firm.

However, the US has recently become a major import market for DAP – a highly unusual situation as the US is normally the largest exporter of DAP in the world.

Strong domestic pricing and low inventories have attracted imports of at least 700,000 tonnes for shipment in the fourth and first quarters. The outlook is that the US spring market will be strong, based on current commodity prices, but a slowdown in offtake plus the heavy import schedule means the US domestic market could be long come the first quarter.

The ammonia market is ending the year in a bullish mood and the short term prospects are looking good.

Continued strong demand from the US over the winter months, delayed shipments from Yuzhny and reduced Trinidad availability have combined to tighten the market and support price increases.

January business out of Yuzhny (the key supply source and pricing reference point)  is reported above $400/tonne FOB, with indications that buyers have been willing to pay much higher levels to secure tonnes and offers are now above $410/tonne FOB. At the same time, the Tampa price for January has been agreed at $475/tonne CFR, up $15/tonne from December.

Prices are at levels not seen since the second half of 2008 and are significantly higher than a year ago, when Yuzhny was at $270-275/tonne FOB. This is partly due to higher gas feedstock prices in the Ukraine raising floor levels but also as result of the general improvement in fertilizer demand this year.

The Tampa price was set at $300/tonne CFR in January 2010, some $175/tonne lower than the current level.

US ammonia demand is likely to remain strong in the first quarter ahead of an expected robust spring application season. At the same time, the European market is looking tight and North African demand is good given a strong phosphates market.

These factors will combine to keep the market firm and are likely give rise to further price increases.

East of Suez, the ammonia market is also looking fairly firm with good demand from India and the Far East. The tight supply situation in the western hemisphere may even see some Middle East product attracted westwards.

Middle East price ideas are around $400/tonne FOB, up from around $290/tonne FOB this time last year. However, pricing has become more challenging with Iranian product being sold at a discount to other Middle East origins due to sanction pressure which have limited export outlets for Iranian ammonia. This situation was likely to continue in 2011.

Further ahead, significant new ammonia capacity is due on stream in the Middle East later in 2011, and this may put downward pressure on prices.

At the end of the first quarter, the Ma’aden ammonia plant in Saudi Arabia is expected to start production which will add around 90,000 tonnes/month to availability before reducing to 34,000 tonnes/month once the DAP plant starts in mid-2011. Ammonia is a key feedstock for DAP.

The Qafco V ammonia plant is due to start production in mid-2011 and will add around 60,000-65,000 tonnes/month of ammonia availability. This extra ammonia will disappear in late 2012 when the Qafco VI urea plant starts up.

The sulphur market is more balanced than this time last year, but also more prone to pricing volatility.

Throughout 2010, prices have been above historical levels, thanks to stronger global demand from the downstream phosphate fertilizers market.

However, prices were also volatile, as the Chinese market’s ability to hold and play significant inventories of 1.8m tonnes and above continued to have an impact on the global balance.

Price swings were particularly evident in Abu Dhabi National Oil Co’s (Adnoc) monthly sulphur prices, which were viewed as an indicator of the market. In 2010, Adnoc prices fluctuated between $65/tonne to $210/tonne FOB, against the range of $33-57/tonne FOB in 2009.

The sulphur market saw a divergence between the spot and contract markets as the final quarter of 2010 approaches its end.

The spot market was predominantly hindered by the slow pace of Chinese demand, but still above price indications this time last year as a result of improved demand.

The latest indications from China were at $170/tonne CFR, reflecting the low-$140s/tonne FOB Middle East. This was up from $100-130/tonne CFR in the fourth quarter of 2010.

For the contract market, negotiations for the contracts in first quarter and first half of 2011 were also progressing on a higher note compared to a year ago.

Middle East producers, which were tabling in the $80s/tonne FOB for the first quarter of 2010, have almost doubled their price ideas for the first quarter of 2011 to $160-170/tonne FOB.

In 2011, the supply and demand ratio was expected to be more balanced. Demand is likely to be strong due to several sulphur-consuming metal leaching projects expected to come on line in 2011.

Meanwhile, the start of the Ma’aden phosphate project would certainly take substantial amount of sulphur for export from one of the biggest sulphur suppliers Saudi Aramco.

Furthermore, global supply was already forecast to be short.

GazpromExport in Russia said that it expected a reduction of up to 1.5m tonnes available to both domestic and export markets next year as it would have depleted its stocks.

New projects aiming to boost sulphur production in the Middle East and Canada would also only be realised in the next couple of years. 

For the above reasons, sulphur prices were likely to remain above historical levels, but also expected to be more volatile in 2011.

China, which already imported 8.82m tonnes of sulphur between January and October in 2010, will continue to be the largest sulphur import market in the world. Together with the involvement of speculative traders, its demand was expected to continue to assert a major impact on global sulphur balance and prices.

The potash market was in a period of recovery this year. During 2009, demand had collapsed as prices were held at artificially high levels, which in turn resulted in low potash application rates and eventually a collapse in prices. The 2010 annual contracts with Chinese buyers were agreed at $350/tonne CFR, more than 40% below the previous year’s level.

Both of these factors helped start the recovery in demand for potash in early 2010, but it was only in the second half of the year that buying interest and prices really took off. Demand began to gather pace, primarily supported by rising agricultural commodity prices, and global potash spot prices moved above the $400/tonne CFR level by the end of the third quarter.

Further increases over the past months have put MOP prices at around $430/tonne CFR for standard MOP and $450/tonne for granular MOP in most regions. The currently tight market, coupled with healthy demand, is likely push prices up further in the early 2012.

Prices of Chinese and Indian long term contracts will be a good indication on trends for the coming year but no agreements have been finalised so far. Producers are targeting at least $400/tonne CFR for Chinese buyers.

A further factor that will shape the outlook for potash in 2011 is a merger between the two major Russian producers, Uralkali and Silvinit. The announcement, on 20 December, has sparked some concern on the buy side as more power on the producers at this time could imply higher prices for the upcoming Chinese and Indian long-term contracts, which traditionally act as a floor price for the year ahead.

On the other hand, some have said that the long-terms effects of this transaction could go either way. The producer could be more bullish in terms of pricing or more competitive towards other potash producers, which would in turn put downward pressure on prices. It will all depend on marketing and management strategies, which will only be clearer once the merger process is complete, in May 2011.

Carl Roache, Rebecca Clarke, Rita Menezes and Freda Gordon contributed to this article

($1 = €0.76)

To discuss issues facing the chemical industry go to ICIS connect