OUTLOOK '19: Nitrogen fertilizer producers face tough start to 2019

Source: ICIS News


LONDON (ICIS)--While nitrogen fertilizer prices ended 2018 on a downward trajectory amid soft demand and oversupply, the 2019 outlook for global fertilizer producers in general is mixed.

International urea prices will continue to be under pressure on the cusp of 2019, although there are signs emerging that the market may be approaching its bottom.

It may, however, be too soon to predict that bottom as a lot will depend on demand materialising from India, south Asia, Europe and Turkey during 2019.

China continues to export with granular business for Chile concluded at $280-285/tonne FOB (free on board), which is close to the cost of production for some plants, according to sources.

Egyptian business is slow, even as buying has emerged in Turkey, with the country's demand estimated at 200,000 tonnes for January 2019 shipment.

Europe too is expected to step into 2019, although this market is difficult to call as buying over the last few years has been lower than expected.

In Bangladesh, offers in a BCIC tender were $25-26/tonne lower than a month ago, but are still giving better returns to China than the recent sale to Chile.

A fresh tender in Pakistan will close on 3 January, while Indian demand is expected sometime in the second half of January.

The urea market may have ended 2018 on expectations that prices will soon stabilise, but if demand in key markets does not materialise as expected there could still be more pain in store for producers.

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The ammonium sulphate (AS) market is feeling the impact of the weakness across the wider nitrogen sector.

Slowing demand in year-end and uncertainty moving to 2019, coupled with falls in the price of urea, have contributed to some of the lower prices registered for major importing and exporting AS hubs.

The Baltic and Black Sea markets are both quiet, and little business is expected to take place until the middle of January.

Nonetheless, prices are holding steady because there is a lack of material available stemming from feedstock problems experienced over the past months.

In Europe, AS values are under pressure owing to the wealth of Chinese product moving to typical importing hubs, particularly Brazil, with demand  also slow in other parts of Latin America.

The phosphates market ended 2018 with weak sentiment in most regions and, while there was some diammonium phosphate (DAP) import activity in India, forecasts are for soft demand in that country in early 2019, as about 6m tonnes have already been sold.

All buyers will be looking at the settlement of the phosphoric acid contract prices for first-quarter deliveries between Morocco's Office Cherifien des Phosphates (OCP) and its Indian customers.

Expectations are for a rollover or a small decrease, as phosphoric acid prices are already too high and raw material prices (such as ammonia and sulphur) are softening.

OCP is expected to agree contract prices early next year, which is expected to determine whether it will be cheaper to import DAP or produce it domestically using phosphoric acid.

In China, DAP and monoammonium phosphate (MAP) producers are focusing on the domestic market, which is in season.

They are expected to be out of the export market until at least the Lunar New Year in early February.

The Australian market is registering increased import demand for DAP and MAP, and is expected to continue into the first quarter of 2019.

West of Suez, the DAP Tampa price remains unchanged due to a lack of export business from Mosaic.

In the domestic market, DAP barges have suddenly posted an uptick, mainly due to a lack of product and the delay in arrival of cargoes from Morocco because of adverse weather and the heavy swells at Jorf Lasfar.

Domestic buyers are expected to return to the market in the coming weeks for spring barges.

The Brazilian MAP market is expected to pick up soon for the important safrinha season and Russian, Moroccan and US producers are expected to compete for business.

On the supply side, most producers are comfortable for January.

Suppliers will be looking to ship cargoes to regions with increased demand in the first quarter of 2019 such as Brazil, Australia and Europe.

Heading into 2019, sentiment in the global ammonia market remains overwhelmingly bearish given the amount of surplus material on both sides of the Suez.

Aggressive price targets – albeit unconfirmed – have been quoted by sources heard for next spot business in several regions, and contract prices on most continents are soft.

The outlook for the first few weeks of 2019 looks gloomy for producers, with capacity cuts likely to become an increasing trend if prices fail to rebound during the first quarter.

Seasonal demand from China could soak up some of the excess volume in the short term, but prior forecasts about Iranian cargoes drying up due to the US' re-imposed sanctions were wide of the mark because Indian buyers continue to receive such material under a waiver agreement.

In addition, new plants in Russia are set to toss several hundred thousand more tonnes onto the market, meaning buyers should hold the upper hand in spot cargo negotiations.

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Although spot sulphur supply is structurally tight, China is expected to remain the control valve of the market in 2019, with the relative strength of its demand largely dictating global prices.

Global spot sulphur supply is tight because of a shift to a sweeter crude mix, lower volumes out of Saudi Arabia because of increased domestic consumption, and ADNOC contracting an increased portion of its sulphur supply to OCP.

Coupled with this, in the first quarter typically limited tonnes are traded through the Black Sea because of Russia's waterway restrictions, and there is a heavy turnaround schedule at European refineries which is likely to result in more limited supply.

Nevertheless, the approach of the International Maritime Organization (IMO) 2020 regulations, and the uncertainty surrounding how shippers will comply with the regulations, has made supply levels throughout the year difficult to forecast.

If shippers predominantly chose to use scrubbers to comply – which extract sulphur from the fuel – this will increase global supply significantly.

If, however, shippers choose to switch to blended fuels to comply, this will encourage a further and more permanent shift to a sweeter crude mix, which will result in sharply lower sulphur production.

ICIS’ seasonality analysis suggests that China arrivals typically fall sharply in January, and reach their nadir in February, with the first quarter being the weakest of the year.

However, China demand is not expected to follow typical trading patterns in January, as the majority of China buyers have not been active since the Golden Week holiday period at the start of October due to uncertainty over the evolution of the downstream phosphates market.

As a result, most are yet to cover themselves for the Lunar New Year holiday period in February.

Market sources estimate that orders must be completed by mid-January for volumes to arrive on time, and buyers are expected to return to the market imminently as a result.

Muriate of potash (MOP) fertilizer supply will remain tight across the globe in 2019, amid increasing demand, tight production discipline, outages and the delayed ramp-up of new capacity.

This tightness – which emerged amid a year characterised by bullish offers – indicates MOP and sulphate of potash (SOP) prices will continue an upward trajectory in 2019; albeit in $5-10/tonne increments, as opposed to big jumps.

In southeast Asia, weaker palm oil export prices gave importers a moment’s pause in Q4 2018.

Buyers instead forecasted demand requirements for the first quarter of 2019, and approached producers in an attempt to secure cargoes early.

Many were turned away, as producers were unwilling to commit that far ahead.

Meanwhile, in Europe, tight supply is similarly a key issue for buyers of both granular MOP and SOP.

With SQM’s SOP production in decline, and Germany’s K+S still racing to recover from outages in Q4 2018, both the European and wider global SOP market will see bullish pricing in 2019.

The shortfall in available production capacity is a similar story across both MOP and SOP, as the likes of start-ups Danakali, Sirius Minerals, and Emmerson, plus Australia’s five SOP potentials, are all some way off first production.

Indeed, only EuroChem has shown overt progress on its MOP production; albeit at a far slower pace than many predicted for 2018.

EuroChem’s potential capacity tops 8.3m tonnes of potash – but despite entering the market in Q2 2018, the Russian major’s plants have ramped up far slower than expected, due to technical issues.

Production is expected to increase in 2019, but much of the volumes will be consumed by EuroChem’s internal nitrogen, phosphate, potassium (NPK) fertilizer lines.

However you look at it, 2019 will be a tough year for buyers, as tight supply continues to put upward pressure on prices, and producers target markets which offer the best possible returns.

Focus article by Richard Ewing

Additional reporting by Julia Meehan, Mark Milam, Annalise Porter, Deepika Thapliyal, Sylvia Traganida, and Mark Victory