FEED Business Worldwide March, 2012

 

Fertiliser prices bottom out, going in different directions 

 

by Eric J. BROOKS

 

 

After rising for the first three quarters of 2011, fertiliser prices have fell sharply in the last quarter of 2011, with urea and DAP down by 27.5% and 20% respectively from their second quarter peaks. Urea fell from Yuznhy port urea fell from US$508/tonne to US$368/tonne over this time, while US NOLA DAP fell from US598/tonne to US$465/tonne. Only potash defied the downward trend, with Vancouver port MOP rising 11.4%, from US$440/tonne to US$490/tonne.

 

Behind the price drops lie deteriorating feed crop returns: The third and fourth quarter of 2011 saw a sharp drop in CBOT grain and oil seed futures. With grain and oil seed prices no longer compensating for earlier cost increases for fertilisers and other inputs. Along with repeated bouts of EU-crisis induced market deflation, this dented feed crop farmers' planting confidence, prompting many of them to postpone their fertiliser purchases.

 

This was particularly true in Brazil, where Q4 fertiliser inventories jumped by 162% year-on-year, from 2.1 million tonnes to 5.5 million tonnes. With much southern hemisphere fertiliser demand already accounted for and prices high, demand is poised to remain soft for the next quarter.

 

Another deflationary factor was India, which accounts for a large proportion of DAP and potash exports. With fertiliser priced in US dollars and its currency falling hard against the US$, this cut this second half import demand for DAP and potash.

 

Against this short-term deflationary impetus however, strong fundamentals is putting a floor below the prices of two out of three fertiliser inputs. With the stocks-to-use ratios of key feed crops (especially corn) at multi-decade lows, fertiliser purchases are being postponed in hope of softer prices but cannot be avoided, as the market is sending clear signals for higher feed grain production.

 

Moreover, there are two factors supporting such an outcome. First, feed grain prices appear to have bottomed out in late 2011 and now appear to be strengthening, with fertiliser-hungry corn in particular once again well above US$6/bushel. Second, with Argentina's drought-shriveled harvest raising US export demand, corn prices look set to stay high and a larger US harvest will be required to offset the loss of Latin American supplies, particularly in light of a 5% US stocks-to-corn ratio for corn. All this implies that North American planted corn acreage –and fertiliser demand –should turn upwards strongly from the Spring time onwards.

 

Third, although Brazil used large inventories to ride out high early third quarter fertiliser prices, its supplies should be depleted by the second quarter of this year. A coincidence of both US and South American buyers sourcing supplies in mid-year can only have a bullish impact on fertiliser fundamentals.

 

On the production side, late 2011's resurgence of political turmoil in Middle East and North African countries did cause some production disruptions. In particular, late year Egyptian political turmoil disrupted urea exports from its port of Dammietta port. With Egypt accounting for 9% of world urea exports, this tightened fertiliser world inventories that were not particularly large to begin with.

 

 

 

Going forward, urea is expected to turn a neutral price performance. Although China turned off exports with an 110% export tax for the first six months of this year, new production capacity coming on stream in Algeria and Qatar at this time. Equal to 6% of existing urea exports, these new MENA supplies help compensate for the loss of China's exports.

 

Together with anticipated urea rationing on the part of North American farmers, this should lead to a neutral outlook for this nutrient component. However, if the record anticipated US corn acreage coincides with sharply higher prices, this could lead to modestly higher urea prices.

 

 

 

A more bullish outlook is in store for potash, where slackness in demand is counterbalanced by a limited number of world suppliers and their cuts in output.

 

On one hand, demand has been soft: In particular, leading buyer India's high 2011 inventories and the rupee's fall against the dollar made it slash April to November potash imports by 48%, to 2.5 million tonnes from 4.8 million a year earlier. Later, seeing the fall in Indian demand, Latin American potash importers cancelled late 2011 shipments in anticipation of lower prices early this year.

 

On the other hand, the lower prices did not materialize: Instead, potash is the only fertiliser component that costs more today than it. Why? Rather than potash costs deflating as well-stocked South American buyers had hoped, China ended up importing 27% more potash in the first ten months of 2011 than a year earlier. Offsetting India's lower demand, China is why potash alone among the three components increased in price in the last half of 2011.

 

Knowing that its actions inflated prices, China appears to be joining India, in refusing to import and demanding lower prices in the early months of this year. And to be fair, with its current bloated potash inventories, China can afford to take a wait-and-see strategy.

 

However, while India negotiated 5% price discounts from suppliers of urea and phosphate in late 2011, it received no concessions from suppliers of potash –nor is it likely to do so. Potash production is concentrated in just a handful of buyers and countries. With leading Russian and Canada supplying 65% of world potash exports and controlling 73% of reserves, Russia's Ukrali and Potash Corporation of Canada recently announced production cutbacks of nearly 10%.

 

Despite slack first quarter demand and Indian and Chinese resistance creating price weakness, they will need to restock supplies sooner or later –and the supplier base is limited. Currently around US$490/tonne, by the end of the third quarter, Russian and Canadian output cutback may be enough to move potash prices to above US$550/tonne.