OUTLOOK ’14: Fertilizer markets eye pick up in demand for 2014

By Rebecca Clarke

LONDON (ICIS)–Fertilizer markets and prices have come under pressure in 2013 from slow global economic growth and rising world grain production reducing grain prices, while at the same time world fertilizer demand stagnated.

As a result, the industry is looking towards an expected rebound in fertilizer demand in 2014 to support growth.

According to the International Fertilizer Industry Association (IFA), global fertilizer demand is expected to rise firmly in 2013/14 to 179.5m tonnes of nutrient from around 176m tonnes of nutrient in 2011-2013. Forecasts for 2014-15 remain highly speculative at present, but the IFA is currently forecasting further growth in demand to 184.3m tonnes of nutrient.

Fertilizer demand was covered adequately this year, with supply covered from production and important stock carry-overs in a few large importing countries.

Indian phosphates demand has been reduced this year due to high stocks, but there is optimism that stocks will be at more normal levels at the start of the 2014-2015 season which will prompt more imports next year, also impacting demand for upstream products.

This year has also seen a change in some fertilizer marketing strategies, with the much documented break-up of the Belarusian Potash Company (BPC), when Russian producer Uralkali exited the marketing joint venture with Belaruskali. This news sent shockwaves through the fertilizer industry in general and saw potash prices fall. The full impact of the break-up is likely to only be seen next year.

The US phosphates export group Phosphate Chemicals Export Association (PhosChem) also disbanded in October this year after 39 years. Unlike the BPC break-up, little impact has been seen on the phosphates market given that at the time of the disbandment there were only two remaining members, Mosaic and PotashCorp, and Mosaic was responsible for the majority of exports, supplying an estimated 93% of the export volume.

However, hot on the heels of this came news that Mosaic had agreed to acquire the phosphates business of CF Industries, and the industry will be watching closely in 2014 to see whether there are any further changes in the sector.

Turning to the individual markets, urea market sentiment has turned bearish as we come to the end of the year following news from India that no further imports are intended in the 2013-2014 year and now that much lower export tax rates have been announced in China for next year.

The Chinese government has announced a peak season tax of 15% plus CNY 40/tonne and a low season tariff of just CNY 40/tonne for 2014. The low tax window remains July-October and there are no benchmark prices.

The policy is in line with expectations, but the lowest rates for the off season could potentially mean more export availability next year, depending on whether domestic and international prices make exports workable. Exports in 2012 were just below 7m tonnes and in the first 10 months of 2013, exports totalled 6.5m tonnes.

Some sources have said that the new tax policy may potentially put a ceiling to the market, as if international prices move too high this will give China the opportunity to sell.

Traders estimate that with ex-works prices at CNY 1,600/tonne, plus the 15% and CNY 40/tonne tax, as well as transport and handling costs this would equate to an export price of around $340/tonne FOB (free on board) during the peak season. Prices are currently at $320-325/tonne FOB.

The Indian import announcement has also weakened sentiment. The Department of Fertilizers said in mid-December that it does not intend to import any more urea in the 2013-2014 year, citing large stocks. There are expectations that India will return to the market before March 2014, but it is clear there is no hurry to make further purchases and whether a tender is announced sooner remains to be seen.

If US import demand starts to kick early in Q1 this could provide some support to the market. There are expectations that the US might start attracting import tonnes in the new year, but for the moment price levels domestically still remain unattractive. Indeed, Venezuelan tonnes are unusually reported moving to Europe as it offers better prices at present, while Middle East cargoes are also heard moving to Europe.

Meanwhile, the official gas price between Russia and Ukraine is being lowered by around 30% from 1 January 2014, which has also given rise to some expectations that Yuzhny prices could soften if production costs are lower.

However, the gas price to industrial users has not yet been set and NF Trading says it has no plans to restart production at its idled units at present. As a result, the lower gas price is likely to be counteracted by limited supply from Yuzhny for the time being, resulting in more stable pricing at least in the short term.

There is a sentiment of cautious optimism in the phosphates world as the market prepares for 2014. China has announced its export tax scheme for next year following weeks of speculation.

The low export tax window will not be extended but the tax has been decreased, which could potentially lead to more exports, especially for triple super phosphate (TSP) where the tax remains flat throughout the year.

However, how much diammonium phosphate (DAP) China will export remains unclear and will be determined by international prices, as producers are even considering focusing on the domestic market unless global prices improve.

In India, there are signs of healthy demand next year backed by lower DAP inventories and a good monsoon season. Traders estimate that stock levels will be at 1.5m-1.7m tonnes in April 2014, compared to 4m tonnes in April 2013. Consumption is expected to reach 9m tonnes in the 2014-2015 fiscal year, with domestic production around 3.5m tonnes and estimates of imports around 5m tonnes.

The market will now draw its attention to the Indian subsidies for next year, which are expected to offer some relief to the severe liquidity issue that fertilizer companies are facing.

The government has granted rupees (Rs) 10,000 crore ($1.6bn) under a special banking arrangement (SBA) as sought by the Department of Fertilizer to help the industry meet its fund requirements until the cash subsidy is released by the Finance Ministry.

Earlier this month, an additional Rs 2,000 crore ($324m) was approved to provide additional cash subsidy for indigenous fertilizers. Rs 29,326.88 crore was allocated for phosphates and potash fertilizers and the provision will finish by late December after making payments until September.

Phosphoric acid negotiations for Q1 deliveries are expected to be the focus over the next month with expectations of a rollover at $609/tonne CFR (cost & freight) due to higher sulphur prices, which could mean that prices have reached a floor.

Activity in the US is expected to pick up in Q1 following a successful application and fall season. Benchmark Tampa prices seem to have stabilised and there appears to be enough DAP/monoammonium phosphate (MAP) demand in Latin America and Australia to support higher prices. In the domestic market, buyers are expecting a strong spring season and have started making purchases out of terminals.

On the supply side, most producers are heard sold out into January. In North Africa, OCP has increased production rates due to improving global prices and GCT is heard producing at a steady rate. SABIC is expected to start MAP production soon and conclude more dark DAP business. PhosAgro is heard sold out of DAP/MAP and focusing on nitrogen phosphorus potassium (NPK)/nitrogen phosphate (NP) production in January.

Heading into 2014, the ammonia market appears to be firming and fundamentals remain strong amid solid demand from agricultural and industrial users in most parts of the world.

The supply/demand balance is likely to stay tight, particularly as Ukraine’s NF Trading says it has no plans to restart several units despite a new lower gas agreement between Russia and the Ukraine.

The supply situation in Algeria has improved with several ammonia cargoes set to load for various buyers in Arzew over the coming days in a development that means Sorfert and Fertial will likely restart their ammonia units over the next week or so.

The benchmark Yuzhny ammonia price has climbed in latest business as OCI Nitrogen paid $435-440/tonne FOB for a 12,000-tonne cargo for late December/early January loading, but such a hike was not reflected in the January Tampa price which rolled over at $450/tonne CFR.

Yara agreed deals for a combined 60,000 tonnes of Black Sea ammonia from Nitrochem and NF Trading at around $416/tonne FOB for first half January loading. While OCI purchased 11,500 tonnes of Egyptian ammonia priced at $425/tonne FOB from Abu Qir for immediate loading in North Africa.

Demand for ammonia from India remains strong and the usual strong flow of cargoes is moving east from the Arabian Gulf amid declining inventories of several fertilizers such as DAP.

There is a growing feeling that price increases seen in the sulphur market over the past few months might be more sustainable than previously thought, given the fact the supply remains tight, Chinese buyers are in the market and other buyers are also stepping in to make purchases.

Prices in China have moved up to around $150/tonne CFR, while latest spot prices from the Middle East are around $120/tonne FOB compared to Q4 business concluded in the $60s/tonne FOB.

While some still argue that Chinese demand will likely diminish ahead of lunar new year in late January and that downstream phosphate fundamentals remain weak, others note that increases have already been achieved without support from the phosphates sector, others buyers are in the market as well as China and that Chinese buyers will likely continue buying once the holidays are over in February.

At the same time, there is talk that Middle East supply will remain limited in Q1.

It is also noted that the phosphate market looks to have stabilised and prospects for 2014 are looking positive, which could support sulphur prices further. There are now expectations that sulphur prices will remain firm moving into Q1, even if the phosphates market does not pick up until Q2.

Q1 sulphur contract negotiations are getting underway, with higher prices likely to be on the cards given the run up in number since Q4 2013 prices were agreed.

The Abu Dhabi National Oil Company (Adnoc) official selling price for December was set at $115/tonne FOB, up $35/tonne from November, and targets for January and Q1 are understood to be above this level considering latest spot business from the Middle East in the $120s/tonne FOB, and even higher FOB numbers seen out of India and Taiwan recently.

The potash market is ending the year on a bearish note amid talk that muriate of potash (MOP) contracts for first half of 2014 with Chinese buyers will be signed at $300/tonne CFR or lower. While an official announcement is expected only in the new year, the market is rife with speculation that a $100/tonne decrease from the previous contract price of $400/tonne CFR is inevitable given the recent slump in the market.

Market direction in 2014 will be determined by the price that the Chinese contract is agreed at since it will act as a floor for prices across the world. The pricing strategy adopted by Uralkali and Belaruskali in the coming year is also important since these suppliers, especially Uralkali have been price setters in major markets recently.

Uralkali has focussed on market share since its split with Belaruskali on 30 July, and has announced that $300/tonne will form the floor of any spot sales/tenders into Asia. However, unless a new price is agreed in China for the first half of 2014, it will be difficult to determine where prices are headed.

As for North American suppliers, they are bracing themselves for a tougher global environment. Potash Corporation of Saskatchewan (PCS) has announced an 18% cut in its workforce and has idled mines as it attempts to match supply with demand and improve its bottom-line.

Markets such as Brazil are the only silver lining for now, with demand in the country expected to remain robust in 2014. Uralkali has already sold over 300,000 tonnes into Brazil for January at $320/tonne CFR.

Despite the recent headwinds in the sector, suppliers expect to do more business in 2014. Uralkali sees global potash demand rising to between 58m-60m tonnes in 2014 on higher consumption in China, India, Brazil and southeast Asia, up from an estimated 53-54m tonnes in 2013. However, the key to watch is if prices will be able to recover from current levels.

($1 = €0.73)

Additional reporting by Richard Ewing, Sylvia Traganida, Deepika Thapliyal, Julia Meehan, Kate Wilcock, Mark Milam and David Tonyan