The fertilizer industry in 2020: tales of challenge, resilience and opportunity
By Lauren Williamson, Fertilizers SVP, Argus
Against a backdrop of pandemic-related practicalities, fertilizer opportunities for Arabian Gulf producers can be found at the intersection of market timing and risk appetite in the next 12 months. While agricultural demand for fertilizer has remained strong in 2020 as governments ensured the security of food supply chains, the industrial demand drag seen earlier this year had disproportionate impacts for different regions and markets, informing both recovery and forward strategy.
Take the byproduct sulphur, for instance. The dual shock of the Opec+ negotiation breakdown and Covid-19 demand disruptions early this year prompted a wave of refinery run rate cuts. Sulphur’s late-January midpoint lows of $38.50/t fob Middle East had risen to $60/t just five months later. More significant localized shortages in some markets – such as the western US – have presented prompt opportunities for those in close proximity and able to respond in time. They have prompted some sellers to re-evaluate any “set it and forget it” offtake arrangements, looking for additional ways to bring profit through the door while crude prices remain subdued. The threat of a wintertime resurgence of Covid-19 across the northern hemisphere has also inspired some sulphur buyers to engage in earlier negotiations, with major phosphate producers Morocco and China leading the buying activity. China’s purchasing increased its sulphur stocks to over 3mn t in early September against an average weekly inventory of closer to 1.3mn t across 2017-2019, but this has yet to cause any price-related downward pressures.
Caption: Nola DAP prices trend higher in the absence of Moroccan and Russian imports
Phosphate demand prospects in the next six months are improving, and sulphur sellers have reason for cautious optimism while FSU and North American supply tightens, as usual, in the fourth quarter. The current trend is a salve for a market that had seen steady price declines resulting from oversupply between October 2019 to January this year. While there has been exceptional phosphate and potash demand in Brazil on higher planted acres for soy and corn in 2020, the most surprising boost came from Mosaic’s International Trade Commission (ITC) petition to impose countervailing duties on Moroccan and Russian phosphate imports into the US. Since the June filing, product from both countries has been diverted to other markets. Separately, Morocco’s OCP has cut granulation rates to produce more acid, and the Argus daily DAP Nola barge price launched earlier this year had surged by 26pc to $346/st fob in late August. The ITC process will continue to be source of disruption for at least the next six months, presenting an opportunity for Saudi product to cover the import deficit, along with supply from Mexico and Australia.
Looking at ammonia, Asia-Pacific industrial consumption slowed early in the lockdown and exporters with production costs at $150/t and higher were tested. East Asia cfr prices dropped by 30pc from late January to late May, prompting a tranche of voluntary shutdowns and early maintenance works across the industry. Trinidadian producers with set floor prices in natural gas costs were hit hard and accounted for a majority of the shutdowns that saw 15-20pc of supply removed from the export market. Meanwhile producers in Europe benefited from falling gas prices on the TTF hub as the downward pressure on the energy complex reverberated widely. While east Asian industrial demand slowed early in 2020, China’s import appetite continued to strengthen year on year, with Chinese imports expected to exceed 500,000t in 2020, motivating our launch of China cfr ammonia prices in March. Now — as the ammonia market shifts into more normal cyclical supply-demand patterns — Arabian Gulf producers are not only armed with more insight into competitor pain points, but have predictive insight for future oil price implications in their industry. The impact of localized lockdowns and industrial demand will remain a key watch item for ammonia pricing into 2021.
Caption: Low industrial demand for ammonia depressed prices, hitting high-cost producers
Caption: China’s annual exports fall, but its role as a swing exporter is undiminished
Conversely, Middle East fob urea prices jumped by 19pc from January to April, supported by sustained demand, only to fall to a midpoint low of $190/t fob in June as fundamental oversupply pressure persisted. At the time of writing, urea prices are the highest in a year, driven by unabated Indian and Brazilian appetite, particularly during the summer. Daily prices provide a zoom lens on urea market volatility and provide Arabian Gulf producers – with widespread global distribution – a chance to seize market opportunities more quickly when normal price spreads between regions dislocate. A key daily market to watch is China, whose role as a swing exporter essentially determines the floor price of the international urea market. As the largest producer of urea, once domestic requirements are satisfied, China has capacity for exports, but only if netbacks are acceptable. In the lower-price environment of the last few years, it is unsurprising that export volumes have dropped. Argus forecasts that these volumes will continue to fall in light of fundamental oversupply and intense competition.
Having said that, China’s relevance as a swing exporter is a crucial barometer for global markets. Through our China fob daily urea price, we can clearly monitor price volatility as this fast-moving market finds equilibrium, more so during seasonal high-demand periods. As the following chart shows, daily assessments are better placed to capture price movements and volatility, which provides a more consistent barometer of Chinese urea’s participation in the international spot market.
For the oversupplied urea market, 2021 looms large, with more capacity coming on line early in the year. Argus expects the first of two 1.3mn t/yr urea units at Dangote in Lekki, Nigeria, to begin producing by March, while a 1.3mn t/yr second unit at Indorama’s Port Harcourt facility in Nigeria will be operational by the second quarter. Add the Metafrax 580,000 t/yr urea upgrade project in Gbakha, Russia, and Acron’s 521,000 t/yr expansion at Novgorod VI, and the balance skews heavily toward oversupply in 2021. Some of these volumes will continue to be absorbed by established import markets, but some are expected to shake up the order in others.
“China’s relevance as a swing exporter is a crucial barometer for global markets.”
caption: Daily urea fob China prices highlight Chinese participation in the international spot market
Caption: Opportunities in TGU markets abound
This suggests a strategy of product-channel diversification and marketing innovation should be prioritized by Arabian Gulf producers, as competition ramps up in key import battlegrounds.
Diversifying supply with technical grade urea (TGU) is an interesting option for producers that ship bulk agricultural-grade urea. Higher margins be captured in these niche segments, especially if innovative supply chain options like break bulk are incorporated. In the case of diesel exhaust fluid (DEF), the pandemic and resulting lockdowns prompted a slowdown in commercial vehicle sales, as well as travel and transport restrictions, which eroded DEF consumption. However, our AdBlue/DEF Monitor now shows demand prospects improving in the US and Brazil – two key markets that Middle East suppliers already serve. US DEF consumption should increase by 5pc in 2020. We see Brazilian demand rising by 8pc this year, but current consumption represents only 65pc of the potential consuming market, reinforcing growth opportunities for suppliers willing to go after new buyer segments.
“Diversifying supply with technical grade urea (TGU) is an interesting option for producers that ship bulk agricultural-grade urea.”
To further the argument that bigger can be better, especially in optimizing supply chain efficiencies, we need look no further than some interesting collaborations by Arabian Gulf producers. The advantages of innovating within the framework of established, consolidated marketing and distribution channels cannot be underestimated in an oversupplied, competitive market. Late last year, OCI and ADNOC formed Fertiglobe, the world’s largest export-focused nitrogen platform. There are some other interesting movements. OQ is poised to market 1mn t/yr of urea from the Omifco joint venture, and is collaborating with an international trading firm and another entity to manage this tonnage. And more recently, Qatar’s state-owned QP has announced that it will be integrating marketer Muntajat into its operations. For the fertilizer divisions being absorbed, it could mean heavier bureaucracy and slow momentum to execution. But it could also mean access to more resourcing options and collaborations with other divisions that might give new life to projects previously seen as unviable for a sole-fertilizer entity.
“Late last year, OCI and ADNOC formed Fertiglobe, the world’s largest export-focused nitrogen platform.”
Arabian Gulf producers will not escape some of the side effects brought by the economic shocks of 2020. But it is clear that fertilizers as an industry has shown more resilience than many sectors, reinforcing the importance of economic diversification for GCC economies – a nod to the pride and promise that fertilizer producers can carry into the year ahead.