Fertilizer International 497 Jul-Aug 2020
31 July 2020
Covid-19 and phosphates: from fear to optimism (for now)
COVID-19 PANDEMIC
Covid-19 and phosphates: from fear to optimism (for now)
The phosphates market to date has remained remarkably resilient during the Covid-19 pandemic. Despite early fears, 2020 has seen strong overall demand so far and no major supply-side disruptions. But concerns still lie ahead, as Alberto Persona, principal phosphate analyst at Fertecon/IHS Markit, explains.
That time when we first began to hear the Chinese city of Wuhan, the capital of Hubei province, regularly mentioned on the news seems so long ago now – almost a different era. As lockdown measures began to be imposed in China, the spreading Covid19 contagion received more and more worldwide media coverage. The global phosphate industry was perhaps the most concerned at the time – with good reason too.
Hubei province is China’s phosphate powerhouse and a key global production hub, accounting for as much as nine percent of global diammonium phosphate (DAP) capacity and 15 percent of mono-ammonium phosphate (MAP) capacity. Despite operating rates typically being much lower than capacity, Hubei is no less significant, both in terms of domestic sales – in what is the world’s largest phosphates market – and export availability (Figure 1).
Developments all happened very fast in Hubei, once Covid-19 took hold. By the time February had ended, phosphate mines and chemical plants in the province were told not to resume production after seasonal maintenance rounds. The whole of the province was placed under strict lockdown, a significant hindrance to the crucial truck-based movement of phosphates to key demand hubs in northeast China. Extended labour shortages also meant that even exports were facing significant delays.
Consequently, many started fearing that Chinese DAP/MAP would not be available for export during much of the first-half of 2020, if not longer. Some even suggested China might need to increase phosphate imports drastically to meet unfulfilled demand (Figure 2).
In reality, neither of these two pessimistic scenarios transpired. This was because Chinese production outside Hubei was less affected by the pandemic, and existing phosphate product stock levels were also sufficient to maintain a broadly balanced market, avoiding phosphate price dips and hikes alike. Indeed, production in Hubei province already started to ramp-up again in early March, with almost all operations resuming good running order by early April. In fact, January-March 2020 DAP/MAP exports were only 400,000 tonnes lower than the same period in 2019. If anything, lost first-quarter business seems to have triggered a desire to keep Chinese production rates firm for the remainder of the year, matching the peak import season in key markets such as India and Brazil.
Fears of scarcity evolved fast into oversupply worries
The shift from a Chinese Covid-19 epidemic to a global pandemic triggered wide-ranging government responses in many countries. This inevitably placed a drag on fertilizer movements, particularly for land-based transportation across national borders (e.g. in Europe) and also on truck loading as control on vehicles and drivers was tightened. Fertilizer plants, however, were generally exempt from full shutdown, having been classed as an ‘essential business’ in most economies.
Consequently, the operations of many phosphate producers have remained almost unscathed, with any disruptions, even when significant, in general being short-lived.
GCT in Tunisia, which had decreased its workforce at mines and chemical plants to 30 percent in March, increased this to 50 percent in April, a sequence of events that ended with the surprising revival of the second granulation line at the Gabès plant – an example of supply tightness-turned-increase. JPMC in Jordan faced a 10-day restriction in port capacity at Aqaba. But the market impact of this was minimal as the timing coincided with annual turnarounds. CMOC and Mosaic in Brazil briefly struggled with labour availability in parts of Brazil – as local mayors moved to prohibit bus transport. But this proved to be a temporary situation that was resolved within the space of one week. The Peru phosphate rock miner Miski Mayo suffered a longer idling of about two months, yet exports were relatively unaffected, being kept buoyant by available stocks until operations resumed in June.
India proved to be the only country where a significant decrease in production was apparent. A country-wide lockdown was announced in strong and decisive terms – perhaps a necessity for a country of 1.4 billion people – by prime minister Narendra Modi on 25th March. Such decisiveness did, however, lead to a series of misunderstandings. Notably, it wasn’t until a few days later that port operations and fertilizer manufacturing were officially declared ‘essential’. Even this short time lag was enough to scare exporters, traders and charterers – particularly those active in basic and intermediate chemicals (phosphoric acid, sulphuric acid, ammonia etc.) – causing a sharp reduction in arrivals. At the same time, local police, still uncertain about which rules to enforce, occasionally prevented plant and port employees from reaching their workplaces. The situation on the subcontinent did, however, return to normal within about three weeks. Yet the sheer size of the Indian market meant this was enough to cause a sizeable year-onyear decrease in total production volumes (Figure 3).
A number of issues are still continuing to affect Indian phosphate production and distribution, as labour availability remains tight for tasks such as in-plant product movement, bagging, and the loading of trucks/railcars. This situation appears to have favoured the import of finished phosphate fertilizers into India, in preference to local production based on raw material imports, as a way of reducing the overall movement of materials. The resulting temporary increase in Indian import demand for finished fertilizers (DAP/NP/NPK) was definitely welcome news for exporters seeking business opportunities. In particular, it marked a strong return of Moroccan DAP exports to Southern Asia, off-setting significant lost sales of phosphoric acid to this market.
India has not been the only country enjoying a good performance in import demand. Many economies where a sizeable share of the population is in rural employment have supported fertilizer demand by strengthening or reviving subsidies for crop inputs and revenue support schemes. Some of the import demand seen could also have other explanations, such as hoarding behaviour by importers, or even farmers, to secure supplies, while available, and take advantage of relatively low interest rates.
Focussing on key phosphate markets, Brazil imported record quantities of ammoniated phosphates during the first five months of 2020, taking full advantage of prevailing international prices. The Latin American agricultural powerhouse enjoyed good demand, both from strong safrinha maize planting and stock replenishment well ahead of the main safra soybeans season. Covid-19 related swings in foreign exchange rates have also played a part – as improvements in Real-denominated revenues on crop exports have more than off-set higher dollar-denominated input purchases.
Demand in the United States was also strong – to a somewhat surprising extent. Planting for both maize and soybeans increased significantly year-on-year. This was despite a sharp decrease in maize-based ethanol production – a consequence of Covid-19 and the oil price war – and ongoing trade tensions with China. High North American application rates have been boosted by strong US planting at a time of cyclically low phosphate prices.
Concerns ahead?
Overall, the early part of 2020 has seen strong phosphate demand, as described above, with no major supply-side disruptions. The United States, however, makes a good case study for where we think there are reasons for concern further ahead. Strong US spring planting has supported demand in 2020. Yet large year-end crop stocks after the summer harvest could depress crop futures – causing a ripple effect into 2021 affecting both spring planting in the US and the Brazilian safrinha crop. Brazil, while not affected by lockdown measures so far, is still facing exponential growth in Covid-19 cases. Labour shortages for truck-based delivery of fertilizers and crops cannot therefore be ruled out for the 2020 safra season.
In addition, top-up fertilizer applications around the world, particularly on fruits and vegetable crops, could suffer as farmers face limited access to fresh markets. All the while, big risks not linked to Covid-19 remain. These include the tragic impact of desert locust swarms in East Africa and Pakistan, and African Swine Fever in East and Southeast Asia.
However, it is not all doom-and-gloom. Those crops more essential for food consumption (e.g. rice, wheat) remain relatively firm, given the focus in many countries on building strategic stocks of staple foods. This bodes well for the autumn application season in the northern hemisphere and for the main import season in Oceania. At the same time, key phosphate producers have plenty of time to adjust their production plans for the second-half of the year. Availability of key raw materials such as sulphur and sulphuric acid will, however, remain crucial to support such plans.
In general, the risks of either sharp inflation or price collapse seem to have retreated for now – making a repeat of the 2008/09 super-cycle seem unlikely. Overall demand continues to be strong and availability high.
Nevertheless, even if we discount the risk of a second wave of Covid-19 infections, market fundamentals do provide cause for concern over the short-term, particularly for the 2021 northern hemisphere application season. With key parts of the world having survived an unprecedented short-term shock from the global Covid-19 pandemic, now is the time to revive longer-term planning.
