Fertilizer International 499 Nov-Dec 2020
30 November 2020
Resilient ratings
“The most important effect of Covid-19 on the fertilizer sector has actually been on prices”
The late autumn gloom has darkened in recent weeks, as Europe slipped back into a lockdown that seemed as inevitable as the encroaching winter.
They say that the darkest hour is just before the dawn. It’s a consoling refrain, one that’s echoed down the centuries since Thomas Fuller first said it in 1650.
During these dark days, could Monday 9th November actually mark a new dawn – by becoming the turning point in the global fight against the coronavirus pandemic?
This was the moment when Pfizer and BioNTech confidently announced that their vaccine can prevent more than 90 percent of people from catching Covid19. The two companies described it as a “great day for science and humanity”. They are now gearing up to supply 50 million vaccine doses by the end of this year and around 1.3 billion by the end of 2021.
Sir John Bell, Regius Chair of Medicine at Oxford University and a member of the UK government’s vaccine taskforce, was bullishly optimistic: “It’s very important because there’s no other way of getting on top of this thing, frankly.” When asked by the BBC whether life could return to normal by spring, Sir John was unequivocal: “Yes, yes, yes. I’m probably the first guy to say that. But I will say that with some confidence.”
Some confidence and optimism are also beginning to return to the fertilizer market too, as we enter the final months of what’s been an unprecedented year. The autumn has allowed time to take stock – with first-half results providing a clearer picture of the effects of the coronavirus pandemic on the major fertilizer-producing companies.
It’s been the industry’s resilience to the coronavirus that’s been most apparent. That’s certainly the view of the American credit rating agency Fitch Ratings – one of the ‘big three’ agencies alongside Moody’s and Standard & Poor’s. As Fitch observed:
“Most [fertilizer] plants and mines… remained fully operational with enhanced health and safety measures in place during the coronavirus-driven lockdown, with some minor exceptions. The supply chains continued functioning and products were kept moving as most countries classified fertilizers as essential products.”
Fitch concluded that fertilizers have been one of the sectors least affected by the pandemic. There were even upsides for the industry in countries like China and India where the virus hit hard initially.
“During the outbreak in China, the majority of its phosphate fertiliser plants were idled or operating at lower rates, which helped to further tighten supply, supporting prices,” said Fitch. “India had one of the strictest lockdowns globally, which created some disruption at Indian ports, but these were offset by an increase in imports demand as most domestic plants were forced to shut down.”
Lower feedstock prices and a surplus supply of ammonia have been two noticeable consequences of the pandemic.
“The negative effect coronavirus had on demand for fuel resulted in lower feedstock prices for fertilizers (gas in Europe and the US) and thermal coal (China),” commented Fitch. “In addition, industrial use of ammonia dropped substantially due to significantly disrupted manufacturing activity.”
First-half results also revealed that volumes growth has been a key factor in offsetting price declines. Higher output this year, argues Fitch, has been more critical than the relative position of companies on the global cost curve. That’s because lower feedstock prices have eroded the production cost advantage of those companies occupying the lowest quartile of the curve.
Fitch reported higher first-half production volumes for all of its rated fertilizer companies, reflecting the improved demand environment in the first half of 2020. That contrasted with the depressed weather-affected demand conditions of 2019, especially in the US.
The most important effect of Covid-19 on the fertilizer sector, suggests Fitch, has actually been on prices. Prior to the pandemic, it had expected nitrogen and phosphate fertiliser prices to increase year-on-year in 2020, as demand recovered from “three consecutive poor application seasons”. In the event, this did not happen.
Correcting for market conditions in the year-to-date, Fitch moved to revise its pricing assumptions at the start of September. The agency reduced its medium-and long-term price assumptions for ammonia, while leaving those for urea unchanged. Its 2020 and 2021 price assumptions for diammonium phosphate (DAP), in contrast, went up, as did potash prices, albeit only slightly.
Fitch believes that the fertilizer industry’s medium-term fundamentals remain strong – supported by a rising population and decreasing arable land. Outlooks for most of the companies in its global fertilizer portfolio are also stable this autumn.
The emergence of an effective Covid-19 vaccine offers the hope of brighter times in 2021. But society, like the fertilizer industry, will need to remain resilient in the months and years ahead.
