CRU Phosphates 2022

CONFERENCE REPORT

CRU Phosphates 2022

More than 300 delegates from over 130 companies and 29 countries gathered for CRU’s Phosphates 2022 conference, 7-9 March.

CRU Phosphates delegates were pleased to network in person for the first time in three years.

PHOTO: SIMON INGLETHORPE/BCINSIGHT

We report on the main keynote and market outlook presentations given at CRU’s 14th Phosphates International Conference and Exhibition held in Tampa in March.

Phosphate prices to rise before they fall

The conference opened with a keynote address from CRU’s Glenn Kurokawa. Glen’s wide ranging phosphate market overview touched on trade, prices, supply, demand, projects and – inevitably –the Russia-Ukraine conflict.

“In the last few weeks, the Ukraine war, a major geopolitical event, has led to a lot of commodity prices rising – including crop prices, energy prices, phosphate raw material prices – and this is now impacting the phosphate market,” Kurokawa said.

In fact, the phosphate market has been convulsed by frequent changes and disruptions over the last two years, such as:

• The Covid-19 pandemic. This was accompanied by halts in phosphate production and rises in commodity prices.
• US countervailing duties (CVDs). Imposed on Moroccan and Russian imports in 20020, these have ‘rewired’ global phosphate trade
• Rocketing prices. As of early March, these were at their highest levels since the 2008 food and financial crisis and were still rising.
• Chinese export restrictions. These will last until June 2022 and are likely to be reimposed in late-2022.
• Russia-Ukraine conflict. Crop, energy and raw material prices have surged since Russia’s invasion of Ukraine in late February. The war’s effect on phosphates and the wider fertilizer market is still playing out with big uncertainties remaining.

The phosphate price rises of recent months have been underpinned by a number of factors, as Kurokawa noted:

“These have been supported by high crop prices, good demand, lower than expected phosphate production in key countries, including the US, increased Indian subsidies, low Indian stocks, raw material prices, particularly ammonia. On top of that, China restricted its exports which tightened the market even further.”

“Phosphate prices have been going up since early 2020 and are currently at their highest level since the 2008 food and crisis,” said Kurokawa. “So, they’re pretty high and still rising, and there have been some new events lately [the Russia-Ukraine conflict] that could push it to those 2008 levels.”

In term of trade, the Chinese export ban introduced in October 2021 had created international shortages by causing its phosphate exports to “slow to a trickle”.

“These measures are supposed to last until the end of June 2022, but once the export ban is lifted there’s probably going to be an explosion of Chinese phosphate exports onto the world market,” said Kurokawa. However, with phosphate prices expected to remain at high levels throughout 2022, any resumption in Chinese exports is only expected to last for several months.

“We expect the Chinese government to reintroduce these phosphate export restrictions, as it’s likely that Chinese farmers will require support again in late 2022,” said Kurokawa. “That means Chinese exports this year are likely to be concentrated in a very small number of months over the summer.”

Reductions in Russian exports are also on the radar in 2022, given the ongoing war in Ukraine. The country’s international trade in fertilizers is significant with Brazil and India being its main export markets. Europe is also a major market for Russian compound fertilizers (NPKs, NPs and PKs) – with potential downside risks.

“Russia exports a significant amount. It’s about 13 percent in 2021 for DAP and MAP and a little over 20 percent for compound NPKs and NPs. Russia exports a lot to countries like Brazil and India and some to Europe. Exports to Brazil and India might not be affected that much – but we’ll have to wait and see, as this is a fast-changing situation,” said Kurokawa.

“It’s likely that phosphate prices will rise further before they start to fall. But there will be some [downward] pressure around mid-2022, and if prices don’t start to decline then, maybe they will stabilise,” Kurokawa concluded.

US phosphate shipments to fall back modestly?

Mosaic’s Bruce Bodine provided a North American market update in his keynote address.

Globally, factors such as tight supply, high grain prices and depleted inventories have driven up phosphate prices to levels not seen in more than 10 years, said Bodine:

“The outlook for ag commodities and prices looks strong in 2022 – as it was in 2021 – and with higher grain prices driving higher fertilizer demand, higher fertilizer costs historically follow. That dynamic alone – based on history – would increase prices. Combined with recent global supply limitations, that really has pushed prices to levels not really seen in over a decade.”

“The long story short here is that phosphate supply is tight with depleted inventories worldwide and any new investments in increasing production is going to take considerable time.”

“Food security concerns and rising biofuels consumption are driving demand for corn and soybean as well as rice, wheat, coffee, palm oil and other agricultural commodities.”

Essentially, it is the strength of crop markets, combined with global supply constraints, that have pushed fertilizer prices higher, in Bodine’s view.

“Global demand for grain and oilseeds remains high while stock-to-use ratios are at the lowest point in more than a decade,” he said. “In fact, the stock-to-use ratio, given the shortages in Soth America and the recent events in Russia and Ukraine, is very unlikely to recover in the short term.”

Farmer economics in most global growing regions do, however, remain constructive. Although rising inflation and input costs are affecting profitability – which reached record levels in 2021 – recent crop price increases are nevertheless sustaining fertilizer affordability, said Bodine:

“As we head into North America’s spring planting season, we’re seeing normal buyer behaviour as demand continues to reflect strong underlying crop prices. In Brazil, fertilizer shipments in 2022 appear set to equal last year’s record setting total. Grower economics [there] are improving thanks to rising crop prices, the availability of credit and a favourable exchange rate.”

“In India, where the farmer demand remains very strong, availability is still lagging. Given the depleted Indian inventories, we see India as a pent-up source of demand going forward which should see phosphate and potash consumption growth in 2022.”

In North America, strong ag commodity prices and high planted acres has seen on-farm fertilizer demand rise sharply in 2021. Consequently, North American phosphate shipments last year came in at just under 11 million tonnes – the highest year on record. Bodine expects the region’s demand to fall back only slightly this year.

“As fertilizer prices and other input costs remain elevated going into 2022, there is the potential for fertilizer shipments to pull back modestly,” he said. “But demand is not really the concern right now – it’s the ongoing supply.”

The world’s ability to produce phosphate is becoming precarious, said Bodine. He pointed out that, in addition to the war in Ukraine, some countries are also pursuing nationalist policies “to keep fertilizer supplies at home”.

China, for example, which accounts for between one-quarter and one-third of global phosphate exports, imposed export restrictions late last year. “Their decision to stop significant exports have impacted supply and demand globally, changing trade flows for every country importing and exporting this critical resource,” Bodine said.

On imports, Bodine argued that the US phosphate market is now more balanced – suggesting there was now fairer trade and a more competitive market which, in turn, was providing American farmers with a larger range of suppliers. He pointed to the fact that 14 different countries supplied finished phosphate products to the United States in 2021 – about double the number in previous years.

“Last year, strong demand in the US attracted products from a much more diverse supplier slate and supply base for imports. US phosphate imports increased to a record level in 2021, increasing by 1.7 million tonnes (or 73 percent) relative to 2020 imports, even with the duties imposed on Russian and Moroccan imports,” Bodine said.

Brazil and India – a study in contrasts

In a joint session, Priscila Richetti of Yara Brasil Fertilizantes and CRU’s Koyel Choudhury presented market updates for Brazil and India, respectively

Brazil is a global agricultural powerhouse, being the world’s number one producer and exporter of commodities such as soy, sugar, coffee and oranges. Dramatic increases in the country’s grain and oilseed growing area and production over the last twenty years – from 96.8 million tonnes in 2001/02 to 268.2 million tonnes in 2021/22 – has driven fertilizer consumption upwards.

Total fertilizer consumption reached an estimated 46.1 million tonnes in 2021. On a crop basis, consumption is targeted at soybean (43.1 million tonnes), corn (18.6 million tonnes), sugar cane (11.5 million tonnes), rice (105 million tonnes), cotton (4.6 million tonnes) and coffee (4.2 million tonnes). Soybean’s agricultural predominance, however, remains the primary driver of crop nutrient use.

“The dependency on soybean drives the nutrient consumption profile in the country,” said Priscila Richetti. “K is still the major nutrient consumed with an almost 39 percent share followed by P with 33 percent and N with 29 percent.”

The consequences of strong fertilizer demand growth can also be seen in Brazil’s import dependency, said Richetti:

• “In 2010, around 44 percent of Brazil’s phosphate consumption was met by imported products. Nowadays, the portion of overseas product in the total consumption exceeds 78 percent.
• “This has made Brazil one of the largest and most significant fertilizer importers in the world. The county is the top import leader in finished phosphate fertilizers.”
• Brazil has become a great opportunity for fertilizer producers in a fast-growing market, concluded Richetti, pointing out how the country has been transformed from a 16.4 million tonne market in 2000 to around 46 million tonnes in 2021.

Koyel Choudhury expects an initial fall in Indian phosphate consumption to eventually herald better longer-term prospects. “For the short-term, we expect P2 O5 demand to reduce but in the medium-term it is going to recover after the slump,” she said.

Low diammonium phosphate (DAP) availability in India last year led to P2 O5 demand destruction. This situation – together with a similar lack of availability for NPKs – is expected to continue throughout this year and into next.

Despite this, CRU expects India’s P2 O5 demand to eventually get back on track and grow steadily over the medium-term as crops such as wheat and rice gain traction. This demand growth is expected to lead to ever larger import volumes.

Choudhury expected Indian import demand to remain strong in future “because of the low availability of [in-country] phosphate rock reserves and also the import dependency on phosphoric acid, ammonia and sulphur”.

“Supply dynamics are expected to remain similar in the medium-term. Indian importers will continue importing more volumes. We do not see production increasing drastically – and thus we expect imports to maintain their share of volume into India,” she said.

Choudhury discussed whether India would be able to produce more finished phosphate products domestically: “Upcoming [Indian] P2 O5 capacity additions are low compared to global capacity additions. However, implementation of the DBT [direct benefit transfer system] is a key reform and – while complicated – can encourage new entrants to the market.”

Geopolitical pressures and rising prices had inflicted hurt on Indian producers and importers in 2021. This will continue if the maximum retail price (MRP) set by the Indian government is not increased, said Choudhury:

“International prices often decide the consumption of fertilizers in India, and this is not good for demand in the longer run. Increasing subsidies is a knee jerk reaction – it’s not good for government it’s not good for supply, and it’s not a sustainable solution for India.”

Changes are required to address Indian phosphate demand in future, said Choudhury, with policy reform, especially the direct benefit transfer (DBT) system, holding the key. “Implementing the DBT – which also improves soil health – is going to take off some burden from the producers and importers, and give them more freedom to produce and import at will, and not be dependent on subsidy and making profits from the government anymore,” Choudhury concluded.

Sulphur set to stay expensive

CRU’s Peter Harrisson gave a nuanced global sulphur market update. He was very honest about the degree of uncertainty in the market at present. Yet he was equally clear that it was scarcity – or scarcity fears – and not underlying costs which were shaping current market sentiment.

“Summing up for price? This is super uncertain. The outcome on price for sulphur is almost anyone’s guess. I think the key thing is that prices are going to be driven by scarcity,” Harrisson said.

He added: “There will be short-term scarcity and there will be a fear of short-term scarcity this year. The important thing, though, is it’s not cost-driven pricing – so stocks can play a role.”

Harrisson pointed out that sulphur price rises could not address a fundamental lack of available product: “Higher prices are not going to solve the problem. They’re not going to fill the market up with new supply.”

Sulphur pricing would continue to shadow the DAP price, in his view, as long as this was affordable.

“The other thing that is really crucial is that where DAP prices move, then sulphur prices will almost certainly follow,” said Harrisson. “Yes, affordability is at the upper limit of normal historical levels – but not at the absolute peak.”

If this DAP-sulphur price relationship was maintained, then DAP at $1,000/t could prompt a rise in sulphur price levels to £400-450/t, while a sulphur price closer to $500-550/t was likely should DAP rise to $1,200/t.

“So, I think sulphur will stay expensive,” concluded Harrisson. “But it’s not, in our view, going to go beyond the level of DAP price change.”

The war in Ukraine

The Russia-Ukraine conflict and its dramatic impact on commodity markets was undoubtedly the event’s major talking point. Chris Lawson, CRU’s head of fertilizers, gave delegates an update on this fast-moving situation.

“This is an incredibly fast-moving target, this is moving by the minute.”

He started by highlighting the dramatic prices changes since the start of invasion, as illustrated by the price movements seen between the last week of February and the first week of March:

“Urea NOLA prices traded at $920/ st today – last week the high end of the assessed price was $685/st. In the DAP markets, we currently see NOLA prices in the range $930-1,000/t, while last week that was assessed at $850-895/t.”

CRU has identified ammonia as the commodity most at-risk from supply disruptions out of Russia. The country is responsible for around 23 percent of global ammonia exports with around two-thirds of that going through the Black Sea. This export route is now blocked following the closure of the OPZ pipeline, which passes through Ukraine, and the shutdown of Ukraine’s Black Sea ports.

Lawson described the ammonia market impacts as “really grim” – and elaborated on the potential knock-on effects for phosphate producers:

“Morocco has around 180,000 tonnes of ammonia storage. They will be able to get that ammonia from elsewhere – they don’t just buy it from the Black Sea – but that’s going to be a very tough market to buy from in the coming months.

“With extraordinarily high [ammonia production] costs in Europe, there’s a massive risk of that shutting down again. Ammonia is undoubtedly at the highest risk and this has implications for phosphate producers.”

There was also “quite a lot of risk” associated with the phosphate supply coming out of Russia, Lawson said:

• “When it comes to NPKs, Russia is about 24 percent of the traded market. That share is much smaller when it comes to DAP and MAP – only around 10 percent.
• “But Russia is one of the lowest cost producers, right at the bottom of the cost curve. So that’s 10 percent of cheap supply – which could be very difficult to source in future.”
• Russia is also an exporter of high-grade phosphate rock, with about seven percent of global traded supply.

“That’s a very European exposed trade. [There’s phosphate rock supply] going into Lithuania for EuroChem, into Belgium for downstream industrial acid and for Euro-Chem’s NPK plant, and around half a million tonnes a year into Norway,” commented Lawson.

The impact of Western sanctions was unlikely to be immediate either, in his view.

“It’s going to take a long time for sanctions to set in and become established,” said Lawson. “Fertilizer is also exempt from some of the sanctions, as fertilizer and energy have been carved out.”

Despite this, the purchase and shipment of Russian fertilizers were already becoming increasingly difficult.

“Some buyers are just steering away from Russia completely, and marine logistics are very difficult as lots of shipping companies are unwilling because of the insurance premiums,” said Lawson. “They’re also taking a stand against the Russian government.”

Technical presentations

Summaries of key presentations from this year’s excellent technical programme can be found in the CRU Phosphates 2022 preview in our January/February magazine (Fertilizer International 506, p30).

Market information

Please note that market information and commentaries reported here date from the time of event in early March 2022. These should be interpreted with caution as market conditions are changing particularly rapidly at present due to the impact of the Russia-Ukraine conflict.