Sulphur 400 May-Jun 2022
31 May 2022
Ukraine and sulphur markets
SULPHUR MARKETS
Ukraine and sulphur markets
Russia’s invasion of Ukraine has turned the sulphur market on its head, potentially removing several million tonnes of supply from Russia and Kazakhstan and sending prices skyrocketing.
Sulphur markets had already picked up in 2021 due to increasing demand from the phosphate sector, and tighter supply, but 2022 has seen prices soar, especially since the invasion of Ukraine and the imposition of stringent economic sanctions. Middle Eastern prices are now over $450/tonne; levels not seen since 2008-9. While there are a number of new supply projects coming on-stream, demand has also been increasing rapidly, and the removal of Russian supply has had a major impact.
Demand — phosphates
The phosphate market continues to dominate demand for sulphur. About 60% of sulphur (in all forms) demand is provided by phosphate fertilizer production, usually to treat phosphate rock to make phosphoric acid, which is then converted into ammonium phosphate or triple superphosphate, but some is used directly to make single superphosphate (SSP).
Phosphate markets had already been tight going into the end of 2021 due to a variety of factors, and the situation in Ukraine has only exacerbated this. Things influencing the high prices in 2021 included the imposition of countervailing duties by the US on imports of phosphate from Morocco and Russia in March 2021. This occurred at the same time as increasing grain prices and higher demand for phosphate fertilizer globally, as well as sharply increased costs for ammonia due to high gas prices, especially in Europe, which impacts MAP and DAP costs. This meant that prices for DAP rose from around $500/t to $800/t during the year, and that then had a knock-on effect on China, which decided to impose export restrictions in September and October 2021. China accounts for about 30% of the world’s trade in phosphates, and said it would not export phosphate until at least June 2022 in order to assure domestic phosphate supplies during the peak application season because of the record fertilizer prices. The international prices had combined with high demand and high energy costs in China to reduce domestic production, as well as supply restrictions due to widespread flooding in Henan province, where the country’s phosphate industry is concentrated.
Finally, the already very tight market conditions were exacerbated in November 2021 by Russia’s decision to impose quotas on exports of fertilizer. Prime Minister Mikhail Mishustin said that the Russian government would introduce quotas to run from December 1st 2021 to May 31st 2022 on the exports of nitrogen and complex fertilizers. The former, mainly urea and ammonium nitrate, would be limited to 5.9 million tonnes, and for MAP, DAP and NPKs the limit would be 5.35 million tonnes. According to Mishustin, from December 2020 to May 2021, Russia exported 6.8 million tonnes of nitrogen fertilizers and 5.7 million tonnes of NP and NPK fertilizers. Though the Russian export limitations have meant that the impact of the sanctions imposed in the wake of the Ukraine conflict have had a more limited effect, it has nevertheless meant that phosphate prices have been at their highest level since 2008.
As far as the outlook for phosphate fertilizer demand goes, there is projected demand growth in two of the major end-use markets; Brazil and India. Brazil in particular is seeing rapid demand growth as the country’s farmers seek to capitalise on the country’s burgeoning agricultural export trade. In the other two major phosphate markets, US demand continues to be relatively stable, while China is expected to see a fall in demand as the government continues to tackle overapplication of fertilizer and consequent leaching into watercourses, as well as emissions and air pollution. Falling Chinese demand for phosphates is also leading to the domestic phosphate industry becoming more reliant upon export markets, but at the same time finds itself some of the highest cost capacity. In any event, the current ban on Chinese exports has shut off this source of demand and led to lower capacity utilisation in China. But while phosphate production in China continues to decrease, this is more than made up for elsewhere by new supply from Morocco and Saudi Arabia in particular, as well as India and Russia. Over the next few years, downstream phosphate expansions are expected at Ma’aden in Saudi Arabia, OCP in Morocco, WAHPCO in Egypt, Serra do Salitre in Brazil, Kazphosphate in Kazakhstan, and several smaller Indian projects, including Paradeep Phosphates Ltd, RCF at Maharashtra, Mangalore Chemicals and Fertilizers Ltd, and Madhya Bharat.
The overall trend is for an approximately 1.4% increase in phosphate demand over the period 2022-26, according to CRU, with total phosphate demand rising from 55 million t/a P2 O5 in 2020 to 59 million t/a P2 O5 in 2025. Between 2022 and 2026, inclusive, phosphate demand for sulphuric acid is thus expected to add the equivalent of 5 million t/a of additional demand for sulphur.
Metals – nickel
After phosphates, the metals sector represents the next major tranche of demand for sulphur. Copper leaching, in Chile, Peru, the US and central Africa has long been the largest slice of metal demand for sulphur, and there is also some significant demand for sulphuric acid for uranium leaching in Kazakhstan. But nickel is the most rapidly growing sector; the breakneck growth in demand for electric vehicles is boosting the requirement for high purity nickel sulphate, and this is leading to a step change in the nickel market. Nickel production for stainless steel has increasingly come to reply upon pyrometallurgical processes such as ferronickel and nickel pig iron manufacture. However, producing high purity nickel sulphates from cheaper laterite ore bodies requires strenuous condition, generally involving sulphuric acid. After some years in abeyance because of being a higher cost production route, high pressure acid leaching (HPAL) is in vogue again, with several Chinese battery makers setting up plants in Indonesia, which has a large amount of laterite nickel ore, and a government ban on its export unless it is upgraded to higher value products. Indonesia is far and away the largest miner of nickel ore, representing around one third of all production.
While there are also copper smelter projects in Indonesia which will generate some sulphuric acid for domestic use, Chinese HPAL projects in Indonesia are by and large relying on burning imported sulphur, leading to around 1 million t/a of additional sulphur demand over the next four years. There are also some projects under development in Australia, although it is not looking likely that any will be on-stream before 2026.
Metals − lithium
Looking slightly further down the track, there is also huge interest in lithium mining, again for battery production for electric vehicles. Lithium occurs primarily in lithium pegmatites, found mainly in Australia, China, and Canada, as well as Brazil, Portugal and Zimbabwe, or in the form of high-lithium brine deposits, which are mainly found in an area known as the “lithium triangle” in Argentina, Bolivia and Chile. While lithium is recovered from brines using sodium carbonate, for lithium ores it is generally leached using sulphuric acid. It ca also be recovered form lithium bearing clays, such as occur in the United States, with acid leaching again the main method of recovery.
Currently around 350,000 t/a of lithium is mined per year, but it is reckoned that some 3 million t/a will be required by 2030. Lithium prices doubled in 2021. Consequently, there is a rush to develop new lithium capacity worldwide. Chile’s SQM and several Australian projects are all under development. In the United States, ioneer is looking to develop a 20,000 t/a lithium mine at Rhyolite Ridge, with production beginning in 2024, and in northern Nevada, Lithium Americas is pressing ahead with a project three times the size, the largest in the Americas, with up to 1.9 million t/a of sulphuric acid consumption at capacity. Overall, CRU estimates that these two projects alone could represent almost 1 million t/a of additional sulphur demand over the coming few years. By the end of the decade, lithium leaching could become a significant source of new sulphur demand.
Industrial demand
Sulphuric acid is also used in a wide variety of industrial processes, from caprolactam production for fibres to pulp and paper manufacture and one of the main routes to titanium dioxide. These uses tend to collectively grow at roughly equivalent rates to global GDP, and will add just under 2 million t/a of new sulphur demand by 2026. Overall, from 2022-2026, sulphur demand is estimated to increase by just over 8.5 million t/a.
Supply – refineries
In general the trend for sulphur supply from refineries has been a steady increase for several decades, as regulations on the permitted sulphur content of fuels tighten to reduce emissions of sulphur dioxide, especially from vehicles, to reduce the impact on public health. While most countries have now moved to a 50ppm or lower sulphur content in fuels (15ppm or less in most of the developed world) standard, and so the extra incremental amount of sulphur being produced to reached higher standards is relatively modest, refinery sulphur production saw another boost due to the International Maritime Organisation’s move to a global 0.5% cap on sulphur in bunker fuels, and 0.1% in emissions control areas.
Vehicle use continues to rise, especially in Asia, though the rate of increase is slowing, and the covid pandemic saw a slump in demand in 2020, though this recovered by 4% to 80 million new vehicles sold in 2021. However, the move to electric vehicles and more fuel efficient gasoline powered cars, as well as impending bans or restrictions on diesel vehicles are likely to lead to stagnating demand for fuel and oil over the medium term. The International Energy Agency’s most recent (March 2022) forecast puts global oil demand at 99.7 million bbl/d by the end of 2022, a downward revision of 1.3 million bbl/d from previous forecasts due to the supply shock caused by the Ukraine conflict and western sanctions on Russia. Global refinery throughput estimates for 2022 have been revised down by 860,000 bbl/d as a 1.1 million bbl/d reduction in Russian refinery output is not expected to be fully offset by increases elsewhere. In 2022, refinery intake globally is projected to rise by 2.9 million bbl/d year-on-year to 80.8 million bbl/d. Surging oil and commodity prices could lead to global recession however and lower demand.
As far as new sulphur output goes, Europe and North American refineries are likely to be relatively constant, with growth from oil sands production balancing falls in sulphur inputs into US refineries from increased shale oil use. New refining capacity will come from China, Kuwait, Saudi Arabia, Qatar, Malaysia and Nigeria.
Supply – sour gas
The other main source of sulphur is from processing of sour gas. Use of natural gas has been on a rising trend for many years, mainly for power production, as it is seen as cleaner than coal in terms of carbon emissions and gas-fired power stations are cheaper and easier to set up. The rapid growth of a global LNG market has made global access to natural gas relatively affordable. Nevertheless, as more renewable and nuclear power is installed, so the ‘dash for gas’ that characterised the previous three decades is slowing. Demand growth has been strong in North America as cheap shale gas displaces coal-fired power generation capacity, and also in the industrialising countries of Asia. It has also seen a surge in the Middle East, where rapidly rising populations and demand for electricity in fast-growing cities like Dubai and Abu Dhabi have pushed growth in power generation. Conversely, Europe has seen gas consumption fall because of falling domestic production and the higher cost of importing from Russia and the international LNG market. Lack of availability of sweet gas has led to an increasing focus on sour gas resources to meet demand.
Sour gas production continues to decline slowly in Germany and Alberta, though there is a small increase in neighbouring British Columbia. The era of major new projects in Central Asia is drawing to a close. Most new sour gas production continues to come from the Middle East, especially Abu Dhabi, Saudi Arabia and Qatar. Saudi Arabia has added 1.3 million t/a of sulphur capacity via the Fadhili gas plant, which began production in 2020 and which is continuing to ramp up. Qatar’s long-delayed Barzan LNG project is also now commissioned. Abu Dhabi is expanding the already huge Shah sour gas project to add a potential 1.7 million t/a of sulphur from around 2023. There is also likely to be around 300,000 t/a of additional production from Chuangdongbei in China.
Major project delays
The covid pandemic and associated slump in economic activity managed to delay several of the major new sulphur producing projects, including Barzan and Kuwait’s Mina Al Ahmadi and Mina Abdullah refinery projects. However, with many of these projects now commissioned or commissioning, 2021 and 2022 are seeing a surge in new sulphur production after a fall in 2020 caused by refinery shutdowns or reduced run rates. In theory this should lead to supply overtaking demand later this year and an easing of the high prices that have been seen. However, the situation in Ukraine has served to complicate matters considerably.
Ukraine
The war in Ukraine has led to an unprecedented range of sanctions on Russia. Some of the most important include its removal from the SWIFT inter-bank transfer system, making processing payments more difficult. Many companies have announced their withdrawal from Russia, including several oil and gas majors. For the time being, Europe continues to buy large quantities of natural gas from Russia, though Russia recently stopped shipments to Poland and Bulgaria because they were not willing to make payments in roubles, and the Nordstream 2 gas pipeline project to Germany now has had its certification removed and gone into liquidation.
Russia produced just over 6 million tonnes of sulphur in 2020, though the figure was only 5.3 million tonnes in 2021, and Russian exports fell even more dramatically that year to only 1.8 million t/a due to increased domestic demand, mainly for phosphate processing. About half of this was exported to Europe and North America, countries which have now imposed sanctions. In addition to this, Kazakhstan, which exported 3.4 million t/a of sulphur in 2021, also used to export most of its sulphur via the Black Sea. Though it can export by rail to China, this is a long and expensive process and the capacity of the rail network acts as a bottleneck.
Some of this 5.2 million t/a of sulphur will inevitably make its way to market. But the question is how much? In their absence, there are stockpiles of sulphur around the world which can be drawn upon, though melting down the blocks in northern Alberta could take time and expense. It seems that in the interim there will be a significant shortage of sulphur on the market, and prices have reacted accordingly. While there is new capacity commissioning, it will not be enough to prevent the shortfall in the market. China, which had been running down its pyrite-based acid capacity, may need to rely upon it for a while longer.
Longer term, everything depends upon how long the war and associated sanctions regime go on for. In spite of some abortive peace talks, Russia has not shown any sign of relenting in its attempt to capture at least a significant part of Ukraine, and the war could drag on for months or even years. In theory, projected new supply from refining and sour gas, taken together, adds about 9.3 million t/a of new sulphur production capacity out to 2026 – additions to refinery sulphur production continue to be larger than sour gas projects, a turnaround from the previous decade. Over the same period, new demand had been forecast to increase by 8.5 million t/a, most of it from the phosphate industry, and this surplus should have led to steadily falling sulphur prices. However, for the moment, the shortage in the market will lead to high prices and possibly even demand destruction in the phosphate sector.
