The year ahead – affordability vital

The year ahead – affordability vital

We look ahead at fertilizer industry prospects for the next 12 months, including the key economic and agricultural drivers likely to shape the market during 2023.

The world economy – recessions ahead

The macroeconomic outlook for 2023 is particularly weak. Rabobank, for example, expects global growth in 2023 to fall to a mere two percent, with many economies entering recession. Inflation, while expected to fall in 2023, will also stay elevated.

“2022 is unfolding as a terrible year for the world economy,” commented Rabobank at the end of last year. “The war in Ukraine, with a big inflation shock in its wake, ongoing lockdowns, a real estate crisis in China, and central banks around the globe rapidly tightening policies, are all starting to take their toll.”

The world economy is now experiencing a broad and sharp slowdown, says the IMF, with inflation higher than seen in several decades. It expects global growth to slow from 6.0 percent in 2021 to 3.2 percent in 2022 and 2.7 percent in 2023. This is the weakest growth trajectory of the last twenty years, except for the global financial crisis of 2008 and the acute phase of the Covid19 pandemic.

The IMF currently forecasts that global inflation will rise from 4.7 percent in 2021 to 8.8 percent in 2022, before falling back to 6.5 percent in 2023 and to 4.1 percent by 2024.

“The cost-of-living crisis, tightening financial conditions, Russia’s invasion of Ukraine, and the lingering Covid pandemic all weigh heavily on the outlook,” comments the IMF.

Ukrainian soldiers inspect destroyed Russian armour in Bucha, Ukraine.

SOURCE: MANHHAI/FLICKR

Fertilizer market turmoil

The fertilizer market has not been immune to these shocks and has undergone months of turmoil since Russia’s invasion of Ukraine in February 2022. The threat of severely restricted global supplies led to fertilizer prices rocketing to all-time highs in May 2022 (Fertilizer International 508, p4). This was part of wider volatility in global commodity markets driven by the threat of energy, fertilizer and food disruption.

Following last February’s invasion, the fertilizer market faced uncertainty over Russia’s ability, as a major international market supplier, to export fertilizers – due to sanctions on Russian companies, individuals, entities and its banking sector. Market uncertainty in 2022 was exacerbated by factors such as1 :

• The international shortfall in Belarusian potash supply following the imposition of sanctions on that country in 2021
• China’s imposition of export restrictions on nitrogen and phosphate fertilizers
• The widespread third-quarter ammonia plant shutdowns in Europe provoked by unprecedented natural gas prices.

“Fertilizer markets have been in a tightened state since the onset of Covid-19, when a renewed emphasis on food security globally, and strong agricultural fundamentals, led to record fertilizer use. Supply disruptions also occurred in this period, with unplanned plant outages, rising raw material costs and sanctions on Belarus.”

International benchmark prices for phosphate fertilizers and potash have fallen back since the second-quarter of 2022. Nitrogen prices, although more volatile, also fell overall between May and October 20221 .

By the end of 2022, fertilizer prices had returned to 2021 levels. Nonetheless, they remain above pre-2020 norms currently, inflated by high production costs and tight supply. IFA has linked fertilizer price volatility since May 2022 to a competing set of market loosening and market tightening drivers1 . Market loosening factors include:

• Record nitrogen and phosphate output in Russia, contrary to earlier expectations
• Delayed and reduced buying interest for phosphate fertilizers and potash due to poor affordability

While the main market tightening factors include:

• The effects of record high European gas prices on the marginal cost of nitrogen production globally
• Chinese nitrogen and phosphate fertilizer export restrictions
• The two-fold impact of sanctions on both Russian and Belarusian potash export supply.

Near record food prices

Food prices on an annual basis remain exceptionally high. The FAO Food Price Index (FFPI) averaged 143.7 points in 2022, up by 14 percent on the 2021 average (125.7 points).

Having peaked at around 160 points – a new all-time record – earlier in 2022, the FFPI then fell nine consecutive months in a row to average 132.4 points in December. This value was, however, still only slightly below the December 2021 average (133.7 points), the previous end-of-year record (Fertilizer International 506, p13)

The FAO’s cereal price index averaged 154.7 points last year, a new record high and around 18 percent up on its 2021 average. It surpassed the previous annual average record, dating from 2011, by nine percent. The index was boosted by a host of factors, including market disruption and uncertainty, higher energy and input costs, adverse weather, and strong global food demand. Average world maize and wheat prices both reached new record highs in 2022, while rice export prices were on average three percent above their 2021 level.

The vegetable oil price index declined to an average of 144.4 points in December, its lowest level since February 2021. However, the index still averaged 187.8 points for 2022 – up by 14 percent on the 2021 average to set a new record annual high.

The sugar price index rose to its highest level in six months to average 117.2 points in December. Higher international sugar price quotations were linked to concerns about the impact of adverse weather on crop yields in India, the world’s second largest sugar producer, and sugarcane crushing delays in Thailand and Australia. The index for 2022 as a whole averaged 114.5 points – up by five percent on 2021 and the highest annual average since 2012.

Ag commodities look bearish

Rabobank, in its annual outlook, is taking a generally bearish view on agricultural commodities. Its two main assumptions are that better weather conditions will prevail in 2023, with an expectation that La Niña will “go away” early on, and that demand will be hit by the recessionary economic outlook. However, the bank also warns of the potential for price volatility ahead, if the weather does not normalise as expected, and given the generally low levels of commodity stocks in exporting countries.

While the high ag commodity prices seen currently would normally stimulate supply, agricultural output is relatively inelastic to prices at present due to the following factors:

• Limited growing area availability – as swathes of very fertile Ukrainian crop land have been lost
• Farm input costs are high
• La Niña is active
• Farm financing costs have increased.

This has placed more pressure on a fall in ag commodity demand to balance the equation. A global recession, suggests Rabobank, would limit demand on many fronts, affecting both feed and energy-related agricultural commodities as well as ‘non-essentials’ such as cotton, coffee and cocoa.

“Here we start to see some weakness that might continue through much of 2023,” comments Rabobank. “Global inflation has resulted in a loss of purchasing power globally, and subsequent hikes in interest rates could result in some major economies going into recession.”

Fertilizer demand

The fertilizer demand outlook is once again dominated by fertilizer availability and affordability concerns – echoing last year’s International Fertilizer Association (IFA) market assessment (Fertilizer International 506, p13)

If anything, affordability has become even more important in defining fertilizer consumption, although availability risks remain. Indeed, IFA expects fertilizer affordability to drive global fertilizer use over the three fertilizer years (FY) between 2021 and 2023. While fertilizers have become less affordable in general since 2021, price volatility – with large ups and downs – has also made the timing of fertilizer purchases critical1 .

Global fertilizer consumption looks set to fall by 4.8 percent during 2022, after a 2.4 percent decline in 2021, according to IFA’s latest outlook (Figure 1). Combined, the drop in consumption over these two years comes close to the spectacular eight percent fall seen in 2008. Indeed, the expected decline in nutrient consumption (N + K2 O + P2 O5 ) – 4.9 million tonnes in 2021 and 9.5 million tonnes in 2022 – would bring global fertilizer consumption back to its 2018 level of 188 million tonnes1 .

Fig. 1: World fertilizer consumption (nutrient tonnes) and annual growth rate: fertilizer year (FY) 2019-2023

The most significant declines in fertilizer use are expected in 2022. In particular: l Latin America is leading the decline, with an 18 percent year-on-year fall in consumption, due to affordability and weather issues l Ukraine’s fertilizer use has sunk due to the war l In sub-Saharan Africa, many countries had not covered their annual fertilizer supply needs, in terms of inventories and market size, as of September 2022 l Turkey’s fertilizer use has also fallen due a weakening lira.

A contraction in global cereal area and reduced fertilizer application rates also negatively affected fertilizer consumption in 2022. Farmers gave priority to nitrogen fertilizers over potash and phosphate products, for example, or skipped their second applications. This was accompanied by changes to the crop mix that favoured crops requiring less fertilizers and/or with an ability to generate higher revenues1 .

Table 1: Year-on-year change in global nutrient supply capabilities, 2023 vs 2022, million tonnes

In particular, farmers have reduced the area planted to fertilizer intensive cereals and expanded the area planted to less fertilizer intensive soybeans. Globally, the International Grain Council expects cereals area to contract by 10.8 million hectares in 2022/23, while soybean area is expected to expand by 6.8 million hectare1 .

Looking ahead, IFA expects to see global fertilizer use partially recover to 194 million tonnes of nutrients during the fertilizer year 2023. This 5.9 million tonne year-on-year rise would return global consumption to just above 2019 levels. Nitrogen consumption in 2023 is expected to grow by two percent while P2 O5 and K2 O consumption each look set to grow by four percent, suggests IFA1 . In particular:

• Latin America is expected to lead the partial recovery in global fertilizer consumption in 2023, most visibly for P2 O5 and K2 O
• South Asia (mainly India and Pakistan) is likely to make second largest contribution to the recovery in N and P2 O5 consumption
• East Asia, meanwhile, is forecast to be the second largest contributor to K2 O consumption growth – driven by the two palm oil producing powerhouses Malaysia and Indonesia l Africa, with an expected nine percent consumption rebound, is set to be the fourth largest contributor to global growth in N consumption in 2023.

Fertilizer supply capability

For its 2023 outlook, IFA has introduced a new supply measure known as ‘capability’. This adjusts announced capacity developments using an effective operating rate based on historical trends. The resulting supply forecast is based on three scenarios: optimistic, middle ground and pessimistic. These scenarios assume different severities of impact for the following key fertilizer market influences1 : l The evolution of Russia’s war in Ukraine l Sanctions placed on Russia and Belarus l Logistical ability of both Russia and Belarus to export to ‘friendly’ countries l The introduction of protectionist policies (e.g. export bans) enacted by key food and fertilizer exporting countries l The agricultural backdrop, particularly fertilizer affordability.

The 2023 supply capability forecast for all three major nutrients is summarised in Table 1.

The pessimistic and middle ground scenarios for nitrogen capability reflect a situation where European production economics, and the ability of Russia to export nitrogen products to the international market, either stay constant or deteriorate1 .

Phosphate capability was adjusted according to Russia’s ability to export, and on the basis of European ammonia raw material costs. The optimistic and middle ground phosphate capability scenarios reflect the potential market upside for capacity expansions, while the pessimistic scenario reflects higher raw material costs and a worsening phosphate export situation1 .

Potash capability was adjusted according to the ability of Russia and Belarus to export, including the potential for overland trade from Belarus to China via Russia. The optimistic capability scenario includes the start up of two new potash mines in 2023, one in Russia and the other in Lao1 .

References

1. IFA, 2022. Short-Term Fertilizer Outlook 2022-2023. Public Summary. IFA Market Intelligence Service, November 2022. International Fertilizer Association, Paris.