Fertilizer International 522 Sept-Oct 2024
30 September 2024
IFA’s medium-term outlook – a supply/ demand driven market
MARKET REPORT
IFA’s medium-term outlook – a supply/ demand driven market
The International Fertilizer Association (IFA) recently published its annual medium-term outlook for the fertilizer market. This followed presentations by Laura Cross and Armelle Gruère of IFA’s Market Intelligence Service at the Association’s Annual Conference in Singapore in late May.
A favourite fixture
The long-standing market outlook session at IFA’s Annual Conference is an eagerly anticipated fixture on the fertilizer industry’s calendar. This highly informative and well attended once-a-year briefing is a conference highlight for hundreds of high-level fertilizer industry delegates.
This year’s back-to-back demand and supply presentations in Singapore in May – summarised below – were as authoritative as ever. They were accompanied, as usual, by the publication of the Medium-Term Fertilizer Outlook 2024–2028 report by IFA’s Market Intelligence Service in July1 .
Better crop conditions
Armelle Gruère, IFA’s Demand Program Manager, opened the session with an overview of the medium-term demand outlook. Global crop conditions have generally improved with the departure of El Niño, as Armelle explained:
“Grains and oil crops were affected in the centre-west of Brazil and in southern Africa. In Southeast Asia, El Niño also affected rice crops and palm oil plantations because of dry weather.
“It’s not all negative as El Niño also brought some beneficial rains to Argentina and the south of Brazil. In the northern hemisphere, the conditions for winter crops and also new spring plantings are also favourable overall. Yes, there have been some heavy rains in northern Europe, but the situation is improving.
“If we look at crop prices, well, they’ve fallen from a year ago, more for cereals than for oil crops. The one exception is rice, where prices have increased, but that’s due to export restrictions put in place by India last year following a smallerthan-average crop.”
Favourable environment on affordability
The overall picture on fertilizer affordability was favourable (Figure 1), if mixed, Gruère said:
“Fertilizer affordability improved considerably for all crops last year – indicated by a declining fertilizer price to crop price ratio – with fertilizer prices decreasing faster than crop prices. But the cost of phosphate fertilizers did start rising again for the major crops in late 2023.
“In the first four months of 2024, nitrogen and phosphorus fertilizers were actually less affordable than at the same time last year. In contrast, potash fertilizers have become a lot more affordable for all crops.”
Armelle did, however, caveat this affordability analysis:
“Firstly, it doesn’t necessarily reflect the local situation. Secondly, high interest rates in a number of countries are affecting the ability of farmers to purchase fertilizers and other agricultural inputs.”
Demand to return to record levels?
Global consumption this year (Figure 2) is projected to return to levels last seen in 2022, said Gruère:
“So, in this environment of better fertilizer affordability, we expect global fertilizer use by the end of fertilizer year [FY] 2024 to reach about 204 million tonnes, a return to the record levels of fertilizer year 2020. In that Covid year [2020], we had higher crop prices, good fertilizer affordability, an expansion in cereal and soybean area, favourable weather in key regions, and increased government support for agriculture with food security as the objective. Then we had two years of declining global fertilizer use.
“We now expect fertilizer consumption to quickly recover by four percent in fertilizer year 2023, with fertilizer prices falling from their previous peaks, and that recovery to continue with a three percent increase in 2024, this fertilizer year.
“That would bring fertilizer use slightly above the previous record of 2020. This recovery is also taking place despite the strong impacts of El Niño on specific regions.”
The recovery in nitrogen and potash demand is the main factor behind improving global fertilizer use, Armelle indicated:
“The recovery in global fertilizer use in fertilizer years 2023 and 2024 is being driven equally by rising nitrogen and potash, about five million tonnes extra [nutrient tonnes] each, followed by phosphate [about three million nutrient tonnes]. As a result, nitrogen consumption is expected to be two percent above its 2020 level by the end of fertilizer year 2024, while phosphate and potash consumption is expected to be two percent below 2020 levels, with phosphate slightly behind the potash.”
Looking at the regional pattern of fertilizer demand since 2020, Gruère highlighted the following:
- Latin America: partial recovery in fertilizer use in FY 2023 despite El Niño
- China: partial rebound in nitrogen use in FY 2022 and FY 2023
- India: stronger government support for nitrogen and phosphate leaves potash consumption behind in the short term
- Western & Central Europe: consumption still not recovered completely.
Slower medium-term growth
IFA expects demand growth to slow over the next five years, as Armelle explained:
“Over the medium term, the period from 2024 to 2028, global fertilizer use is expected to grow more slowly and at a declining rate to reach 1.5 percent [per annum] by 2028. This reflects slower growth in food production – which itself reflects a slower growing population – and increased nutrient use efficiency.
“Latin America and South Asia are expected to be the main engines of growth in the medium-term, adding between three and four million tonnes of nutrients each over that period. Major markets such as East Asia, North America and Western & Central Europe [meanwhile] are expected to grow very little.
“It’s interesting to see that Africa ranks third in terms of its contribution to additional fertilizer consumption in the next five years – which is remarkable given that Africa currently only accounts for four percent of global fertilizer use. Its fertilizer use is still low and will need to rise to support increasing agricultural and food production for a growing population.”
Extreme weather events represent an increasing risk to agriculture, and therefore the demand outlook, Gruère said.
“Weather variability – and extreme weather events in particular – is a major risk in this outlook. Of course, that’s not new as weather has always been the wildcard in agriculture, but it is becoming an increasing concern.
“That’s related to the succession of La Niña and El Niño events, but extreme weather is also a fact, it’s actually happening. As the climate warms up, there is a growing intensity of extreme weather events, whether they are floods or whether they are droughts.”
The following extreme weather events, for example, have all affected fertilizer use in recent years:
- The economically devastating and deadly 2022 flooding in Pakistan prevented mid- and late-season fertilizer applications
- The 2023 La Niña-related drought in Argentina prevented crop planting
- The 2023 El Niño-related dryness in Indonesia resulted in lower fertilizer applications by oil palm plantations.
The World Meteorological Organization has also warned that the intensity of heavy rainfall events will increase in future as warmer air can hold more water vapour – about seven percent for every degree of global warming.
Commodities – a riskier business?
Laura Cross, Director, IFA’s Market Intelligence Service, then presented the medium-term supply outlook:
“What I’m going to talk about is what the business environment is looking like at the moment, how the world is changing from a supply perspective – and what that means for the balance between supply and demand in the next five years.”
Laura opened her presentation by focusing on geopolitical risks and market fundamentals such as manufacturing output and investor confidence. It wasn’t all bad news:
“The world is a riskier place than it was prior to 2021 – a pretty significant amount of new risk has been introduced into the market. Last year, when we first had disruptions in the Middle East, there was an initial spike in geopolitical risk – and that impacts lots of different parts of our industry.
“But I would argue that recent risks have actually become more priced-in by the market. So, actually, things are not quite as difficult or challenging as you might expect [from] the situation in the world globally.
“If we look at global manufacturing output, from the PMI index regularly produced by S&P Global, this has actually been continually improving since 2020. What’s also telling from the PMI is how manufacturing production in Asian markets is breaking away from the rest of the world.
“It’s also a relatively positive time from an investor standpoint – the S&P Global Investment Manager Index shows that the appetite from equity investors is actually pretty good. That index hit a two and a half year high in recent months, again reflecting a more positive market situation.”
“Africa ranks third in terms of its contribution to additional fertilizer consumption in the next five years – which is remarkable given that it currently only accounts for four percent of global fertilizer use.
IFA’s overall conclusion is that, while the commodities business has become riskier in recent years, underlying market fundamentals continue to outperform background geopolitical sentiment. Cross gave her informed take on this:
“We’ve had a massive rerouting of trade away from the Suez Canal and the Red Sea – with routes going the longer distance around the Cape of Good Hope. But also don’t ignore the role of the Panama Canal as well – with a slow tail off in volumes as a result of the drought conditions there.
“That’s made it trickier, harder, more complex to move fertilizer products around the world. Fertilizers are one of the most exposed of the major dry bulk commodities, as shown by declining volumes going through the Red Sea-Suez Canal route.
“But actually, looking at fertilizer deliveries, we haven’t seen that much of an impact in terms of availability as farmers are still receiving their shipments. These are, however, taking a much longer route.
“That may add time, it may add cost, but – as I said before – this is generally priced-in by the market. What these longer distances do mean, though, is a negative impact on emissions.”
Nitrogen supply breaks away
Looking at the current supply picture, nitrogen supply broke away in 2023 while phosphate and potash partially recovered (Figure 3), as Laura explained:
“Nitrogen production globally has continued with this year-on-year rise that we’ve seen over the last five years or so. A lot of that is driven by China but also by increasing domestic production in markets like India where we’ve had the onset of new capacity in the last couple of years.
“For phosphates and potash, it’s been a little bit more mixed. Both of these markets have partially recovered – but not completely – to their pre-2022 levels with a mix of drivers behind that.
“On the phosphate side, this is pretty much market-driven and mainly about a reduced appetite for the affordability of phosphate fertilizers. For potash, one of the biggest drivers behind the 2023 recovery – hopefully this is no big surprise – was [extra] supply coming from Belarus and Russia.”
Belarus is exporting far more potash than originally expected. In 2023, new routes to international markets replaced lost volumes previously exported via Lithuania. In particular, Belarus has increased exports to China by rail and to seaborne markets via Russian ports.
Major port investment is taking place at the Russian port of Murmansk, for example, a potential future route for Belarusian potash exports. Cross elaborated on this:
“Belarus exported 10 million tonnes of potash through different routes last year. We can track through China customs import data that a record volume went by rail to China last year.
“It’s also surprising how much of this volume went through Russian Baltic Sea ports – and this is where we’ve seen quite a lot of investment in port infrastructure from Belarusian companies. One example is Murmansk: this is already exporting a pretty decent amount of potash and could have 25 million tonnes of dry bulk capacity a year.”
For nitrogen and phosphate, a key supply factor at play has been the much higher operating rates at existing and new Chinese plants. These are working much harder, said Cross:
“For a long time in IFA’s supply and demand balance models, we’ve had an 80 percent utilisation rate for China with a pretty good amount of idle or unused capacity for the last 10-15 years. This is the first year in recent history that we’ve actually increased that to 85 percent in order for these plants to produce enough to meet domestic demand.
“The key takeaway is that, whether for exports or the domestic market, Chinese nitrogen and phosphate plants are working harder.”
Changes to the investment cycle
Medium-term capacity forecasts for nitrogen, phosphate and potash are shown in Figures 4-6. According to IFA, the fertilizer investment cycle has changed in two main ways1 :
- Firstly, lower fertilizer prices have weakened the investment case to fund new capacity
- Secondly, the industry is becoming more sustainable, underpinned by the energy transition, which raises project costs.
Laura Cross elaborated on the causes and consequences:
“The main reason why the investment cycle is changing is the artificial peak in prices [in 2022] against a backdrop of Russian sanctions and disruption to the flow of fertilizers – rather than a cyclical pattern that was stimulating investment in new capacity previously.
“In the historical price cycle, you’re usually looking at a 3-4 year timeline to build a new nitrogen plant. For a phosphate rock mine [and complex], this calculation is more like 4-5 years, and then for potash you’re looking at about on average 8-10 years for the development of a new potash mine.
“In terms of number of projects, there is quite a lot of investment interest in nitrogen capacity. The key takeaway is that we’ve got investment in ammonia projects with carbon capture and storage in North America, with a lot of that driven by new tax breaks from the Inflation Reduction Act. We’ve also got conventional ammonia capacity commissioning in Russia in the next five years, and then we’ve also got expansions driven by green and blue ammonia projects in places such as Saudi Arabia and Qatar.
“Phosphate is more conventional in terms of the investment cycle. A smaller number of regions are contributing to the capacity increase with mainly existing producers continuing to expand. We also have some plant additions in new countries such as Brazil, where a small investment started this year, and we’ve also got expansions in India and in Egypt.
“There’s actually been relatively low phosphate capacity investment in the last 10 years. But we actually start to see that ramping up again by the time we get to 2026 and 2027 – showing that we’re seeing more investment in the next five years.
“There are even fewer new potash suppliers but some pretty big mega projects in our five-year forecast. Laos is a country where potash supply has shot up really quickly, adding three million tonnes of new potash capacity in the last two years, with those mines forecast to continue expanding over the next five years.
“Then we’ve got BHP’s Jansen mine in Canada, probably the most talked about potash project, which is now in our forecast for 2027. We’ve also projects in both Russia and Belarus in our forecast – although these may not necessarily add saleable supply in the medium-term.”
Back to a supply/demand driven market
Laura Cross expects the supply/demand balance to resume its traditional role as a key fertilizer market driver:
“We’ve returned to a supply/demand driven market. In the last three years, most of our presentations covered what might happen in really disrupted markets. I don’t want to say back to normal, but we’re back to conventional market drivers – I think that’s the right way to define this.”
The supply/demand balance is projected to loosen for nitrogen and potash over the next five years with the phosphate balance remaining stable.
“With all of the low-carbon ammonia project announcements made in the last couple of years, you might be forgiven for thinking there could be an oversupply of nitrogen in the next 5-8 years or so. Actually that’s not the case when you look at the project delays that have taken place and also the lack of investment appetite in certain parts of the world.
“We see a relatively well balanced phosphate market in the next five years. A lot of that comes back to slowing demand growth and a lack of any sizable projects outside of existing suppliers. Very tight supply has loosened since 2021 – but it’s not outpacing demand growth
“The potash balance, which was much tighter if you go back to 2019 and 2020, loosens up as we move forward into the next five years. This still assumes relatively low utilisation rates for the mega projects in our capacity forecast because we know these take time to ramp up.”
Disruptors around the corner
Laura Cross rounded off her market outlook presentation by looking at potential fertilizer market disruptors These included the emergence of new demand centres, a slowdown in globalisation, the use of ammonia as an energy carrier and the exponential growth of lithium iron phosphate (LFP) batteries. Paraphrasing Ernest Hemingway, she said:
“How do these big changes happen in the world? They happen gradually and then they happen suddenly.
“That’s why it’s really important that we make sure we’re keeping an eye on all of these potential developments. Some are positive, some are negative, some we don’t quite know exactly what the impact will be yet.
“Nitrogen fixing developments, biostimulants, nutrient recycling and organic fertilizers? When you look at most of these you think of a decline in fertilizer consumption – but not necessarily – and we may not see these play out uniformly either.
“Today, the production of ammonia uses the same technology it did 100 years ago. There are so many rapidly developing technologies that could potentially change the entire operating environment.
“We’re going to see some of these changes coming in and really changing the way we think about the market,” Laura Cross concluded.
Further reading
1. Cross, L., et al., 2024. Summary Report: Medium-Term Fertilizer Outlook 2024–2028. IFA Market Intelligence Service, Paris.
Publicly available at: https://www.ifastat.org/market-outlooks
Acknowledgements
Fertilizer International and CRU Group would like to thank IFA’s Market Intelligence Service, and Laura Cross and Armelle Gruère in particular, for their kind cooperation and access to the information used in this article.
IFA’s Medium-Term Market Outlook report 2024– 2028 report is authored by:
• Laura Cross, Director
• Armelle Gruère, Program Manager – Demand
• José de Sousa, Program Manager – Supply
• Hanna Chtioui, Phosphate and Potash Market Analyst
With contributions from:
• Etienne Achard, Fertilizer Market Analyst
• Grace Chilande, Fertilizer Demand Analyst
• Sylvie Marcel-Monnier, Project Coordinator
