Ammonium nitrate has now reached a punishing £310-plus on farm – but just what is driving the market? Our commentator Roger Chesher looks behind the global trade
Hopes of a respite in crippling UK fertiliser costs were dashed last week when Europe’s leading industry analyst shared his outlook at an open meeting of the International Fertiliser Society.
Bernard Brentnall, director of Fertiliser & Chemical Consultancy, reckons that the gross oversupply which has shaped the global fertiliser industry for 30 years has been eroded. And coupled with this, he sees direct government involvement in the funding, construction and operation of fertiliser plants continuing to decline, although indirect support for private investment may remain.
Current high nitrogen prices are underpinned by elements of the energy market like natural gas and, clearly, the days of cheap natural gas are over. Furthermore, gas prices, once contracted to the needs of the fertiliser industry, will follow the energy market regardless to the needs of the fertiliser producers. This has already been illustrated by the US gas crisis of 2000/01, when many producers simply shut down their fertiliser factories and profited by just trading the gas instead.
A large tranche of the world’s nitrogen industry – 12m tonnes to date – has become “on-off” production, irrespective of whether for export or domestic markets. Soaring demand for gas has changed the expected pattern of capacity and investment. The last peak of the nitrogen price cycle resulted in 40m tonnes a year of new urea capacity and a surge of oversupply. But today plans only account for 11-13m tonnes, in areas of lower gas cost in the Arabian Gulf and North Africa.
China may well add capacity to this list through new coal-based technology, but its role as an exporter may soon be limited by government intervention.e_SClBThe final blow to hopes for greatly increased capacity is a massive hike in plant building costs. The last major project was the Sohar complex in Oman, costing US$ 850m for 1.1m tonnes of urea capacity. Today those costs would be $1.4bn. Add to this the current credit squeeze and banking chaos and the prospects for new construction look slim.
On the other side of the scales to production capacity is increased demand – and it is this that is causing the market to heat, says Mr Brentnall.e_SClB
Population growth remains the fundamental driver, but changes in diet in favour of meat and dairy products and the current political infatuation with biofuels have both resulted in a sharp growth spurt in fertiliser demand. Nitrogen fertiliser demand will have grown by 20m tonnes N (equivalent to 60m tonnes Nitram) by the end of 2010.
Overall the supply/demand balance looks likely to remain tight for some time, with no radical correction on the horizon. The volume of production tied in with high-cost producers remains substantial. These are the swing, or “on-off” producers but, fortunately for the consumer, Europe is in a reasonably secure position, surrounded by industries in Russia and North Africa capable of serving it with commodity fertilisers. Until, that is, Russia becomes determined to export food rather than fertiliser.
But it seems unlikely we are in another “micro-cycle” and we may be mistaken in expecting a bust following the boom times. Some correction may indeed take place, but the fundamental question is whether the energy market has changed permanently.
Phosphate and Potash
Demand for phosphates and potash is similar to that for nitrogen, says Mr Brentnall, but the concentration of power in phosphate rock and processing has shifted to China and Morocco.
Increasingly, the quality of phosphate rock, linked to its ease of processing, is becoming an issue. Many producers are concerned to conserve reserves of higher-quality rock for domestic consumption. Russia and China, which together account for 25% of world rock export deliveries, appear to be leaving the business rapidly. In the case of processed rock (DAP and MAP), as with nitrogen, we are seeing a distinct shift from developed to developing economies and from West to East.
Ammonia and sulphur costs have hit ammonium phosphate producers hard but there is a degree of supply control at the rock face. In the medium term, only serious demand erosion could burst the current phosphate market bubble.
There is little excess production capacity in the potash industry. Talk of further investment in Potash is lively but the pitfalls of opening a new mine are legion, not least those of cost inflation. A short term drop in fertiliser prices for the UK farmer is definitely not on the cards.
China’s fertiliser barrier sends global markets rocketing
Beijing has imposed massive tariffs on fertiliser exports to ensure that product is retained for domestic food production to feed its 1.3 billion people.
From this week, the tariffs vary from 100-135% and are expected to stem exports of urea which have risen by 250% in the last year, and 280% in the case of monoammonium phosphate.
The effect of this loss to global markets will be similar to that of taking two urea plants out of production, about 2.4m tonnes.
The announcement caused global urea prices to rocket overnight by $100 to $500/t. This is a crucial time in the season for UK nitrogen buyers as the new season price could be announced as early as next month.
Manufacturers are not being drawn into disclosing prices, but the trade is speculating on a new-season price of £290/t for ammonium nitrate.