Fertiliser price rises inevitable

Thursday, 30 December, 1999

By Roger Chesher

FERTILISER prices will rise in 2000, the only questions are, by how much and when?

The industry is highly cyclical and farmers have enjoyed exceptionally low prices for nearly two years. However, the cycle will
move upwards very soon, although the current level of farm incomes will slow price rises a little.

There are a number of factors which, taken together, make price rises inevitable.

First, raw material costs are rising and the most important of these is energy. In continental Europe energy and nitrogen prices
are closely linked and with the UK fertiliser business now very much part of a European, if not global, industry, this pattern is
likely to be followed.

European ammonia prices are around US$125 tonne and rising with Brent crude oil at US$20.

The last time oil was at a similar level was mid 1996 when ammonia reached US$250tonne. The cycles fit each other very well.

Environmental and energy levies also raise the spectre of increased costs but successful lobbying is so far holding these in check.

A third concern to both manufacturer and merchant is the increased cost of transportation, but more worryingly the sharp
decrease in numbers of hauliers who are prepared to make the investment necessary to retain a Dangerous Goods Safety
Advisor (DGSA) or to renew their vocational training certificates (ADR).

For the first time this spring we could see fertiliser failing to arrive in time on farm, despite ample stocks.

These factors are all very well but to recover increased costs there has to be a buyer at the higher price.

Farmers have profited and manufacturers have lost by the fact that Europe is awash with excess fertiliser. This has to be moved
and is currently being sold at a heavy loss to the industry.

For a company the size of Hydro, Terra or Kemira, £1/tonne lost is £1m off the bottom line. All three will post
heavy losses indeed at the financial year-end.

Industry estimates vary but there are at least 3m tonnes of excess nitrate production capacity in Western Europe and stocks
of finished product are high.

These high inventories are the key to price. When stocks are high it is a buyers market, as at present. When stocks are high but
falling, or low and rising, the market is neutral but when stocks are low it is very much a sellers market.

In the current situation individual fertiliser manufacturers can do one of three things: sit tight, lose money and wait; trim costs,
stem the flow and wait; or undertake drastic action to reduce capacity.

The first option didnt work; very little capacity left the industry by natural wastage and losses mounted.

The second option has been too little, too late and although all three UK majors have cut costs, reduced staff numbers and
slowed manufacture, the savings made and the production reduced are not enough. Inventories still remain high.

Surgery is therefore required. A nitrogen fertiliser plant can be slowed down a little but basically it is either on or off.

Switching on and off costs literally millions in energy and catalyst costs, so it is not done lightly. The only real solution for the
industry is to permanently reduce capacity and that is finally about to happen

Last week Hydro announced that they would close 1m tonnes of nitrate capacity in Europe in 2000, but have not said where.

Common sense would suggest that they are awaiting decisions from Grande Paroisse (France), DSM (Holland), Fertiberia
(Spain), and Kemira who have also just announced a plant closure at Pernis in Holland.

Of relevance to Britain, Hydro has clearly stated that it will put its own house in order and remain a world force in nutrients.

The Kemira group wishes to reduce its reliance on fertiliser and is seeking joint ventures or alliances, and Terra remains lean,
mean and competitive but, like the others, loss making.

Significant reductions in capacity are expected soon and inventories will start to fall in a major shake up.

Against all of this must be placed an anticipated upsurge in demand. Lack of recent sales, reduction of farm stocks of fertiliser,
increased plantings, milk quota and set-aside figures all point to a “big” spring.

Increased demand and reduced supply equals increased price.

But when and how much?

Already we are seeing prices creeping up and one would anticipate that the trade could well achieve its anticipated £90
tonne for AN in Jan/Feb.

If industry restructuring is as fundamental as forecast this could well rise to £95 + by May and £100 by the end of

The import situation is currently weak, depressed by lack of confidence and low prices, but as UK prices rise we could see an
increase in imports providing a lower price base to the market.

Fertiliser prices will therefore not have a run-away increase whilst the industry fights for survival.

Service and innovation are already badly hit and will disappear unless paid for directly by the customer.

Finally, before getting too despondent about price rises, it helps to put things into proportion. In 1985 AN was £133
tonne and Milk 14.5p per litre.

Fertiliser was as cost effective then as it will be in 2000, although we are unlikely to see those nitrogen prices for some time yet.

What we will witness is a return to normality.

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