Indicators point to price rise this year

21 January 2000

Indicators point to price rise this year

LIKE the whole agricultural industry, the fertiliser sector is under enormous pressure and has finally reached the stage where change is inevitable. Fertiliser prices must rise this year and the only speculation is by how much and when.

The industry is highly cyclical and farmers have enjoyed exceptionally low prices for nearly two years, says market analyst Bridgewater Partnership. The cycle will move upwards very soon, but will be held in check to a significant degree by low farm incomes.

Several factors make price rises inevitable. First, raw material costs are rising, the most important being energy. European ammonia is currently $125/t and rising, with Brent crude oil at $20/barrel. The last time oil was that price was mid-1996, when ammonia reached $250/t.

Transport costs are also rising and fewer hauliers are investing in retaining a dangerous goods safety adviser or renewing their vocational training certificates. For the first time this spring fertiliser could fail to arrive on farms in time, despite ample stocks.

But fertiliser stocks are the key to price. Industry estimates suggest there is at least 3m tonnes of excess nitrate production cap- acity in Western Europe and stocks of finished product are high.

When stocks are high it is a buyers market, as now. The market is neutral when stocks are high but falling, or low and rising and when stocks are low and falling it is very much a sellers market.

Fertiliser manufacturers can do one of three things – sit tight, lose money and wait; trim costs, stem the flow and wait; or take 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. The savings made and the reduction in fertiliser production are not enough.

Surgery is now required. The only real solution is to permanently reduce capacity. That is finally about to happen. Before Christmas Hydro announced it would close 1m tonnes of nitrate capacity in Europe in 2000 and Kemira is closing a plant at Pernis in Holland.

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

But there will also be an upsurge in demand. Lack of recent sales, reduced 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 by how much?

Prices are already creeping up and the trade could well achieve its anticipated £90/t for AN in Feb-ruary or March. If industry restructuring is as fundamental as forecast this could rise to over £95 by May and £100 by the end of 2000.

Although imports are currently weak, depressed by a lack of confidence and low prices, an increase is possible as UK prices rise, providing a lower price base to the market. &#42


&#8226 Industry now restructuring.

&#8226 Late ordering, strong demand.

&#8226 Prices set to keep rising.

&#8226 Late delivery risk this spring.

&#8226 Imports weak for now.

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