The Global Fertilizer Markets

For the past few years, Al Mulhall, senior director/market research for PotashCorp, has provided CropLife magazine with a detailed anaylsis of how the fertilizer is performing, in its current year and projecting forward. This year, instead of providing an article looking at these topics, Mulhall instead gave us a question and answer session looking at these same areas.

Q: How does the performance of fertilizer markets in 2011 compare to previous years?

A:  A reduction in fertilizer shipments from producers accompanied the “Great Recession” of 2008-09. During 2009, many retailers appeared to have a more cautious mindset in response to the economic downturn. In addition, a substantial number of farmers also adopted this cautious approach or experienced difficulty in obtaining credit for their purchases, and as a result deferred fertilizer applications. Retailers drew down their inventory levels and growers did not fully replenish the nutrients removed from the soil bank by their crops.

In 2010, there was a very strong rebound in the fertilizer markets, as favorable crop prices encouraged farmers to boost yields with good fertilizer applications, and drawn-down soil nutrient levels provided a further incentive.

While these factors encouraged a substantial increase in 2010 fertilizer shipments, the need for crops to be able to withstand the stresses of the growing season and achieve optimal yields was still not fully met. Further market growth followed in 2011.

In the nitrogen market, demand for ammonia, the feedstock for production of both nitrogen fertilizers and industrial nitrogen products, rose in 2010 by close to 5 million tonnes, an increase of more than 3%. Demand in 2011 was up an additional 6 million tonnes, an increase exceeding 4%.

In the phosphate industry, rock is processed to produce phosphoric acid, which contains phosphates in a soluble form available to plants. This is the feedstock for production of concentrated phosphate fertilizer products such as DAP and MAP and of industrial products containing phosphorus. In world phosphate markets, demand for phosphoric acid increased by 19% from 2009 to 2010 and a further 7% in 2011.

Potash markets also rebounded strongly. Global sales were up an unprecedented 86% from 2009 to 2010. The final sales figures for 2011 are not in yet, but record shipments are expected, up by 4% to 7%.

Q: The nitrogen, phosphate and potash markets all grew in 2011 as you noted. Can you address the impact of macroeconomic events?

A: The strong crop prices we discussed were a major driver of the excellent nitrogen, phosphate and potash movement seen in the first three quarters of 2011. In the fourth quarter, both the northern and southern hemispheres experienced the usual seasonal slowdown in fertilizer activity. However, the quarter is over and the lull appears to have been longer than normal in both hemispheres. It seems that some purchases are being deferred as the usual markets are taking more of a just-in-time approach. However, a repeat of the events of 2008-09 is not expected as the situation differs substantially.

Despite the economic issues, the fundamentals behind global agriculture are strong. The most recent projection by the International Monetary Fund is for GDP growth in the developed world at about two-thirds of the typical level while the developing world is expected to continue to achieve strong economic growth, at a slightly lower rate than in 2011.

Ending stocks and stocks-to-use ratios for major crops are near historically low levels. Prices for a wide range of crop commodities are attractive although some have softened somewhat from their earlier peaks. Prices remain well above the 10-year averages, giving farmers a sense of optimism, a desire to increase production and the cash to support increased fertilization.

Unlike 2008, fertilizer prices have not increased as much as crop prices. Fertilizer costs represent approximately 14% of U.S. corn revenue for the 2011 crop, compared to a 10-year average of 18% and the 22% experienced in 2008.

U.S. net cash farm income in 2011 reached an all-time high.

In 2008, Brazil and several other countries suffered from constrained credit conditions, which adversely affected farmers’ purchasing ability. Current credit market conditions are healthier.

In the potash market, inventories were elevated going into the 2008-09 downturn. The inventory reduction that followed contributed in a major way to the lower shipments during this period. With exceptions largely related to specific market needs, present global inventories are generally at or below normal levels.

Q: Can you describe global potash inventories at the beginning of 2012?

A:  North American producer inventories are near the five-year average. At the retail level, dealers typically wanted to end 2011 with low stocks, and indications are that this has resulted in below-normal dealer inventories entering 2012.

Indonesian inventories are reported to be somewhat above normal. However, they are expected to be quickly drawn down by the heavy spring applications anticipated on the expanding oil palm acreage, as palm oil prices are very strong.

Inventories in Brazil are higher than usual for the beginning of the year, following record imports during 2011. These higher-than-usual inventories will help meet Brazil’s increased fertilizer consumption, which is expected to reach a total of 28 million tonnes for 2011, up about 15% from 2010. The draw-down on these inventories in 2012 is also expected to be greater than usual due to increased plantings of corn and the need to rehabilitate the sugarcane crop. Brazil needs to boost its sugarcane-based ethanol production to relieve its current shortage so the ethanol blended into its gasoline can return to the normal level of 25% and to allow its hydrous ethanol fuel prices to be lowered to a level where they are again competitive with gasoline.

India’s ports are congested as importation of potash had to be compressed following the drawn-out negotiations that meant settlements were not achieved until the middle of 2011. There are conflicts with other imports coming in and difficulties with the transportation systems moving product away from the ports. India has requested that orders in the first quarter of 2012 be spread out beyond the original plan. Reports indicate that potash in the interior is in short supply and that concerns are being voiced.

In China, data are available only for potash inventoried at the ports and the major producers, not for the holdings of the many small fertilizer distributors. However, the price in the interior provides a fairly good indicator of the availability of potash; it is at the level expected for normal to slightly-below-normal inventories in the interior at this time of year.
Q: What is the outlook in 2012 for the nitrogen market?

A: Nitrogen markets tend to have the greatest seasonal volatility of the three products, with phosphate less volatile and potash the most stable. Ammonia and urea prices experienced seasonal softening in the last two months of 2011, which was further impacted by the lull mentioned earlier. As we move into the spring season, we expect the favorable crop economics to encourage strong spring applications, which are anticipated to again firm up the market.

Some of the new urea capacity originally scheduled to come on stream in 2011 was deferred to 2012. The limited amount of new capacity currently scheduled to be operational in the first half is expected to help firm markets during this period. More new capacity is expected in the second half of 2012. If it all comes on stream as projected, a slight excess of about 5% of global trade demand is possible. However, startup delays are common and may negate this possibility.

India is projected to again require high urea imports and contribute to the strong demand.

In mid-December 2011, China issued a revised export tariff policy for fertilizers. For urea, the previous 7% tariff is continued from July to October, with the remaining eight months taxed at 110%. In 2011, exports of urea in small bags were exempt. In 2012, they are included in the tariff. China’s estimated urea exports of just below 3 million tonnes in 2011 are expected to be reduced substantially by this change.

Strong overall demand for both ammonia and urea is anticipated, with projected growth of 4% for each.

Q: What is the phosphate market outlook in 2012?

A: China’s tariff policy revision also affected phosphates. In 2011, it did not include a high export tax period for TSP or for phosphate fertilizers with a lower analysis than DAP. These have been included for 2012, which is anticipated to reduce exports.

India’s DAP import requirements are expected to remain strong.

Saudi Arabia’s Ma’aden project, with a design capacity of 3 million tonnes DAP, started up in June 2011. However, it is ramping up slowly, with estimated exports of only 250,000 tonnes in 2011, and difficulties are reported with the 1,500-kilometer railway carrying phosphate rock from the mine to the plant.

Global prices for the inputs required for DAP production are expected to remain strong in 2012. Phosphate rock is expected to strengthen slightly from the current level, and sulfur is anticipated to remain around the present level. As a result, the cost of DAP production for the 30% of world producers purchasing their inputs is expected to increase.

Global demand for phosphate products is expected to raise the 2012 requirement for phosphoric acid by about 3%, and the global utilization of phosphoric acid capacity is projected to increase.

Q: What is the 2012 outlook for the potash market?

A: Strong demand for potash is again expected, with shipments projected to establish a new record. Buyers in North America and elsewhere are moving closer to just-in-time inventory management, which may result in congestion in the spring season. This could be compounded by adverse weather, which can affect movement of product from the mines in Canada to both domestic and offshore markets and can also interfere with potash shipments from Russia and Belarus through the Baltic Sea.

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