The Nitrogen-Based Fertilizer Outlook for 2018
The global nitrogen market — from producers and traders to retailers and end-users — faced a year of transition in 2017.
After several years of major nitrogen capacity increases around the world — particularly in China, other parts of Asia, and the Middle East — new nitrogen capacity came online in North America. CF Industries’ new capacity was started up in 2016, and additional capacity in the region ramped up during 2017.
Some of the impacts from this transition could be seen as predictable.
Nitrogen prices worldwide were uneven, though generally lower than the year before due to the excess global supply of nitrogen. This was a positive development for the farm economy in North America during the year compared to relatively stagnant crop price levels and tighter farm credit. For example, on a nutrient basis, ammonia costs accounted for approximately 6% of Midwest farmers’ corn revenue in 2017, down from about 8% and 10% in 2016 and 2015, respectively.
Imports of urea and UAN to North America from July through November of 2017 were down 31 percent and 29 percent year-over-year, respectively.
However, predictable is not a word market participants would use to describe nitrogen prices in 2017. Indeed, the predominant symptom of the global market’s transition was volatility, not predictability.
Consider the dramatic movement in the price per ton of urea traded at New Orleans, LA, during the year. Prices rose to $250 per ton in late January for March delivery then plummeted to $160 per ton around the end of June. They rose again to near $250 per ton at the end of October, fell to $220 in four weeks before finishing off the year near $250.
These dramatic price movements occurred as market participants adjusted both to the increased global capacity and to changing demand requirements in certain regions. For example, North America, while still import-dependent, needed fewer imports. India, which is now the largest importer of nitrogen in the world, did not import any product from October 2016 through March 2017.
We expect this volatility to continue in 2018 because the global market is still in transition. We continue to expect demand for nitrogen to grow at its long term average rate of about two percent driven by increases in acreage and the desire for greater yields in places such as Argentina, Brazil, and Ukraine, and by growth in industrial demand. At the same time, the global industry has more new nitrogen capacity to absorb. This includes the last of the new North American capacity expected to come online sometime in 2018.
Producers, traders, distributors, and retailers all face the same challenge in this environment: How to interpret market signals.
In the past, everyone had largely similar outlooks for when and in what direction prices would change within a year based on past shared experience. Retailers could purchase forward confident prices would rise during traditional demand periods.
In recent years, that dynamic changed. Prices, particularly in North America, have not moved in historical patterns, leaving producers, traders, wholesalers, and retailers struggling to anticipate the right time to buy and sell.
What will be the major drivers of price movement in 2018? I believe there are three parts of the world you need to keep an eye on during the year.
China. China is the world’s largest consumer, producer and, until recently, exporter of nitrogen. However, low global prices, higher coal costs, currency fluctuations, gas supply limitations and stepped up enforcement of environmental regulations have led to operating rates between 50% to 60% in 2017. Chinese urea exports declined from approximately 13 million metric tons in 2015 to 4 million to 5 million metric tons in 2017. The country even imported a small volume of urea in 2017. This transformation over two years has been the largest single origin shift in global urea trade ever seen.
Should China continue to keep operating rates low and import urea, even in small amounts, global prices will be supported. Should China dramatically increase operating rates and exports, global prices will likely fall.
India. India and Brazil now both import more urea than the U.S., which makes them key demand centers for the world. However, India’s tender process, where government entities request bids for large quantities of urea a limited number of times during the year, makes that country a key driver of global prices. When India is purchasing, global prices tend to be higher. When the country is not, prices tend to drop quickly. In fact, in November 2017, India canceled a tender, causing the global price of urea to drop as much as $80 per metric ton.
On a recent CF management visit to India in November, the expectation was that the government would eventually move away from tendering for urea, leaving it to private companies and thus removing the dramatic effect the country has on global prices. Until they do, however, keep your eye on Indian urea import demand for an idea on where the global price will move.
North America. Developments in North America cannot be discounted. For most of 2017, the region’s prices were among the lowest in the world, and below international parity. In other words, producers around the world could receive higher prices for their products in other regions.
As a result, it was not economically viable to send product to North America for most of the year as seen by the significant reduction in imports of urea and UAN that I mentioned earlier. Indeed, there were brief moments when the region was a net exporter of urea — in July — and UAN — in August and September — as CF Industries pursued higher prices in other regions.
However, when prices in North America were above international parity, importers brought more product to the region than needed. When prices dropped dramatically, many traders and importers suffered significant losses.
Finding a Balance
How importers, producers, and retailers find a balance from these extremes will certainly play a large role in prices paid during the year for ammonia, urea, and UAN.
The uncertain nature of how much and in what direction these factors will move prices make this the most challenging marketplace for participants in recent memory.
So it’s not a surprise that buyers in North America are more risk averse than in recent years, with more purchasing in a just-in-time manner or selling and purchasing back-to-back. Producers as a result have had to be more nimble. Delivering tons to the right areas at the right time requires using all available options, including product mix, transportation modes, storage and destination flexibility.
This predictably volatile dynamic is the new normal for now.