Up to Date Fertilizer Market News
Back in December I provided some explanations as to how and why the fertilizer market got so out of whack. I was hoping that by now we’d have turned the corner on many of the root cause issues and could provide some glimmers of hope as the spring season quickly approaches. Unfortunately, some new developments have occurred that now pose some potentially worse circumstances for our industry.
Please don’t shoot the messenger, but here are some downright dreadful issues that are currently happening which we all will need to navigate.
Urea Supply Destabilized by Current Events
Unless you’ve been living under a rock, you’ve undoubtedly heard that the Kremlin ordered Russian troops into the separatist territories of Eastern Ukraine. As I’m writing this, the full extent of the action is not known. Nonetheless, beyond the obvious reasons, this dramatic world event directly impacts the overall fertilizer market in multiple ways, but mainly impacting urea.
Immediately following the Russian troops entering Ukraine, The US and other countries began imposing sanctions on Russia, which included asset freezing and travel bans for certain Russian oligarchs and politicians. As Russia escalated their actions in the region, harsher and more extensive sanctions were employed, which included exports into the global market. This is the first place where our industry comes into play.
Russia is the world’s largest exporter of urea, shipping out more than 7 million metric tons annually. These additional sanctions will likely limit the overall supply of available urea throughout the world. With spring right around the corner, the US demand for urea will be unquestionably high as high priced corn fields will need to be planted. Since the agricultural industry always get the first bite of the apple, whatever is left for us in the T&O market will be greatly diminished and it will be expensive.
As bad as this scenario sounds, it’s the lesser of the two imminent threats.
Previously, I wrote about the energy crisis that gripped Europe and Asia throughout 2021, which ultimately led to many urea manufacturers to completely shut down due to inflated natural gas prices. Prices, in recent months, have somewhat stabilized and urea manufacturing has begun to come back online again. Now, however, the natural gas market is facing a more perilous situation.
One of the most damaging and immediately imposed sanctions on Russia was taken by Germany that suspended the approval process of the Nord Stream 2 pipeline, a 764-mile-long natural gas pipeline under the Baltic Sea, that runs directly from Russia to Germany's Baltic coast. It runs parallel to the original Nord Stream pipeline and would increase the natural gas supply to Europe to a whopping 110 billion cubic meters per year. The big issue with the pipeline is that it’s operated by a company called Gazprom, which is state-owned. This means that Gazprom’s sales directly fund and support the Russian government’s budget.
By not completing the certification of the Nord Stream 2 pipeline, Germany is not allowing Russian gas to be imported into Europe, which has been touted as a major solution to the on-going energy crisis throughout Europe. Immediately following the announcement of Germany’s decision to halt the certification process, European benchmark gas prices jumped by 10%. Ultimately, Germany landed a crippling blow to future Russian cash flow expectations at a time they need it the most.
In terms of overall global economic impact, Russia is actually a fairly minor player, except for some very specific areas. They are the key supplier of oil, gas and raw materials that keep the world’s factories humming along.
As Jason Furman, a Harvard economist who was an adviser to President Barack Obama, stated it, “Russia is incredibly unimportant in the global economy except for oil and gas. It’s basically a big gas station.”
However, gas stations are still very important for those who need it. Europe needs it. They need natural gas because it’s replacing numerous decommissioned coal and nuclear plants before renewable energy sources such as wind and solar are sufficiently built up. Europe gets nearly 40 percent of its natural gas and 25 percent of its oil directly from Russia. Currently, Europe’s natural gas reserves are at less than a third of capacity, with weeks of cold weather ahead.
All these events translate into natural gas prices, yet again, becoming highly inflated with significant spikes in heating and gas costs as the supply quickly diminishes and demand steadily increases. The result will be a complete reversal of the initial recovery we’ve seen in recent months. In all likelihood, it will lead to a worse situation than before. If this does come to fruition, urea manufacturing plants will most assuredly be forced to shut down, again. Ugh.
India Buying Urea Later in Q1
Overall, we’ve seen some initial urea market softening, giving us all hope that perhaps the worst was behind us. Then, on February 4, urea prices jumped up by $90 a ton, which equate to an 11% weekly increase, the most since Sept. 10. What happened? India happened.
India is the world's largest importer of urea that brings in almost 12 million metric tons annually. They account for over 22% of the world’s total imported urea. In short, India is the 600 lb. gorilla of the urea world. When they do something, everything is impacted.
What happened on February 4th was that India informed their contract suppliers that they were shifting their timing to buy urea later than they have in the past, more specifically later in the first quarter of 2022. This unexpected timing change will increase the competition for urea at the very same time that the US and Europe traditionally buy urea. In short, India is going to be buying up urea that would normally end up in US corn fields and our bags of T&O fertilizer.
The longer-term impact of this development will likely mean sustained and elevated urea pricing for a longer than expected period due to excessive, unanticipated market demand.
More Woes for Potash
We’ve all seen that US spot prices for potash have nearly doubled in the last year. As much I would love to write about how it’s turned the corner, I’ve nothing but more bad news when it comes to potash.
In addition to Russia being the world’s largest exporter of urea, it’s also the world’s second largest exporter of potash, supplying over 9 million metric tons to the global market. For all the same reasons why the ever-increasing list of sanctions will impact availability of the urea market; the same logic extends to the potash market. Shockingly, this development isn’t even the worse new for potash. That distinction goes to Russia’s neighbor, the country of Belarus.
Belarus is the third largest global exporter of potash, sending out 8 million metric tons annually. The largest Belarusian potash company is Belaruskali which, like the Nord Stream 2 pipeline, is state-owned. This, again, is where the problem lies. The US and Europe has placed sanctions on Belaruskali due to their fraudulent presidential elections held in 2020. The heaviest sanctions from the US come into effect on April 1, 2022, which is the deadline for all US companies to end all business dealings with Belaruskali.
While not every country has placed sanctions on Belarus and their potash companies, they too will feel an unexpected development. On February 16, Belaruskali sent out a letter to their clients declaring “force majeure”.
If you’re not familiar with this term, it’s a legal term and commonly used clause in business contracts which essentially frees both parties from liability or obligation when an unforeseeable circumstance prevents a contract from being fulfilled. In this case, delivery of contracted potash.
With the US and Europe halting business dealings and Belaruskali not being able to fulfill long-standing contracts, the absence of the Belarusian potash supply will have major consequences. Customers who have historically purchased from Belarus are now trying to secure supplies elsewhere, which results to shifting trade flows and, likely, demand rationing.
Nutrien Ltd., another player in potash manufacturing, said that they have an additional capacity of one half million tons they could supply, but it wouldn’t be available until the second half of 2022. Additionally, they indicated it was possible to ramp up potash output, but first, it would need to see a prolonged impact on the market for “years” in order to justify bringing on additional sustained capacity. Nutrien did increased its potash capacity by 1 million tons in 2021 and additional volumes are expected to come online later in 2022 from other companies.
In short, all realistic indications are that the global supply of available potash will be far less than initially expected and it’s going to remain to be very pricey.
Here’s how we’re going to be impacted
What does all of this mean to us in the T&O industry? That’s the real question here.
First off, expect overall less availability of multiple raw materials, most notably urea and potash. The amount of available supply will be significantly less than expected only a few months ago. This development will likely lead to only being able to source these nutrients in larger than desired size for our market. Since the agricultural industry uses SGN 300 and larger sized particles for row crops, it very possible that many T&O products will need to tap into these sources just to be able to build the needed products. While certainly not ideal for our market, it does allow us all to continue to serve our clients.
Secondly, expect the current pricing to, at least, remain at where they are. But also, be aware that they may continue to spike upwards until the market figures some things out. The entire globe will be vying for a much smaller supply than it’s accustomed to. Some of the increased pricing will force behavior changes, but most probably will not. Until this new supply and demand model finds some form of equilibrium, erratic pricing will continue to be seen.