Sector News

Fertilizer industry approaching bottom of cycle

May 29, 2017
Energy & Chemical Value Chain

The mood was mixed at the recent International Fertilizer Association conference at Marrakech. “Producers of nitrogen were depressed, producers of potash were cautiously optimistic and producers of phosphate confused,” says Jonas Oxgaard, an analyst with Bernstein.

But leading producers say that, although there are still a few challenging quarters to come, most data points put the industry at the bottom of the cycle. “Demand is growing and supply additions are ebbing – setting the stage for the emergence of a more favorable backdrop from next year into 2019 for nitrogen and phosphate,” says Olivier Harvey, head of investor relations at EuroChem (Zug, Switzerland). EuroChem is a major producer of nitrogen and phosphate fertilizers and is about to enter the potash market in a big way. “The absence of new potash capacity beyond a few key definite projects—with EuroChem’s being the biggest–and market behavior of the incumbents are all positive signs,” he says.

EuroChem’s CEO Dmitry Strezhnev said at the time of the company’s first-quarter results that the market is rebalancing. “Once again, our investments in raw material mining operations and distribution have proven to be a source of strength in an uncertain fertilizer market.  We see a more encouraging backdrop emerging from next year as the market begins to rebalance.” With the rate of new sizeable nitrogen and phosphate capacity additions already ebbing, the group sees trading activity intensifying as growing demand and capacity curtailments gradually erode excess supply starting from 2019.

In nitrogen, additional export-orientated capacity and new facilities in key import markets have led to an increasingly competitive backdrop. Accordingly, the anticipation of lower prices has kept market participants reluctant to actively replenish inventory, painting a generally softer demand picture. Lower urea export volumes from China are providing some near-term support to prices while reports of potentially significant production cuts later in the year from a mix of costs, credit and environmental issues could help support tighter longer-term supply and demand assumptions, according to EuroChem’s outlook.

The consensus at the conference was that it will be some time before it gets better. “We share this view, and fear that we will have a repeat of last year – prices below marginal cost of production for 4-6 months before a supply response moves prices back to marginal cost of production of around $250/metric ton of urea,” says Bernstein’s Oxgaard. The consensus outlook for potash is positive, despite capacity additions. “Most participants expected the market to remain disciplined, and the debate appeared to center more on how much impact the capacity additions will have. We share this view, expecting potash prices to appreciate to above $300/metric ton next year,” he says.

Divided opinions on phosphate point bears to new capacity additions and disbelief in Chinese shutdowns, while bulls pointed to the fact that most of the new capacity is under the control of Morocco’s OCP (Casablanca), the host of the IFA conference. “Our base case is that OCP remains disciplined and phosphate prices remain roughly at current levels with a decent possibility of upside if China does indeed permanently close capacity,” Oxgaard says.

OCP’s most recent expansions focused on upgrading the infrastructure of its mines, including a company-wide integrated control system. OCP spoke about flexibility as one of the key pillars of its strategy and also said it was concentrating on price over volume.  In 2015, OCP produced 26.3 million metric tons (MMt) of phosphate rock, Mosaic, the second largest, produced 14.5 MMt, followed by Jordan Phosphate Mines with 8.7 MMt, Vale 8.2 MMt, PhosAgro 7.9 MMt, PotashCorp 6.9 MMt, and Ma’aden 4.2 MMt.

By Natasha Alperowicz

Source: Chemical Week

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