"Why were prices high in 2021 and what's next?", - AGROTRADE CLUB

Author and founder of Agrotrade Club, director of the public association Agrobusiness Club Kateryna Iliushenko (Kalibina).

Industry analysis within the framework of the annual agrochemical conference «AGROTRADE CLUB RESULTS OF THE YEAR 2021» - 21.12.2021 Kyiv/Ukraine

Thank you, Eugene, thank you everyone who managed to get here today. My name is Kateryna Iliushenko, I am the author and founder of the platform Agrotrade Club, who does not know, and the director of the public association Agrobusiness Club. Together with the law firm Winner, our partners, we have registered a public association in the summer of 2021, which will promote the development of agrochemical business in Ukraine. I made not a small presentation, but more of a mini report about the fertilizer market. It's called "Why were prices high in 2021 and what's next?". I have been looking closely at the world market for several years now, because it sets the pace for all local mineral fertilizer markets, mostly large cargo. And I would like to tell you a little bit about it. I did not make the presentation, because it is like a mini-report, a mini-research. During the presentation I will switch to Russian. It's easier for me if no one minds.

Over this presentation we will look at the key drivers and events during 2021 that influenced the rapid growth in prices and model a short-term forecast with you.

So, the global market.

Mineral fertilizer prices at the global market are determined by the balance between supply and demand and the level of production costs.

Prices also change depending on the season and the contracts manufacturing plants have throughout the year.

So why were fertilizer prices high throughout the year?

There are several key market drivers:

The first driver is high demand

Fertilizer demand has reached a record level over the past 12 years. This was aided by a strong emphasis on food security and government support for the agricultural sector in a number of countries. It was also driven by high crop prices around the world, which increased the incentive to plant more acres and increase the fertilizer use of to maximize productivity.

The next very important driver, which I would like to highlight is the high prices for raw materials

The production processes of the main macro fertilizer types are energy intensive or energy consuming. For example, in the structure of nitrogen fertilizer production about 70–80% of total production costs are accounted for by the production of ammonia. The phosphate fertilizer segment has also seen higher end product costs as ammonia and sulfur are used as raw materials as well.

About 200 million tons of ammonia are produced annually in the world, from it nitrogen fertilizers, plastics, explosives and much more are produced. For example, in the world production structure, the Russian share occupies, the volume of ammonia production is 17.8, about 18 million tons in terms of production of methane chemistry. That is, roughly speaking, 10%. The ammonia quotes growth began everywhere from the beginning of 2021. The cost of ammonia on bases, for example, FOB Yuzhny increased by $150-153 and reached $445-$450 in the first quarter of 2021. The catalyst was a series of unplanned power outages on both sides of the Suez Canal. In total, 5 largest factories stopped. Then the total deficit amounted to 300000 tons per month. 

World market operators point out that as soon as ammonia quotes reach urea price levels, fertilizer goes up sharply, price rises sharply. In mid-February 2021, ammonia quotes caught up with urea quotes. The average indicative price was $350 per ton on FOB Baltic, FOB Black Sea basis. In December 2021, ammonia quotes exceed the average indicative prices of urea by about $100 per ton.

In 2021, energy prices rose sharply due to tense supply and demand dynamics. This has significantly increased the cost of production for many fertilizer manufacturers around the world.

December 16, last week, following news from the German energy regulator that no decision would be made on the Nord Stream 2 gas pipeline in the first half of 2022, the TTF gas price January index rose sharply.

The spot gas price in Europe (in the 3rd trading week of December), I looked at the latest data from last week on the global market, exceeded the range $1400-$1600 per 1000 m3, which is the highest level since the beginning of October 2021, when the price soared to almost unthinkable $2000 per thousand cubes.

The price of the nearest (January) TTF futures on the ICE Futures exchange reached $1,425 per 1,000 m3. In November, for example, last month, a day-ahead contract traded on the TTF at an average of $945, in December - $1,153 per thousand cubic meters. Since the beginning of the year, the average value of the contract has reached an average of $515. The global spiral of price growth received support from gas indices in Asia - following the European one, the futures for the Asian LNG index rose - the January contract reached $1,276 per 1,000 m3.

A very important moment, the current level of gas reserves in underground storage facilities in Europe (as of mid-December 2021) reached 63% of their maximum capacity, which is 17% lower than the average value over the past 5 years. This information is according to Gas Infrastructure Europe.

Ammonia quotes again renew price maximums. Last week they rose by another $35 per ton. On FOB basis Yuzhny Black Sea, they already exceeded $1,000 per ton, last week.

In the fall of 2021, CF INDUSTRIES Holding shut down factories in Britain, Yara International reduced ammonia production at its plants by 40%, and some even stopped. For example, we know the Sueskil plant has recently launched. By the way, Yara bought ammonia at $900 and $1100 in November and December. So, this moment of the stop in the fall, the company stated that they would fulfill their obligations under previous contracts. Fertiberia in Spain, OCI in the Netherlands, Borealis cut their production, chemical giant BASF cut ammonia production at plants in Antwerp, Belgium, and Germany.

Also last week, the news was confirmed. On December 15, the Romanian producer AZOMURES ceased production due to the high cost of gas. Their production capacity is 1.8 million tons nitrogen fertilizers per year.

Moreover, phosphoric acid quotes rose sharply in the fourth quarter of 2021. This is also an important raw material component in the production of large tonnage mineral fertilizers. The price increase about $170 per ton compared to the third quarter. This autumn we saw a fairly sharp increase in phosphoric acid prices. Phosphoric acid 100% P2O5 in the fourth quarter of 2021 reached a range of $1294-1527 per ton, these are spot sales on FOB North Africa basis, on European market the prices ​​reached $1425-1455 per ton on CFR terms (cost + freight) and on Indian market on CFR $1330 delivery bases. This is the latest data.

The third most important driver that I would like to mention is supply disruptions.

Fertilizer production has been hit hard by a series of disruptions this year: shutting down a number of production facilities due to a range of factors ranging from weather to high production costs. As a consequence, this has prevented fertilizer producers from maintaining the level of supply needed to meet market demand. As a result, the fertilizer availability has decreased on the world market.

Supply disruptions can be divided into several groups:

The first group is geopolitical instability: export restrictions amid availability issues; sanctions against the Republic of Belarus; market uncertainty.

The second group is weather influence, a decrease in production volumes. In the US, for example, in February there was icing in the Midwest, which is not typical for this region, and very much affected the disruption of supplies. Then in September, the consequences of Hurricane Ida also influenced the market. And the delayed launch of production capacity in India this year. In India, if we recall, they suffered greatly from the delta strain, some catastrophic moments.

The third group is financial and economic: high production and delivery costs. Raw material costs (natural gas, coal, ammonia, and sulfur) have increased, as I mentioned earlier.

And a very important point is the increase in freight rates. I looked at the freight market. Between February and May 2021, freight rates for shiploads, I looked at small ones, 3000 tons or 6000 tons, averaged $50 per metric ton. Turkey ports Marmara, Mersin freight rates were $20, Adriatic ports $28-30 per metric ton. This indicator has already increased in June-July 2021, Marmara freight rates increased to $28-29, this is the range, per metric ton, Mersin $38-39, Adriatic freight rates increased to $39 per metric ton. After that freight increases in August-September 2021. Marmara averages $35 per metric ton, Mersin $43, Adriatic $46. And between October and November 2021, freight rates continue to rise further. Marmara $42-43 per metric ton, Mersin $57, Adriatic $61. And very important, freight rates for December: Marmara is already $45 per metric ton, Mersin - $59, Adriatic - $63. And this is not the limit. We will have more details in the presentation during the second half after the coffee break. Vsevolod will address this a little, he will cover the logistics market. Mineral fertilizers logistics, they are well versed in this.

The next driver is the fourth driver, geopolitical risks

The fertilizer market in 2021 was affected by geopolitical turmoil. The most significant was the economic sanctions against Belarus by the EU and the US. The Republic of Belarus supplies almost 1/5 of the world's reserves of potash fertilizers and is the 3rd largest exporter of potassium chloride in the world. The possible potassium chloride supply cease from Belarus has caused uncertainty within the world market, given the country's contribution to world supplies.

The fifth driver is internal politics

In response to shortening of fertilizer availability in 2021, a number of governments have taken steps to protect the domestic market and fertilizer supply. The fertilizer supply is considered a matter of national importance, given their impact on the productivity of land and on the country food security. Many major fertilizer-supplier countries have introduced policies in order to secure the domestic market. This policy has led to reduction or limitation of the export potential of the main world market suppliers (such as China, Russia, Egypt and others). These exporting countries have worsened the situation on the world market even further during the current year.

For example, China has reduced export of 29 mineral fertilizer types since October 15, 2021, anticipated for several months period. The Chinese government believes that limiting the fertilizer export will help with the price rise on the domestic market. But in late November and early December, there were several accounts from market operators that some cargo was cleared for export. But most likely these were some previous obligations. So, full export from China to the world fertilizer market is not yet to be expected.

China is the largest exporter of phosphate fertilizers in the world. In the first half of 2021, China has exported 3.2 million tons of diammonium phosphate (DAP) and 2.4 million tons of urea. The main importers of Chinese fertilizers in 2021 were India and Pakistan.

In 2020, for comparison, China exported 5.5 million tons of urea to the global market. The total fertilizer export volume in 2020 from China was 30 million tons. Export growth in mineral fertilizers, compared with 2019, by 5%. The export volume increased due to shipments of urea and NPK fertilizers. Almost 3 million tons of urea were shipped to India from China. Import position is potassium chloride. In 2020, China's potassium chloride import amounted to 8.8 million tons.

Russia issued mineral fertilizer export quotas from December 1, 2021, for approximately six months, until May 31, 2022. There were some hiccups, the Ministry of Trade was planning to issue licenses, around the first week of December, the volumes of fertilizers were accumulating in Russian ports. But it seems that at this moment everything has already been resolved. For nitrogen fertilizers, the quota is 5.9 million tons from Russia, for complex fertilizers, NPK / NP / DAP / MAP - 5.35 million tons.

According to experts, this should not greatly affect the balance at the global fertilizer market. Russia exported the approximately same volume of fertilizers to the foreign market every year. But given the absence of most countries on the global market, this is likely to lead to further increase in prices.

The US has set up a task force to address short-term supply chain issues. June 2021, a petition from a domestic US manufacturer CF Industries regarding the UAN import from Russia and Trinidad. In 2020, the United States imported 2.4 million urea-ammonia mixture, the share of Russian import was 1.4 million tons, and Trinidad and Tobago - 900,000 tons. In April 2021, duty orders were issued for 5 years, from the Russian Federation and Morocco.

Turkey. Export restrictions in October 2021 for N, P, K fertilizer groups.

Egypt. In November, the nitrogen group fertilizer export was ceased (only with the permission of the Ministry of Agriculture). The monthly quota required for the domestic market in July-August was 320 thousand tons, producers had to ship to the domestic market.

Vietnam imposed 6% DAP import duty this year.

Sri Lanka. The government of Sri Lanka, if anyone paid attention, decided to completely switch to organic agriculture in the spring of 2021, in order to reduce the chemicalization load. And six months later in October, they felt a significant drop in land productivity. At this moment it is necessary to return mineral fertilizers and not to restrict import.

In May 2021 India increased subsidies for the mineral fertilizer purchases and additional assistance to farmers by 140%. As a result, the market immediately reacted strongly, the imported DAP price rose, reaching $585 per ton on a CFR basis.

Urea also, it is skyrocketing, right from the beginning of the year, from the first trading week of 2021. India imports quite a lot of urea, quite a lot of diammonium phosphate. For example, India imported 11 million tons of urea last year.

In the third quarter of 2021, world urea prices continued to grow, accelerating in the fourth quarter. Why I look at urea? This is the most popular nitrogen fertilizer, with practically no replacement, there are few alternatives. In November, Baltic prices exceeded $800 per ton FOB, renewing 2008 highs. On some markets, prices have reached $1,000 per ton. Talking with global experts from various analytical agencies, with international traders, people noted, those who have been in the industry for more than 20 years, they have never seen urea quotes $ 1,000 per ton, even during the 2008 crisis. The increase in prices is mainly driven by supply restrictions, related to a number of production shutdowns in Europe due to the energy crisis, and the restrictions on the fertilizer export from China.

At the same time, urea demand is sustained by high grain prices, Indian active purchasing and the start of seasonal demand in the Northern Hemisphere. The recovery of urea consumption in the industrial sector also continues. If anyone paid attention, for example, such countries as South Korea, they have special requirements for the automotive industry to use urea, and they were forced to raise rates in the second half of this year in order to purchase small batches of urea on the spot market. And this is one of the reasons why the rates grew up to $1000 per ton. Let's take 5-10 thousand tons batches, this is considered a small batch for the global market, and it was quite difficult to buy it.

Ammonium nitrate and UAN prices are rising along with the urea prices, which is their benchmark. In November, prices for these products in the Baltic exceeded the $600-700 FOB range, hitting new 2008 highs.

NPK prices also continue to rise, helped by higher prices for all base products - urea, DAP, and potassium chloride. In November, NPK 16-16-16 prices in some markets reached $600 per ton FOB Baltic, the highest level for this grade since 2008.

Further, premium markets, record quotes, seasonality, and pent-up demand

Prices for phosphorus-containing fertilizers and nitrogen fertilizers began to grow from the fourth quarter of 2020, exactly a year ago, and continued to grow during the first quarter. Since December 2020, urea quotes in the world market have been continuously growing, and since the beginning of 2021, urea prices in key markets have increased in the range of $70 to $100 per ton during the month. This is a very large growth.

The average global indicative import urea price in 2020 was $265 per ton. This is very average, because here we can argue for a long time, different delivery bases, different regions, and so on.

The first trading week of January 2021, the year of the white metal bull, has started with a real “bullish” trend in the urea market: average indicative prices (depending on the region) started from $250 per ton FOB and during the next to last trading week of December 2021, I’ve looked up details for the last week for us, complete their rally with over $900 per ton. What a growth!

The largest mineral fertilizers importer in the world, India, has purchased urea in the long-awaited first tender of 2021. India, it has a population of 1.3 billion people there, and here they are, as most of you probably know, they announce tenders for large quantities of fertilizers. The Indian market is a kind of indicator for the global fertilizer market. The balance of demand and consumption, it is considered a premium market, a large market, sets the pace for the urea, diammonium phosphate market. The second half of March, fertilizer suppliers have been waiting for this long-awaited tender since the beginning of 2021. In January there was nothing, in February nothing, and only in the second half of March, India announced its first tender.

India was buying somewhere around $350 per ton at an average indicative price. The volume was declared at 1.3 million tons, and the main supplier then was China. They traditionally did this last years, after sales to India from Iran, which is under sanctions, were banned. Earlier Iran supplied large volumes of urea there. By the way, Iran has a huge potential, they can produce almost 10 million tons, they export 7 million tons to the international markets. China met the demanded volumes for India from the east coast, and there the Middle East countries and the ones closer geographically, from the west coast. But as China has now left the market, it is possible that the supply transformation will change a little.

As part of the urea import tender, held by the Indian RCF at the end of July 2021, offers from suppliers were in the range of $475-485 per ton.

On December 16, last week, India entered the market with a new import request. IPL has announced the urea import tender for the rabi season, traditionally from October to April. An important season for India. They mainly grow cereals and legumes. The country is expected to purchase 1-1.5 million tons. There are no exact data. Final shipping date is January 31, 2022.

Offers are accepted until December 23. As part of the previous tender, India was offered the lowest price for urea (there was a previous tender, they had just two tenders in a row, it was November, last month). The lowest price for urea at that time was $998.5 per ton. The total urea consumption in India, as I said, in 2020 came to 11 million tons.

In 2021, this figure will be significantly lower. This is my personal opinion, from my observations, since the country, observing it within the current year framework, it announces tenders and does not reach the declared quantities. Therefore, it may affect food security. That is, the main threats here were high fertilizers prices, supply disruptions, and high prices.

A slight stabilization at the urea market was noticed this year from the beginning of the second quarter, which did not last long (about 2 weeks). It was April. Then there was growth again. In the period from May to June, the average urea indicative prices increased from $370 - $385 per ton to $400-415 per ton (this is just the off-season), prices were growing. Urea quotes rose by $40-$50, which is also quite a lot per month, reaching the range of $440-$450. For the off-season, this is a large figure.

Another major region for the consumption of mineral fertilizers is Southeast Asia. In mid-November, a historical maximum of urea quotes was recorded. Malaysian Petronas sold a 6,000 tons batch at $1,000 FOB. And as I said, South Korea artificially raised the rates to attract the attention of suppliers in order to get the amount for their market.

So, what do we have in the short term?

In many regions of the world, planning begins for the next agricultural season. The increase in quotations and indicative prices for mineral fertilizers in Q3-Q4 2021 forced agricultural producers to postpone purchases in the hope of a decline. Even within our market, talking with agricultural producers, I realized that many people do not even know that roughly speaking, urea costs 30,000 hryvnias per ton. Some are now busy shipping agricultural products. Part of the market expects stabilization or price reduction. I mean consumers. As a result, pent-up demand is formed.

At the global market in 2021, fertilizer manufacturers did not work for the “storage”. Raw materials were expensive, and the previously listed factors did not contribute to this, which significantly reduced the volumes at the spot market. The production of mineral fertilizers is a technological process. The manufacturer cannot increase volumes above the given capacity. For example, the urea 46 unit, if we look at our Odessa Port Plant, I think one unit makes 1100 tons per day. As we multiply this by 60 working days, plus each enterprise has its own scheduled repairs, scheduled technical shutdowns. So, the manufacturers did not work for the “storage”, the production of mineral fertilizers is a technological process, the enterprise cannot increase the volumes above the given capacity. Moreover, shutdowns are scheduled for repairs (approximately 1 month a year). As a result of the drivers listed above: high cost and limited availability of raw materials and energy, higher freight and logistics costs, as well as pent-up demand from agricultural producers, in anticipation of lower prices, there are no factors that may bring the decline in fertilizer prices in the short term. 

Moreover, if there is a further increase in natural gas prices in the first quarter of 2022, companies will not manufacture it into the final product (fertilizers), and whoever has the opportunity, they will transport it to heat networks, as was the case in the USA in February, some European factories did this as well. Who has the opportunity. Perhaps we will hear about a number of production shutdowns.

It is likely that the market will experience a new peak in fertilizer prices as early as February 2022. The first signs of stabilization may appear with the end of the heating season by the second quarter of 2022.

These are my conclusions, my information I have collected for you. The situation on the global market is like this. So far, I see no signs of decrease, and if the winter is as cold and snowy as today, as we are promised, there may still be interruptions in supplies. And the most important thing won’t be the price, but the availability and delivery and shipment on time.

AGROTRADE CLUB does not speculate on future prices and individual market positions of private companies. Therefore, my opinion, my conclusions may differ. Thank you all for your attention!