Spend Matters welcomes this guest post from Monika Sosnowska of Mintec.
After more than two years of difficult economic conditions, low demand and sinking prices, fertilizer producers could finally enjoy charging more for their products. The price trend of the majority of fertilizers rebounded this year, supported by favorable weather, recovering global demand and strong crop prices in the first half of the year. However, could the recently falling crop prices and fertilizer production capacity expansions put an end to this positive outlook?
Global fertilizer demand is certainly on the rise, driven by the population growth and the resulting increase in food demand. The largest demand growth rates have been seen in developing regions of Latin America, Africa and Asia. The estimates for 2013/14 showed 3.1% year-over-year growth and the forecast for 2014/15 shows another rise, albeit a more modest 2.1% y-o-y.
In order to satisfy this growing demand, many new production facilities have been started in recent years and are expected to increase production capacity across all three fertilizer types. The capacity is expected to increase in 2015 by 4.8% for nitrogen, 3.7% for phosphoric acid with the largest increase expected for potash up 8.2% y-o-y.
The market is expanding despite accumulated stocks being relatively high and an expected surplus of supply in 2015 for nitrogen (5% surplus), phosphoric acid (7%) and potash (21%). However, the situation for nitrogen fertilizers is more ambiguous as the supply from Ukraine, the third biggest global exporter, remains uncertain due to the political unrest between Russia and Ukraine.
In addition, there have been discussions regarding the reunion of two major potash cartels (Belarusian Belaruskali and Russian Uralkali). Although unsuccessful up to now, these talks evidence the insecurity in the market, with suppliers seeking cooperation with one other as a risk mitigation tactic.
Another factor that has affected prices is the favorable weather that has assisted the development of the major crops this season. This has caused crop prices to slide, with soybean, corn and wheat prices all falling over 20% since the beginning of the year. When crop prices were high, the use of fertilizers was encouraged, and now the prices have fallen, that factor is no longer prevalent.
On the flip side, El Nino can have a significant effect on crop performance like disrupting the monsoon season in India. This would cause a drop in demand of fertilisers from one of major global fertilizer importing regions. The most recent NOAA estimates show a 65% chance of El Nino developing in the autumn or winter of this year.
The price effects for the fertilizer market are mostly tentative, but the factors are adding price pressure in both directions. In my personal view, prices should not come back to low levels of last year, as demand shows clear signs of improvement. Equally, there is little chance of a sudden rise, with crop prices dropping sharply and more supply on the way to an already oversupplied market.