Fertilizer Outlook Brighter, But Price Picture Cloudy
Forecasting prices into 2010 is no easy task for the fertilizer industry, however there is some agreement that costs are unlikely to skyrocket.
Bryce Knorr
Published: Nov 2, 2009
After being whacked upside the head with an unprecedented period of volatility no one predicted, the fertilizer industry remains gun-shy - perhaps understandably - about forecasting prices headed into 2010. But industry experts appeared in agreement that costs are unlikely to skyrocket, despite rebounding demand around the world.
The good news for farmers is the prospect for production of nutrients to increase over the next five to 10 years, offering hopes of stability, at the least, if not competitive costs down the road.
Here’s a rundown of the fundamentals in the industry moving forward that was presented at the annual Fertilizer Outlook & Technology Conference this week.
Potash: Production is set to explode as new projects come on line, and the world has massive reserves. While that supply lies outside the United States, more companies are trying to enter the lucrative market, which could change the stranglehold currently enjoyed by the handful of cartels that control production.
Kevin Stone, analyst for the agency that oversees mineral resources in Canada, says his country alone has what amounts to a 1,000-year supply at current levels of consumption. “We have a lot of potash in the ground,” Stone proclaimed.
Despite the financial crisis that shattered the market over the past 18 months, not to mention huge costs and environmental hurdles, a group of projects are all moving forward that will increase Canadian production 35% by 2013, while word capacity grows by 20 million metric tons. In addition to expansions underway from the three existing kingpins of Canadian potash, a group of new players is entering the segment there. Other major projects are also on the drawing boards in areas outside some of the traditional regions that produce the mineral.
Demand is also expected to recover, returning to 2007 levels in the year ahead. “Potash demand will recover quicker than other fertilizers,” according to Stone.
Still, it’s uncertain how U.S. producers will react. Some may cutback on purchases again in 2010, after achieving better than average yields in 2009.
Phosphorus: Big projects are also reaching fruition for production of phosphates, including developments in China, Saudi Arabia and Morocco. Demand should recover two thirds of its 10% decline, says John Malinowski, Vice President of J. R. Simplot, a major ag supplier.
Corn Belt farmers were already mining phosphorus in their soils even before the crunch of the past year accelerated the trend. Now, manufacturers have also worked down their excess inventories. ”The system is destocked,” Malinowski said.
Still, buyers aren’t likely to bid up prices scrambling for supplies like they did in the run to the record price levels of 2008. Use in the U.S. has been flat long-term. Brazil, which uses lots of the product due to its soils, is buying again but could face problems with financing input purchases due to fluctuations in currency values.
Sulfur: This key ingredient for many fertilizers is also seeing a big increase in supplies. Once mined, sulfur is now produced as a byproduct of energy refining as it’s removed to make cleaner burning fuels. “Surpluses should prevail the next couple of years,” says Robert Boyd, a consultant to the industry. Supplies also should grow in the U.S. as oil sands are delivered by pipeline to the U.S. for processing to lessen reliance on petroleum from the Middle East.
Natural gas: The major feedstock for nitrogen based fertilizers also should be plentiful, though it appears unlikely major new ammonia capacity will come on line in the U.S. Volatile prices earlier this decade forced producers to shutter ammonia plants here, switching to cheaper imports out of the Middle East and Black Sea. However, the cost of imported supplies is on the rise, and gas is expected to again be more expensive overseas than in the U.S. One big factor: Contracts in areas that ship out of the Black Sea are pegged to the price of crude oil, which is expected to rise much faster than gas, according to Ed Kelly, an industry consultant.
Gas prices in the U.S. appear to be stabilizing, with inventories swollen as a result of industrial cutbacks caused by the financial crisis. Gas traded briefly for less than $3 this year, making it cheaper for electrical generation than coal.
Gas prices are more expensive now, but remain cheap compared to other fossil fuels. Kelly, for examples, expects U.S. gas to average $4.85 next year. At that price, anhydrous ammonia at the farmgate should cost around $385 a ton, according to Farm Futures’ pricing model.
A key unknown in the natural gas outlook is whether demand could increase rapidly - hiking prices - as a result of climate change legislation that advances used of cleaner fuels. If that happens and imports increase, the $8 overseas gas price could mean ammonia that costs the farmer $550 or more a ton, according to the Farm Futures model.
Nitrogen: Lower prices and expanding corn acreage in 2010 should mean increased demand for nitrogen, which some projections show to have the tightest fundamentals of any nutrient next year. After that, more production should come on line around the world.
“Over the last 20 years we’ve never seen three years of decreasing demand,” says Jason Newton, an analyst with Agrium.
That increase could create problems, especially with fall applications uncertain. Pipeline supplies are low because many dealers decided not to take the risk of prebooking inventory after last year’s debacle. “Suppliers decided it would be better to pay the market price, rather than be long and wrong,” Newton said, indicating swings in demand could develop due to the market’s “herd mentality.”
Producers looking to cut costs might consider UAN, which has been priced under urea, if they can make the substitution, Newton said.
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