Nitrogen
The Indian tender was announced this week but was insufficient to overcome all the other bearish factors pushing urea down. Urea supply is outweighing demand and prices reflect this downward pressure.
The Indian tender details surprised the market by capping the volume at 500,000t. The previous tender had specified 1.5 million tons and ended up with almost 1.7 million tons being booked. 500,000t is way less than the market hoped and could in theory be supplied by (cheap) Russian product alone. This leaves the Middle Eastern producers under pressure to win some volume as they have been turning away low offers and chosen to build inventory in anticipation of the Indian tender. There may also be an element of shrewd positioning by the Indian buyers as their lower volumes may well lead to the urea price falling further and sellers feeling pressured to take lower prices to keep sales moving. The Indians could purchase follow-up volumes at lower prices should they require additional volumes.
The Middle East urea producers are now long on stock and lots of volume for August still uncommitted. The Brazilian price remains quite low and is thus not hugely appealing for Middle Eastern sellers unless they want to consider another $20-30/t off current prices. Southern African urea purchasing this year has been slow for a variety of reasons – high urea prices being chief among them. South Africa purchased around 190,000 tons for January-May 2022 compared to 230,000 tons in the same period in 2021. Even cargoes booked for June/July are being delayed where possible by the local buyers/importers. So urea imports for the upcoming summer rainfall season are well behind normal levels. And as mentioned last week, the port delays in Durban remain substantial, so another 30 days can be added to the lead-time for inbound cargoes. The local market is therefore hugely at risk of urea shortages for early season application. It would seem to make sense for buyers to try and secure urea from Middle Eastern producers who are currently long and are likely open to negotiating a discounted price for prompt shipment.
Ammonium sulphate and ammonium nitrate prices were flat this week. With urea continuing to fall week on week, this makes imported CAN (assuming sourced from Europe) more than double the cost of urea on a unit of Nitrogen basis delivered to Durban port (R49.91/kg N for CAN compared to the R24.43/kg N for urea). Historically CAN imports to South Africa from Europe have been possible at a discount to the European market price, so the delta between CAN and urea is probably not quite as wide as suggested above. But the delta leaves a lot of space for the local CAN producers to try and achieve a hefty premium over urea. European gas prices remain at all-time highs thus European CAN prices are unlikely to see much downward movement in the short term.
Ammonia markets were very quiet this week but the sentiment is pointing to ammonia prices rising in the short-term when European buyers look for volumes to substitute their lost production while their ammonia plants remain idled due to high gas prices. Ammonia imports via Richards Bay were 63,000 tons for January-May this year versus 56,500 tons for the same timeframe a year ago.
Phosphates
Phosphate markets were buoyed by substantial Indian purchasing of DAP, following the phos acid price agreement last week. MAP markets remain quiet and the international price is unchanged this week.
The biggest MAP importing market, Brazil, continues to see a lot of buyer resistance to current prices. The high number of cargoes imported in the first half of the year means that port inventories remain high and local Brazilian buyers aren’t under pressure to collect yet. To put numbers to the trade slowdown into Brazil, around 300,000 tons of phosphate imports have been booked so far for July and August this year compared to 1.5 million tons of phosphates in the same period last year.
There is some moderate demand appearing from the US currently but this is mostly ‘refill’, i.e. phosphates being imported ahead of winter and distributed throughout the US interior ahead of next spring. The refill programme is taking place now because the US has transitioned from being mostly self-sufficient in phosphate production to now being heavily dependent on imports. Imported fertilizer relies on the Mississippi river system for inland transfer and distribution and the river system closes in winter as its upper reaches freeze. There is thus a longer lead-time for phosphates to be sourced and flow through the supply chain to reach the interior warehouses ahead of winter.
In terms of the local cost of a unit of phosphate (from MAP), we see that the cost has risen steadily over the past month, even though the international MAP price has been stable to declining. The reason for this is the softening in the value of Nitrogen, which must be deducted from the total cost of MAP to calculate the cost of the remaining phosphate. The weakening rand has also caused supported Rand prices.
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Potash
Potash prices shows signs of falling in Brazil as ongoing lack of demand is pressuring sellers to accept lower prices..
Potash prices are seeing small reductions in most markets around the world, all for the same reason – demand destruction due to high prices. Sellers remain optimistic that Q3 buying from the Southern Hemisphere markets should kick in soon and provide some support for prices, or at worst, cause prices to stabilise. With the outlook for crop prices not very optimistic and potash still close to all-time highs, it is difficult to see potash demand really stepping up much in the short term.
Locally potash sales remain very quiet as a mixture of high prices and the late harvest (and later cashflow) is delaying purchase orders from farmers. The weakening rand is also a serious concern as the cost of all new stock will be inflating even though the dollar price may be stable. The 5% devaluation of the rand in the past 2 weeks equates to an increase in the cost of potash of almost R500/t, despite the dollar cost being unchanged.
General Market Outlook
Crude oil falls through the $100/bbl threshold as recession fears hit the energy and commodity markets. Grain markets are bearish and further US interest rate increases by the Fed could cause price to decline further.
Brent crude oil dropped $4/bbl to break back through the $100/bbl level this week. It dropped as low as $99/bbl on Thursday and is trading at just over $100/bbl today. Oil climbed above $100/bbl on 28 February this year on the back of the Russian invasion of Ukraine on 24 February. The US Henry Hub gas price has now followed the oil trend and risen this week to trade at $6.5/MMBtu currently. The European TTF gas price dropped to $48/MMBtu on Monday but that proved to be brief and has been above $50/MMBtu ever since. The US Fed meets in 10 days' time and is expected to hike interest rates yet again, perhaps by as much as 100 basis points (1%), which is likely to push commodity markets down even further.
Maize prices remain under pressure on the CME as this week’s USDA report gave bearish news. The weaker rand gave local maize prices on Safex some relief, with maize prices gaining around 1.3% on the week, whereas the rand lost 2.6% to the dollar. Soya and sunflower followed a similar trend, losing money on the CME but remaining flat/stable on Safex.
It is a worrying trend when the full weakening of the rand is being felt in fertilizer prices (and on all inputs that have underlying dollar pricing – fuel and chemicals too) which are going up in rand terms but crop prices are not reflecting the equivalent higher prices that should be coming through from the devalued rand. This is hurting farm revenues.
Latest Direct Hedge quotes for urea and MAP swaps in USD:
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