The global fertilizer industry is complex, driven by political and macroeconomic factors, export duties and trends in other commodities.

As one of the largest farm input costs and against a backdrop of weak dairy markets, prices are predicted to increase 7% this year. But what are the main factors driving the price increases?

Weaker euro

The largest single driver has been a weaker euro relative to the dollar. It has weakened by 15% against the dollar over the past 12 months (Figure 4). As most fertilizer is traded in dollars (particularly urea and di-ammonium phosphate (DAP)), a weaker euro has a major impact on price here. For example, the devaluation has added €75/t to DAP and €55/t to Urea (Figure 5 and Figure 6). This means the devaluation alone adds €25/t to 18-6-12 and about €40/t to 10-10-20. This is before taking into account any commodity price rises. And if the euro continues to weaken, it will add further to the price pressure.

Reduced supply

Since all fertilizer used in Ireland is imported, Irish fertilizer companies have little to no control over the cost of the fertilizer.

During the 1990s, plants were closed across Europe because of over-production. The number of manufacturing plants dropped from 282 15 years ago to 198 units today, which equates to up to 30% loss in production. IFI was the final producer in Ireland when it fell foul of this oversupply.

However, the reduction in production capacity exceeded the fall-off in demand. Coupled with increased demand from new markets such as Latin America, this has resulted in the market going from a situation of oversupply to tightness in the supply-demand balance. For example, the total fertilizer market in Brazil has increased from 22m tonnes five years ago to almost 32m tonnes today. As these new markets open up, they also provide better prices than those available in Europe. Simply put, fertilizer producers can now sell more than they can produce.

Geo-political

With 25% of our potash now coming from Russia, the collapse of the rouble should have made its fertilizer more competitive. But the political difficulties between Russia and Ukraine have added further to supply problems. At one stage Ukrainian producers were not allowed by their government to use gas to make fertilizer as it was needed for other uses. This was coupled with a new gas contract with Russia which was at a significantly higher price than before.

CAN

CAN, which is the main form of nitrogen used in Ireland, is produced in western Europe. It is much more sensitive to supply/demand tightness than urea because only 14m tonnes are produced in the world, compared with 162m tonnes of urea.

Because of new regulations introduced in Brazil, which restrict the use of ammonium nitrate, a new market has been created for CAN outside of Europe. This saw Yara shipping upwards of 200,000t of CAN to Latin America last year, leaving a large gap in an already tight market.

European nitrogen prices have increased on a monthly basis since last September. CAN supplies are tight due to production problems in early 2014, when many plants in Europe were shut down. This resulted in little stock carryover, and the effect is still being felt.

Urea

Most (95%) Urea brought into Ireland and western Europe has been supplied by Egypt. In Egypt, due to economic issues, investment in gas infrastructure has been minimal and hence gas supplies have been cut by 50%. This resulted in some producers not producing urea while the government there is also insisting that Egyptian producers supply the domestic market first. This has led to Irish importers going as far afield as Indonesia to source supplies.

Phosphorus

Phosphate prices are being driven higher by a combination of high ammonia prices and tight supplies. While the ammonia price ($) has fallen in recent times, it is still more expensive than this time last year when converted to euro.

As few as three suppliers dominate the European DAP market – Morocco, Russia and Tunisia. All three producers have been limiting production recently and, coupled with a lack of confidence from European buyers as they watched a weak grain market, this has led to a supply shortage across Europe right now.

Potash

Potash prices collapsed in August 2013 as a result of the breakup of the Russian/Belarus marketing agreement. However, as the key potash players tried to recoup some of their losses, prices have been increasing since. Today’s price is over 10% higher than this time last year, but still lower than 2012.

A total of 58m tonnes of potash is sold around the world, with 20m tonnes supplied by Russia and Belarus. The flooding of the Uralkali potash mine in Russia last December takes about 2.5m tonnes of annual production out of the market. Strengthening grain prices in recent months has also boosted producer confidence.

Will falling oil drive down fertilizer?

It is well known that energy in the form of oil and gas is the main cost involved in producing nitrogen fertilizer.

Over the last 20 years there has been a strong (72%) correlation between oil and urea prices. It was strongest between 2005 and 2012, meaning fertilizer more or less tracked oil prices (Figure 1). However, in the past two years, the relationship has been broken, with the correlation now as low as 27% as the industry moved towards a market-orientated approach rather than pricing based on the cost of the feedstock. Supply and demand drove this shift. Prices of urea have fallen since 2011 driven by capacity expansion and export growth in China, where urea exports have increased threefold. However, Chinese urea uses coal as feed-stock while Europe uses gas. It is likely that Chinese exports have weakened the price and that any further reductions because of falls in oil may have already taken effect.

Closer to home, Europe has moved away from traditional oil-linked natural gas contracts to more hub/ spot gas exposure contracts. It remains to be seen when high-cost producers benefit from lower gas prices which are linked to oil but with a six- to nine-month time lag. This would mean any expected reduction in on farm N prices is unlikely to be seen before May.

COMMENT

Based on current Irish imported prices, CAN looks like it will be up about 6% on this time last year. However, a lot of buying needs to be completed and, with European producers increasing prices by €9/t this week, it would appear that N prices are firm up to the end of April as high demand kicks in across Europe for the peak fertilizer season. While 8% up on last year, international urea prices are firming on a weekly basis and the near-term outlook looks firm. What happens from May, especially if low oil prices persist and if gas falls to meet oil (gas has only fallen 25%), may tell a different story. With firm P and K outlooks, 18-6-12 and 10-10-20 prices are up about 9% compared to last year.