Urea prices face “substantial upside risk” thanks to production cuts prompted by energy market squeezes – although the outlook for costs of potash and phosphate fertilizers, and of agrichemicals, is more reassuring.
Rabobank warned that price of urea, the key nitrogen fertilizer, looked poised to build on the 11% recorded for the month to mid-August, thanks to capacity closures in China, a major exporter, as well as the high-profile shutdowns in Europe.
In China, “a downturn in electricity produced via hydropower due to water shortages is resulting in power restrictions for urea plants”, the bank said.
Last week, state-owned Sinofert Holdings said that power rationing in southern China would have “some impact” on its production of both nitrogen and phosphate fertilizers.
Coupled with government-imposed export controls – which have prompted a tumble of more than one-quarter in Chinese urea prices from June’s record high, Zhengzhou futures show – the output squeeze is “hampering chances of increased export flows from China”.
In Europe, the bank noted report that “operations in over one-third and possibly even over half of European ammonia plants has been curtailed” – ammonia being the base nitrogen product from which urea is manufactured.
A series of manufacturers – including Norway-based Yara International, Germany’s SKW Piesteritz, Achema in Lithuania, Anwil and Azoty in Poland, and CF Industries in the UK – have announced production cuts, blaming soaring costs of natural gas.
Nitrogen production is a hugely energy-intensive process, requiring high heat and pressure to capture the element from the atmosphere, with Western manufacturers typically using gas their energy source.
European gas prices have actually fallen markedly since hitting record highs last week, as politicians have threatened measures to cap values, and with worries over China’s economy, after weak manufacturing data on Thursday also blamed for undermining sentiment in a range of markets.
Benchmark Dutch values, which touched E343.08 per megawatt hour on Friday, stood on Thursday at E241.50 per megawatt hour, with UK values at £3.45 per therm, down more than 40% over the same timescale.
However, Rabobank noted that “northern hemisphere heating needs are also on the radar” as winter approaches, meaning that “the cost of gas, and therefore ammonia production, will likely lift”.
However, the bank was more downbeat on prospects for potash values, saying that with Russia still exporting the nutrient, and “rumours of sizeable stocks in North and South America”, it foresaw a “downward trend in potash prices moving into the end of the year”.
With the UN supporting the need for Russian nutrient shipments to support world food production, the country’s “exports of fertilizer, including potash, are expected to be down only marginally year on year”.
Meanwhile, prices of phosphates, the third of the big-three nutrients, “are similarly expected to trend down moving into the end of 2022 due to larger than expected supplies in North and South America”.
Rabobank saw potential for an easing too in values of agrichemicals, citing output capacity expansion.
“As a consequence, domestic Chinese prices have already declined, and we expect that to flow into local markets.”
Chinese export prices of weedkiller glyphosate have fallen nearly to $8,000 per tonne, from more than $12,000 per tonne at the start of the year, although “recent rationing of energy in China due to shortages is likely to slow the rate of decline”.