Analysis and forecast of the fertilizer market trends

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Urea – The situation is severe; improvement is unlikely in the short term. First, there are numerous difficulties in exporting, and the market shows no signs of improvement. The demand for international fertilizers is shrinking steadily, and a sharp decline in international trade volumes has intensified competition among countries. Trade protectionism is on the rise, and in this wave of protectionism, China will undoubtedly be the biggest victim. Due solely to the decline in the US dollar exchange rate, China’s fertilizer exports are facing significant difficulties. Given the concerning outlook for the RMB against the US dollar, if the RMB appreciates by 2%, companies’ profit margins will be completely eroded; even if the factory export price is reduced to below 1,500 yuan per ton, it will barely be sufficient to cover costs. Due to the significant decrease in domestic demand for urea during this year’s spring plowing season, companies have turned their attention to exports. As early as March, some companies began shipping goods to ports in preparation for export in July. To date, almost all ports in the country that can be used for exporting urea, large and small alike, are already filled with fertilizer stocks. When exports resume in July, these goods will flood the international market, inevitably exerting pressure on international prices. The inventory levels of urea at Chinese ports are well known to our main buyer, India. In a buyer’s market, India holds a very strong position; further price cuts are likely to be reflected in its next round of tenders. What’s more serious is that some countries in the Middle East and North Africa, which possess advantages in terms of energy and resources, **are still building large-scale fertilizer production facilities. As these new facilities come online, they will not only pose a threat to our country’s traditional export markets but may also re-enter the Chinese market by taking advantage of their lower prices. China’s urea exports are facing pressures from all sides, and the situation is extremely severe. II. Inventory pressure is increasing steadily, and it is expected that operators will suffer severe hidden losses. Taking the statistics from the China Fertilizer Industry Association in March as an example, by the end of March, the inventory of fertilizer manufacturers had reached 2.3 million tons, a 110% increase compared to the previous year. At present, in China, the production of fertilizers made from coal accounts for about 77% of the total national fertilizer production, with the vast majority of these being produced using anthracite coal as raw material. According to monitoring by the China Nitrogen Fertilizer Industry Association, the price of anthracite coal delivered to key fertilizer manufacturers in March this year was 192 yuan per ton higher than it was in October 2009, while the price of fuel coal rose by about 50 yuan per ton. The increase in coal prices alone raised the cost of producing one ton of fertilizer by 210 yuan. Following the electricity price adjustment in November 2009, the cost of electricity for fertilizer production increased by an average of 4.7 cents per kilowatt hour; together with water costs, labor expenses, and transportation costs, the production cost per ton of fertilizer rose by about 80 yuan. The current cost per ton of chemical fertilizers is 290 yuan higher than it was in October last year. However, the ex-factory price of these fertilizers is 1,600 yuan per ton, which is lower than that figure from last October; as a result, the ex-factory price falls below the production costs. The vast majority of the 198 coal-based fertilizer production enterprises across the country are operating at a loss. Low fertilizer prices are beneficial for agricultural production as they reduce the costs for farmers growing crops. However, when the factory prices of fertilizers remain below their production costs for too long, it leads to chronic losses for fertilizer manufacturers, which hinders the healthy development of such companies as well as the sound progress of agricultural production. The decline in fertilizer prices further exacerbates the situation for companies that maintain reserves during the off-season. For example, if fertilizer is stored during the off-season at an average cost of 1,700 yuan per ton, it can now only be sold for 1,600 yuan per ton. Adding in all related storage costs, the loss per ton is estimated to be between 150 and 200 yuan; the greater the amount of fertilizer stored, the higher the losses. III. Weak demand may lead to another price war. Has the bottom concept been formed? Having gone through the hardships of the 2008–2009 market, fertilizer sellers are now in a very fragile mental state; any minor change can lead to sudden price fluctuations. Urea products are highly homogeneous, and aside from brand advantages in certain regions, the only way to compete in sales is through price wars – selling at or below production costs, which is inevitable in today’s environment. In summary, the market situation for urea is very severe, and there are unlikely to be any significant changes in the short term. Phosphatic fertilizers – relatively stable. The price of sulfur*. In 2009, China’s production capacity for diammonium phosphate was 12.5 million tons, with actual production amounting to 9.9 million tons; meanwhile, the domestic demand was around 6.5 million tons. The production capacity is expected to reach around 17 million tons in 2010. The situation of supply exceeding demand will become even worse. Although domestic production capacity and output of phosphate fertilizers are already severely in excess of demand, the country’s macroeconomic policies have not been adjusted in a corresponding manner. In 2009, the export volume of diammonium phosphate was 2.07 million tons. Therefore, reliance on **regulatory policies cannot solve the problem of overcapacity. Moreover, the export policies for peak and off-peak periods also have a certain impact on market fluctuations to varying degrees. The future trend of phosphate fertilizer prices will be influenced by the international market and the prices of key raw materials. The international market rebounded rapidly after December last year, reaching over $500 by March this year. However, in early March, India suddenly signed a large contract worth 6 million tons with major diammonium phosphate producers such as the United States and Russia, driving the price down to around $460. Although international market prices have dropped slightly, a large number of diammonium phosphate plants have already signed export contracts with shipments scheduled to take place between June and August. It is expected that prices of phosphatic ammonium fertilizers will remain relatively stable in the near term. However, the operating capacity of compound fertilizer plants is insufficient, and the consumption of monoammonium phosphate as a raw material continues to decline. In the future, it will be necessary to pay close attention to sulfur prices; the transaction price of sulfur has already fallen from 1300 to 1100. If this trend continues, it will lead to a decrease in the costs of phosphatic ammonium fertilizers, leaving room for further price reductions. In summary, regarding phosphate fertilizers, our preliminary forecast is that prices will remain relatively stable in the near term. After August, exports will cease, and business performance will depend on domestic demand; at the same time, it is necessary to closely monitor the trends of sulfur, the main raw material, as a risk of price drops still exists. Potash fertilizers – fluctuating and consolidating during the off-season, with steady recovery during the peak season. The relationship between supply and demand in China, the prices and shipments of domestically produced potash fertilizers, as well as trends in the international market, are the main factors affecting the price trend of potash fertilizers. According to investigations, at the beginning of 2010, there was an oversupply of potash fertilizer stocks across the country. The total production of domestic potash fertilizer in 2010, combined with the total amount imported that year, was already higher than China’s total demand for potash fertilizer in 2010. However, due to existing delivery constraints related to domestic potash fertilizer that cannot be fully resolved, there may be shortages during periods when demand increases sharply. Therefore, the price trend of potash fertilizer cannot be analyzed solely based on overall supply and demand; during times when the market starts to activate rapidly, there is still a possibility of supply shortages and price fluctuations. The stability of the international potash market provides support for the stability of domestic potash in the future. In 2010, despite a sluggish domestic economy, international potassium fertilizer prices kept rising due to strong demand for it. After reaching an agreement with China at $350 per unit, a price of $370 was set with India, and subsequently the price was maintained above $400. During spring, international potash suppliers faced shortages in inventory and supply constraints. Due to the decline in China’s import demand, in the second half of the year, prices in the international market will rely mainly on the demand from India, Southeast Asia, and Brazil to sustain it. If demand remains stable, the impact on the market from potassium fertilizers imported through border trade, as well as those imported under short-term contracts such as those from Dezhou Potash, will be reduced, and domestic potassium fertilizer prices are unlikely to experience further significant drops. When the peak season for autumn compound fertilizer production arrives, there may be a new wave of purchasing activity. The uniqueness of potassium fertilizers lies in the fact that their main market is for industrial use as raw materials, and demand is closely related to the total production volume of compound fertilizers. Currently, the operating rate of compound fertilizers is low, and there are very few raw material reserves; they are purchased as needed, with the market adopting a cautious attitude. When the peak season for autumn compound fertilizer production arrives, demand may surge significantly. In the off-season market from May to August, if the shipment of domestically produced potash fertilizer can be increased, and the inventory of potash fertilizer moves to areas where it is used, price fluctuations in the future are likely to be slight upward trends. If the inventory remains concentrated in Qinghai, a rapid increase in prices could occur when a new wave of purchases arrives. Our analysis of potassium fertilizers suggests that prices will continue to fluctuate and consolidate during the off-season, while there is a chance for steady recovery and upward movement during the peak season.