In its 2015-2019 forecast, the International Fertiliser Association (IFA) included significant capacity additions for fertilisers in all nutrient sub-segments. Over the five-year time-frame, the IFA expects the total fertiliser supply to rise by 47 million tonnes on a nutrient basis. The increase is carried across nitrogen (+16%), phosphates and potash (+17%).
The extent to which planned capacity additions are realised depends on various factors, including construction delays and access to (project) financing. Especially in recent years, emerging supply and resultant product price projections have also proven to slow down/cancel new projects.
Even when possible delays and cancellations are taken into consideration, completion rates could still be close to projected levels, putting downward pressure on fertiliser prices.
Crude oil versus fertilisers
Since the summer of 2014, crude oil prices have declined significantly. The combination of greater supply (shale, OPEC, etc) and weaker demand from emerging markets pushed crude oil prices about 50% lower.
For 2016, the US Energy Information Administration (EIA) assumes that production will continue to exceed demand, sustaining an overall surplus. Inventories have been building throughout 2015, but that will level off if production growth subsides as expected. As far as prices are concerned, the EIA forecasts WTI crude in 2016 will average US$51.31/barrel versus US$49.88/barrel in 2015.
Low oil prices and (subsequent) low natural gas prices have pushed down the production cost of fertilisers, as well as their delivered cost through lower raw material and shipping costs. While supply and demand remain the most important price drivers for fertilisers, especially nitrogen varieties, they do generally correlate (modestly) with energy prices.
As 2016 energy prices are expected to be fairly stable from current levels, their impact on fertiliser markets should be considered neutral.
General demand projections
On numerous occasions, WPI has reported on more than comfortable balance sheets for corn, soybean and wheat. Unless serious weather problems arise in key production areas in the Southern Hemisphere and next spring in the Northern Hemisphere, this situation will likely continue well into 2016.
With urea and corn prices correlating quite strongly (Figure 2), the global grain outlook offers few, if any, reasons to believe fertiliser prices will stage a grain-driven rally.
Emerging currencies
The US Dollar is holding close to multi-year highs after investors increased bets on a US rate rise in December 2015. If that actually occurs, renewed strengthening of the US Dollar against most currencies seems intuitive, including the Indian Rupee and the Brazilian Real.
Indirectly, a stronger US Dollar is generally considered a bearish macro factor, and that also applies to fertiliser markets. Nevertheless, the results may be mixed.
In Brazil, a weak Real has helped boost farm profitability and consequently aided corn and soybean plantings that otherwise would have suffered from low international prices. Higher acreage helped fertiliser demand, but a weak Real has also made imports more expensive. This scenario certainly applies to the import of phosphates into India, which have been made very expensive by a weakened Rupee.
The weakening of the Brazilian Real and the Indian Rupee has tapered off in recent months or even reversed (Figure 3), but may resume well into 2016 with a Fed rate rise in focus, and that will have an overall bearish impact on fertilisers.
Joost Hazelhoff
AG Review December 2015,
This is an edited version of the article.
