Fertilizer Demand Falters
28 January 2009 Here’s the good news for fertilizer: Market fundamentals are strong, nitrogen futures are robust, and the industry expects demand to accelerate some time in 2009. So the long-term prospects for fertilizer makers and distributors look good, despite the global macroeconomic meltdown in the fourth quarter of 2008.
“Global drivers today are the same as they were 12 months ago,” says Patrick Heffer, executive secretary of the International Fertilizer Industry Association (IFA) Agriculture Committee and co-author of the organization’s annual report on supply, demand and agriculture. “I don’t believe we can remain at the low levels of fertilizer consumption (that we are currently experiencing) for the next 24 months.”
OK, so now the bad news: You probably already know the bad news. Right now, global macroeconomic conditions — primarily falling grain prices and constricting credit — have forced growers to lower their inputs for winter crops already in the ground and postpone the purchase of nutrients for spring plantings, especially in areas where soils contain appropriate levels of phosphate, potash and potassium, according to the IFA report.
With prices for both food and feed grains continuing to fall, farmers likely will continue to wait to purchase fertilizers until they have a clear picture on the price of their yields. That means a meaningful surge in fertilizer demand likely will not take place until well into 2009, fueling further uncertainty for the industry.
After reaching record highs earlier this year, commodity prices — from wheat to copper — have fallen back down to Earth. During the boom times earlier this year, growers were willing to purchase fertilizer at slightly inflated costs because they could recoup expenses in the market. With falling crop prices — and expectations that they will continue to fall — farmers appear unwilling to jeopardize their already unpredictable margins by purchasing inputs at high prices. Even though inputs are slightly lower than their highs earlier in the year, they have not fallen in line with crop prices, says Heffer, who is IFA’s expert on global markets and demand.
| World Supply/Demand Balances: 2007-2008-2009 | |||||
|---|---|---|---|---|---|
| Products | 2007 | 2008 | 2009 | ||
| Nitrogen (Mt N) | Supply | 126.9 | 134.2 | 139.4 | |
| Demand | 126.0 | 129.4 | 133.1 | ||
| Potential balance | +0.9 | +4.8 | +6.3 | ||
| Urea (Mt urea) | Supply | 145.1 | 150.4 | 159.2 | |
| Demand | 141.9 | 147.6 | 154.8 | ||
| Potential balance | +3.2 | +2.9 | +4.4 | ||
| Phosphoric acid (Mt P2O5) |
Supply | 36.9 | 39.4 | 40.6 | |
| Demand | 36.1 | 35.1 | 36.0 | ||
| Potential balance | +0.8 | +4.3 | +4.6 | ||
| Potash (Mt K2O) | Supply | 34.7 | 36.1 | 37.4 | |
| Demand | 32.2 | 30.3 | 31.0 | ||
| Potential balance | +2.4 | +5.8 | +6.4 | ||
|
IFA Production and International Trade Committee — November 2008 |
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Only two regions are expected to increase demand in 2009: South Asia (up 4%) and Eastern Europe/Central Asia (up 3.5%). West Asia and Central Europe are expected to see the largest declines in demand with more than an 8% drop.
Overall, global demand is expected to ebb 2.2%, according to IFA. However, demand in 2010 could rise as much as 3.5%.
Supply Side
Fertilizer supply might be more of a question mark than the demand side. The reason resides in China because of new export tariffs that went into effect in November. At presstime, it was too early to determine whether tariffs were affecting Chinese exports.
“The impact of the tax and the way the Chinese will implement it is impossible to predict,” says Michel Prud’homme, co-author of the IFA report.
Prud’homme, executive secretary of the IFA Production and International Trade Committee, is the IFA authority on supply. He says the Chinese export tariffs could result in more production as exporters try to generate more revenue to compensate for higher taxes. Or, the tariffs might make the export of raw materials cost prohibitive for some smaller companies, thereby keeping more supply at home and reducing supply in the global market. China was the largest exporter of urea in 2007, and it consumes one-third of the world’s fertilizer each year.
In either case, “The uncertainties result in an industry that is waiting to see what happens in the market,” Prud’homme says.
But some of the supply equation is clear: Shipping rates, especially ocean shipping rates, have lowered delivery costs and instigated trade across the globe. Also, the decline in light sweet crude and other petroleum-based products has reduced costs for nitrogen producers.
In general, global production of fertilizers and raw materials will likely register very marginal growth, and what little growth that materializes likely will be driven by speculation of better times in 2010 instead of actual demand in 2009. But as inventories diminish toward the end of 2009, demand is expected to rise.
“It’s clear that the main drivers to demand are the crop-to-fertilizer price ratio,” Heffer says. “We expect a rebound in the total demand possibly in 2010, but that will depend on the ratio going forward.”
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