Future fertilizer supplies expected to send prices down

New facilities | Prices should decline for the long term

Fertilizer analysts say a rash of new production plants will drive down nitrogen prices for years to come, reducing the cost of the biggest input expense on Canadian farms.

“We’re just about at the tipping point of seeing this cycle begin to turn,” said David Asbridge, president of NPK Fertilizer Advisory.

“We’re definitely heading to a lower price situation.”

Rabobank recently released a report that said more than 65 new projects have been announced that will expand global urea capacity by 30 percent between now and 2020.

“The expansion is driven mainly by the exploitation of shale gas in the United States, new gas fields in Brazil, political incentives in India and low-cost natural gas in the Middle East and Africa,” Rabobank analyst Rakhi Sehrawat said in a news release.

“This rush on the supply side will have a strong influence on the urea demand-supply picture in the coming five to 10 years.”

Rabobank predicts the urea market will enter an era of oversupply starting in 2015 as key importers such as the United States, Brazil and India attempt to become more self-sufficient in production of the fertilizer.

Competition among exporters in the Middle East, Africa, China and the former Soviet Union will also intensify, resulting in price pressure and capacity rationalization in high-cost regions.

Green Markets, a U.S. publication that covers the fertilizer industry, published a list in December of 26 companies contemplating the construction of more than 40 nitrogen fertilizer projects in North America. The list has since expanded to more than 30 companies.

However, executive editor Steve Seay said there is serious doubt whether all of those projects will proceed.

“It seems like a lot of people have money for press releases. It’s a lot easier to put out a press release than it is to go out and find somebody that’s going to loan you $1.5 billion to build a plant,” he said.

“Maybe a handful of the projects will go forward.”

Even then, he believes there is a “distinct possibility” the industry will be overbuilt in the next four to seven years, which would drive down urea prices.

Neil Fleishman, senior industry analyst with Green Markets, has compiled a list of projects that are likely to come to fruition.

His work shows world urea capacity could reach 285.4 million tonnes by 2017, up 89 million tonnes from last year’s levels.

By contrast, demand is expected to increase 15 million tonnes over that same time frame.

“I do agree that an oversupply situation is going to happen in the global urea market,” said Fleishman.

Asbridge said urea is the most widely traded fertilizer product in the world and sets the tone for all nitrogen fertilizer prices. Urea is used by everybody from subsistence farmers in China to massive operations in Canada.

“That’s why urea is kind of the linchpin of the whole system, is because it is so predominant when it comes to world fertilizer usage,” he said.

Urea is by far the most popular fertilizer product in Canada. According to Agriculture Canada, it accounted for 33 percent of all fertilizer use in 2010, which is almost double phosphate use, the next most popular ingredient.

Asbridge said urea prices are already on their way down. The Gulf Coast price for the product is about $400 per tonne, down from $720 per tonne the same time last year. That’s a bit of an anomaly because U.S. growers got into their fields about one month earlier than expected last year, causing a supply shortage in the U.S. Midwest that drove up prices to artificially high levels.

Asbridge doesn’t think prices will fall to the levels seen in 2010 of about $230 per tonne, but they could easily drop by $50 to $75 per tonne.

“For the next three to five years, we’re going to see the supply growing faster than demand is going to grow, and that is what is going to put the pressure on prices,” he said.

If prices fall 20 percent, he expects plants to be idled in high-cost regions such as Ukraine. It will also bring an abrupt end to some of the proposed new projects, which should keep a floor on how low prices can drop.

Asbridge said producers shouldn’t expect lower prices this spring. In fact, there could be a seasonal up-ward blip in prices as seeding gets into full swing in the United States.

However, more nitrogen fertilizer is already hitting the market, and there is a good chance prices could trend lower in time for fall fieldwork.

“But it’s partially going to be offset by lower crop prices,” he added.

Asbridge said the building frenzy will lead to the first new production plants in North America since the 1960s.

In fact, most of the new project announcements are for the U.S. market, which has the lowest natural gas prices in the world, said Fleishman.

Natural gas is the primary feedstock for urea fertilizer production in most parts of the world, with the exception of China, which uses coal.

Natural gas prices have been stabilizing in the U.S., but they are still low and are expected to remain in that price range for the foreseeable future.

“The days of very expensive gas in the United States are over,” said Fleishman.

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