New plants in North America coming online, may cause an oversupply
Nitrogen fertilizer prices are heading lower and will remain depressed for years to come, says a fertilizer analyst.
“Demand for imports is falling while availability of exports is rising,” said Neil Fleishman, director of research with Green Markets, a fertilizer analytical publication.
“It’s that import-export imbalance that we see as a driver to push prices lower.”
Global urea production is expected to rise to 285 million tonnes by 2019 from 224 million tonnes last year, a 61 million tonne increase in supply.
Meanwhile, demand is expected to climb by only 31 million tonnes in that period, or about half as much.
However, developments in North America will have the biggest influence on prices.
It is projected to become self-sufficient in urea as 10 new nitrogen fertilizer plants start churning out product.
Production capacity is expected to reach 17.8 million tonnes in 2019, up from 10.1 million tonnes last year.
“We think enough projects are going to come on line in North America to meet domestic needs for urea and UAN,” said Fleishman.
In fact, North America is expected to become a net exporter of urea, shipping a small amount of product overseas in 2019.
It would be a seismic shift from last year when 6.8 million tonnes, or 44 percent of the region’s annual urea requirements, were imported.
North America would still import 2.7 million tonnes of ammonia, well below the 4.9 million tonnes imported last year.
The region is expected to become self-reliant at the same time that global capacity is increasing in places like Egypt, Saudi Arabia, Brazil and India.
New plants will start contributing to North American supply by the end of this year.
“All of these projects have been in the works for a couple of years, but now we’re finally starting to get to the point where they’re actually going to come online,” said Fleishman.
“It’s nearing the tipping point, we believe.”
Fleishman expects oversupply to start weighing down nitrogen this year. Prices will remain depressed for at least the next five years.
It is good news for western Canadian farmers who use more nitrogen than any other fertilizer product.
Nitrogen fertilizer is the top variable expense for spring wheat crops in Saskatchewan’s dark brown soil zone and the second biggest cost for canola crops next to seed.
Wheat growers will spend an estimated $36.05 per acre applying nitrogen to their fields in the dark brown soil zone this year, while canola growers will pay an average of $37.66 per acre, according to Sask-atchewan Agriculture’s latest crop planning guide.
The U.S. Gulf coast price for granular urea was about US$290 per short ton free on board last week. Fleishman believes prices could eventually tumble below today’s floor, which is the Chinese cost of production of $245 per ton f.o.b.
Prices in a textbook scenario would never fall below the cost of production for the lowest cost producer.
However, the textbook doesn’t apply in this case because of the plethora of new plants being built around the world. The owners of those multibillion-dollar facilities have no interest in curtailing production right out of the gate.
“You are getting to a point now where there is just so much supply that I don’t think China will be able to shut off enough (production) to kind of stem that anymore,” said Fleishman.
New plants will compete with existing facilities to see which ones can operate near their capacity. Fleishman forecasts a global capacity utilization rate of 73.4 percent by 2019.
“I’m hesitant to actually use the term price war. I don’t like to go that far. I just like to use the term increased competition,” he said. “There is definitely some room for (price) downside based off our projections.”
Growers may want to hold off buying nitrogen fertilizer given the prospects for a falling market. However, retailers will likely be doing the same thing, so inventories could be low at the local crop input store, said Fleishman.