Urea prices should cool this winter

The recent run-up in nitrogen fertilizer prices is going to be short-lived, according to industry executives.

Prices have been rising in North America since late summer, despite a global oversupply of the ingredient.

Mark Fracchia, president of PCS Potash, said dealer inventories are down in the United States because they were anticipating new capacity coming online and driving down prices.

“However, we’ve seen some of that new capacity hasn’t come on as planned. It has struggled a little bit,” he told analysts listening to the company’s third quarter results webcast.

As well, a surge of fertilizer exports from Louisiana have contributed to the temporary squeeze in supply.

“Across that whole nitrogen complex we have seen prices here react, and part of that has been due to the reluctance of people to engage the market for the last six to eight weeks, and now the market prices are reflecting that,” said Fracchia.

However, PotashCorp president Jochen Tilk said the price rally won’t last long.

“Prices improved late in the third quarter from multiyear lows, but we expect the ramp-up of new capacity will limit upside in the fourth quarter, keeping gross margin well below the prior year,” he said.

Svein Tore Holsether, president of Yara International, expressed a similar view of the market during his company’s third quarter webcast.

According to CRU, a business intelligence research company, 7.2 million tonnes of urea capacity was scheduled to come online this year, which is much more than that the average annual growth in consumption of three million tonnes.

However, the supply increase was likely significantly smaller than that because of the closure of the largest plant in Algeria and delays in the construction of new capacity.

“This means that there’s potential for significant supply increase in 2018, and therefore we do not see or expect a fundamental improvement in the global supply-demand balance outside China until after 2018,” said Holsether.

CRU is forecasting 3.8 million tonnes of additional urea capacity next year, but Holsether said it will be higher than that because of the spillover from 2017.

It isn’t until 2019 that additional capacity of 2.1 million tonnes drops below the annual growth in consumption.

China is of course the wild card in the urea market. It has significantly decreased production and exports of the product this year, helping reduce the global oversupply of urea.

Stephen Dowdle, president of PCS sales, estimates that China’s plants are operating at 50 to 60 percent of capacity.

Urea exports are down about 50 percent at 3.6 million tonnes so far this year compared to 7.2 million tonnes in 2016.

“So there is obviously something going on,” he said.

The Chinese government is cracking down on old, inefficient, polluting fertilizer plants. Higher production costs are also curtailing output and exports.

However, China is unpredictable and that could lead to further price volatility for the remainder of 2017 and 2018, said various executives.

Holsether said another market factor to consider is India, which in September started importing more than it did the same time last year.

Tilk said while the short-term outlook is for continued lacklustre urea prices, the long-term outlook is much different as all the additional supply is absorbed.

“Over a period of 24-plus months, we’ll certainly see more (price) upside, there’s no question,” he said.

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