LONDON, U.K. (Reuters) – Soaring fertilizer prices are unlikely to reach 2008 highs because manufacturers are better prepared to respond to rising demand.
“I would think we are not going to get anywhere near those sort of figures. I think that was a one-off,” said trader Calum Findlay of Gleadell Agriculture.
Fertilizer producers were caught on the hop as demand surged in 2008, he added.
“We’ve got manufacturing capacity that has come on stream since then and there is more coming on stream.”
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Prices for ammonium nitrate fertilizer have risen to about $300 per tonne, f.o.b. Black Sea, from $181 in June 2010 but remain well shy of a peak of $500 set in August 2008.
Analysts said capacity has been added in response to the 2006-08 price boom. The lead time on new fertilizer projects is three to five years.
For example, urea supply is expected to rise to 164.2 million tonnes in 2011, up 18 percent from 139.1 million in 2007, according to the International Fertilizer Industry Association.
“Although fertilizer prices are expected to remain elevated compared to historical values, they are unlikely to revisit the peaks set two years ago,” CRU analyst Andrew Prince said.
Severe drought in Russia and growing demand from biofuel producers, particularly in the United States, have led U.S. corn prices to more than double since June 2010.
They peaked at $7.35 a bushel earlier this month, the highest price paid for the front month since the summer of 2008, when it reached a record high of $7.65 a bu.
“Grain prices took off in June and the global nitrogen market followed,” said Ken Bowler, marketing manager with leading British fertilizer manufacturer GrowHow.
High prices encourage farmers to use fertilizer to boost yields.
They also increase the area on which crops are grown. U.S. corn plantings this spring are expected to cover the second-largest area since the Second World War
Even so, analysts and fertilizer manufacturers see room for only limited fertilizer price gains this year.
“The waning seasonal demand towards the middle of 2011 should bring some relief to the market tightness,” Prince said.
Fertilizer trading is most active during the northern hemisphere winter, and demand typically declines in summer.
“The prices we see in 2011 are relatively flat during the first half of the year, then start to rise again as we get to the end of 2011,” Bowler said.
“Whether we see any significant rises is very debatable as we are at a high level at the moment.”
Fertilizer prices have received support in the past month from turmoil in North Africa and the Middle East, a key producing region due to low energy costs.
The production of fertilizers such as ammonium nitrate requires huge amounts of energy, and natural gas represents more than 70 percent of production costs, Bowler said.
“Urea supplies from Egypt were suspended in the first week of February following the political unrest. Only a few sales of urea to traders were realized at prices that were the highest level since the peak of 2008,” Prince said.
“By the end of February, supplies of urea from Egypt were back to pre-crisis levels, and prices also retreated.”
Yara said Libyan government and rebel forces had engaged in fighting around its fertilizer factory in Brega, though without causing much physical damage.
“Unrest in Libya hasn’t supported urea prices yet, because Libya is a small exporter with exports of around 500,000 tonnes a year of urea,” Prince said.
However, the importance of the Middle East and North Africa is set to increase over time because of their comparative advantage in energy costs.
“All new urea manufacturing is built on top of cheap gas,” Findlay said, pointing to Qatar, Saudi Arabia, Iran and Egypt as key areas of expansion.
European manufacturers also face the challenge of stricter environmental standards.
Bowler said GrowHow is investing $24 million at its Billingham plant in northeastern England on technology to control emissions of nitrous oxides.
“I think at the moment we are in a position to be able to afford the investments (in new emissions technology),” Bowler said.
“Fortunately, we’ve seen the improvement in commodity prices. Without that money, we would never be able to meet those standards and, quite frankly, European plants would close.”
