It seems to have entered a normalization phase, according to Rabobankthe global fertilizer market, leaving behind at least two years of intense volatility and swings in prices, mainly… to their upper end, with a corresponding impact on consumption.
According to a recent report by the Dutch bank, 2023 is expected to close with a 3% increase in global fertilizer use, following the 7% decrease recorded in 2022, while a further recovery of 5% is forecast for 2024. A pivotal role, according to the bank, is expected to be played by the looming stabilization of prices at levels clearly more affordable for farmers, after the historic highs seen in the last two years.
In support of this, Rabobank refers to the “Fertilizer Affordability Index” which it has compiled and which captures the evolution of the prices of a “basket” of basic fertilizers in relation to those of a corresponding “basket” of basic agricultural products (mainly grains and oilseeds). Based on the course of this index -and- in the individual product categories, the bank comes to a forecast for a 2% increase in the use of nitrogen fertilizers in 2023, while for phosphates and potassium, an increase of 3.9% is also expected and of 5% respectively.
Overall, and compared to a year ago, conditions today look “clearly better for buying fertilizer,” the report notes, but that doesn’t mean the challenges and uncertainty have disappeared, nor that we’re back. to a normality, at least as we knew it before the outbreak of the war in Ukraine. Vitor Pistoia, the bank’s Agricultural Inputs analyst, considers that 2023 was a relatively calm and, at the same time, transitional year for the fertilizer market, as it carried with it some… leftovers from the complex, as he characterizes it, 2022.
One of them was the reluctance of farmers to move into new markets, which was reflected in the first half of 2023, despite the fact that prices had already started to decelerate. The reason is that in the same period the prices of most agricultural products also fell, correspondingly compressing the profit margins of farms.
In addition, despite the fact that the production costs of both ammonia and urea in Europe have been rationalized compared to a year ago, by historical standards they are still at high levels.
The good and the bad scenario for Gaza
“As winter approaches in Europe, there is greater uncertainty regarding the natural gas market and, by extension, the production costs of nitrogen fertilizers,” comments Bruno Fonseca, analyst at Rabobank. Notably here, natural gas prices in Europe have risen 30% since the start of the Middle East war, hitting a nearly nine-month high on Monday after news that Egypt’s imports were zero, fueling concerns that the country will not be able to resume deliveries of liquefied natural gas (LNG).
Despite the fact that Egypt covers only a small part of the EU’s needs, this nervousness demonstrates, according to Bloomberg, the vulnerability of the European market to geopolitical risks after last year’s energy crisis.
At this stage, however, and at least as long as the war in Gaza retains the characteristics of a local conflict, Rabobank estimates that the impact on the fertilizer market will be relatively small and rather controlled. As mentioned in the report, Israel has a share of 3% in phosphate fertilizer exports at the global level, while in potash fertilizers its corresponding percentage is 8%.
Possible roadblocks to Israeli exports could lead to price increases, while the reluctance, if not inability, of some shipping companies to approach the Mediterranean port of Ashdod, which is close to the “heart” of the conflict, could lead to delays and an increase in logistics costs.
However, apart from the fact that there is the alternative of some ports in the Red Sea, Rabobank estimates that there is currently “sufficient availability and several alternative sources for the supply of potash and phosphate fertilizers” in the market, with Russia, Belarus and Germany to be able to fill any gaps.
The scene will, of course, change dramatically if the conflict in Gaza escalates and involves, in one way or another, countries such as Syria, Yemen, Iraq and, of course, Iran. Mike Every, geopolitical analyst at Rabobank, expressed concern in a recent podcast that this could lead to a generalized regional conflict, which would have an immediate impact on energy prices, with oil potentially reaching $150 the barrel.
“If we reach this scenario, the economic consequences will be profound and felt around the world,” Every commented, likening the situation to what followed the Yom Kippur War in the 1970s, when Arab economies decided to limit oil flows to the US.
According to Sam Taylor, senior agricultural inputs analyst at Rabobank, “nitrogen fertilizer prices are intrinsically linked to the hydrocarbon complex. So if we start to see wider unrest in the Middle East and the hydrocarbons market reacts because of that, the nervousness will likely carry over into nitrogen prices.”
Going a step further, Every considers the possibility that China and Russia will side with Iran, with the goal of complicating and, if possible, tying the US and Israel into a protracted war in the Middle East so that it can disengage Washington’s attention from Ukraine, but also from East Asia, a region that is of particular interest to China because of Taiwan. “This is not a prediction, but a disturbingly logical sequence of events, which could unfold more quickly than anyone imagines,” Every said, adding that the consequences for food, agricultural and energy markets would they were incalculable in such a case.
Reduced, but uncertainty remains
On a shorter-term horizon, possible Iranian involvement in the Gaza conflict would have a direct impact on the fertilizer market. “Something like that would “remove” a significant volume of products from the market and in the first year we would have some shortages in the wider Eurasian market. For example, Iran is a key supplier to Turkey,” says the head of a large fertilizer industry active in our country to “YX”.
As he explains, although the current conflict has not escaped from the Israel-Hamas dipole, the prospect of its expansion has already weighed on the climate in the world market, which is reflected both in the prices of some basic raw materials and in the commercial and tariff policy of some companies: “Some industries are holding back on their sales, either because they are waiting for the situation in the Middle East to clear up or because they estimate that prices will rise.
Also, we learn that in Egypt some factories will stop their production for a while due to the lack of natural gas”, he notes.
“Although we are not where we were at the start of the war in Ukraine, there is still a lot of uncertainty at the geopolitical level, which continues to fuel extreme volatility. For example, the price of ammonia, from 300 euros/ton in August, recently climbed to 700 euros/ton.
Obviously, one can cite some issues with logistics, the fact that some factories have shut down, as well as the supply-demand ratio which, understandably, plays its part. But if we look at the big picture, the more than doubling of the price in such a short period of time shows that normality has not yet returned to the system,” adds our interlocutor.
The same can be said, in his opinion, about the prices of almost all fertilizers. “There is a de-escalation compared to last year, but it is not what one would expect, after the extremes we saw in the previous period. Roughly and very schematically, an average for all fertilizer prices, today, is between 400 and 500 euros/ton – levels that are 100-150 euros above what we expected. In short, what we saw after the price rally of the previous interval was not a collapse that many expected, but simply a correction,” he concludes.