Following six months of downward pressure, fuelled by unrelenting oversupply in the ammonia market, spot prices are heading towards lows not seen since mid-2017, leaving market participants weighing up the implications of any reduction in ammonia production in the months ahead.
The contract price between Yara and Mosaic for Tampa shipments in May, agreed last week at $237/t cfr, equates to fob prices in the Caribbean below $200/t, steeply undercutting loading prices in Yuzhny, the Middle East and southeast Asia. But while some producers can keep operating at this level, prices in the $190s/t fob fall below the cost of production in certain regions, notably Yuzhny, and the possibility of some production coming off line if these prices levels are tested for a sustained period is increasing.
The last time significant capacity came off line in response to low pricing was in mid-2017 when spot prices hit $190/t fob Yuzhny and $190/t cfr Tampa. Prices subsequently recovered quickly, gaining over $160/t in value over the next five months. But the 2019 trade balance suggests that this pattern is unlikely be repeated, largely because of significant new capacity additions in markets both east and west of Suez over the past two years.
Factors that kept the ammonia market in balance throughout much of last year, such as high European gas costs, lengthy commissioning periods at new plants, and gas curtailments in the Caribbean, are all now largely resolved. Supply availability has been steadily growing globally over the past few months. Indonesia's PAU plant is operating consistently at capacity, Russia's Kingisepp plant is producing export ammonia, and the US Freeport joint venture between Yara and BASF has come on line this month, creating three new significant export projects to feed ammonia demand. In addition to this, in Trinidad, the largest global ammonia producer, gas supply is becoming more reliable, while in Europe gas costs have halved from $10/mn Btu last year to under $5/mn Btu currently, which in both cases is bolstering ammonia production.
While global demand for ammonia is steady this year, it appears it is not growing at the same pace as supply, with many of the largest buyers such as India, South Korea and Belgium expected to buy similar volumes in 2019 compared with the previous year. The two countries where buying is expected to show steep year-on-year increases are Morocco — where imports could grow from 1.4mn t to over 1.8mn t this year — and China, which is likely to exceed 1.1mn t, up from 950,000t last year. Mexico and Turkey are the two other countries that are soaking up spot availability at higher-than-average rates, and the level of buying from those two countries may be able to offer some short-term support to the market in the remainder of the second quarter.
Overall, markets east of Suez are more balanced than the west, and prices there are expected to find some stability in relation to other markets. But the sharpest losses could be seen in Yuzhny. Spot trade has been scarce from the region this year, with much of the focus on contractual shipments. Last confirmed business was close to $240/t fob, and inevitably producers may have to lower their price ideas in order to compete with product from Trinidad priced below $200/t fob. Shipments from Trinidad across the Atlantic have noticeably picked up in the past few months as the arbitrage has opened, with traders shipping material more regularly from Point Lisas to northwest Europe, Morocco and Turkey.
Steady production levels from north African producers in Egypt and Algeria is adding further weight to the supply outlook. Elsewhere, European producers are ramping up their own production in the face of low gas prices, and are unlikely to need to step into the spot market as often as they have previously. Compounding this are two terrible application seasons in the US, which has left significant carryover stocks in the US Gulf, giving further evidence that the market may not have found its new floor just yet, and could fall closer to where the Tampa cfr price bottomed out in 2017 at $190/t cfr.
