Inside Fertilizer Analytics: Sulphuric acid, Apr. 2021

Author Argus

The closure of Inovyn’s Runcorn sulphuric acid plant has impacted the European market, while the tightness in supply is set to influence global prices in the longer term.

Join Meena Chauhan - Head of Sulphur and Sulphuric Acid Research, Siobhan Lismore-Scott - Editor, Sulphuric Acid and Tim Cheyne - VP, Fertilizers as they discuss trade, prices and the impact of supply disruptions on the market. We start with a review of the global sulphuric acid price rally and its causes, the evolution of contract pricing in Europe – including Argus’ new NW European sulphur burning contract price – before moving on to the 2021 outlook for pricing in the global market. We then assess global market drivers in the mid to long-term, before moving on to the impact of Inovyn’s closure of the Runcorn plant and a global outlook for new capacity and associated risk factors. We review drivers of demand in the short, mid and long-term, with key insight on increasing demand from the metals sector. We end with an intriguing look at shifting trade flows.

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Tim: Welcome to the "Inside Fertilizer Analytics" podcast. I'm Tim Cheyne, from the fertilizer team here at Argus Media. Today, we'll be discussing the sulphuric acid market, and I'm joined by Meena Chauhan, who's head of sulphur and sulphuric acid research in our consulting group, and Siobhan Lismore-Scott, who's editor of our weekly sulphuric acid market report. Welcome to both of you. It's great to have you both on the podcast. It allows us to delve into the current market situation, and also the market outlook, so, a really good combination.

Let's jump straight into the discussion, and talk about prices, because prices have really rallied. I was looking at the data earlier today, and just seeing prices have really ramped up during the course of this year, even reaching triple digits coming out of Europe recently. So, Siobhan, talk us through what's happening. What's driving that increase in prices?

Siobhan: Thank you, Tim. So, sulphuric acid have reached triple digits out of Europe, you're right, but this has happened all over the world. This is a global trend. Within Europe, the prices are just at that cusp of their being into triple digits. There's a lot of acid within Europe, but demand elsewhere means that a lot of it's being shipped out, and there just is a supply situation there. There just isn't enough acid in Europe. And so, the prices are going higher and higher as demand climbs. But it's mainly a supply situation in Europe.

Tim: Very interesting. I know we've been discussing how the contract pricing in Europe is evolving, and there's some interesting changes that you've seen during the last few months. Can you talk us through what you've seen change, and how that's affecting the market?

Siobhan: Yep. Certainly can. What we've seen, basically, is that the Northwest European contract price that we carry is a smelter-grade price, and that has always served to, you know, just cover the Northwest Europe market. But as there's been a constraint in the amount of sulphur within Europe, the sulphur burners are seeing that they are seeing a premium, so that price is decoupled, in terms of we're now looking at having a Northwest European sulphur-burning contract price, and the one that we carry, which is the Northwest Europe smelter grade. So, we are going to be introducing a new contract price to cover the quarters in the report, because it's become so decoupled. For example, we just recently settled the Q2 price, and the smelter-grade acid was looking at an increase of around 10 Euros from the first quarter, which is a lot, actually. Before, I think the increase was between three and four Euros. But the sulphur-burn grade was, they are looking at between 25 and 30 Euro increase. So, you can see how that market has become decoupled.

Tim: Is this a result of firmer sulphur prices? Is the sulphur market price strength causing this differentiation here between those two market prices?

Siobhan: There's a lot less sulphur around, basically, in Europe. The refineries used to produce the sulphur, and that's what was used by the sulphur burners. So, yes, you know, the high sulphur prices means that there is a resistance to pay some of the higher prices, and there's also constrained supply as well. This wasn't part of a lot of the formula basis, you know, to pay so much for what is a feedstock. This means, of course, that there is less sulphuric acid around, and that means there's a constrained supply at a time of very high demand. So, there's really strong fundamentals there, in terms of the supply-demand balance in Europe.

Tim: Great. So, the market's generally tight. Supply and demand factors featuring in the way that prices have developed. Let's turn to the future, and Meena, can you tell us what you think is going to happen for the rest of the year? What's the outlook for this firm market looking towards the end of 2021?

Meena: There's little room for downside currently in sulphuric acid pricing, with all the factors that Siobhan's just outlined on the tight supply situation, but I would say we are expecting to see a downward correction of some sort. It's likely to be muted, and not a major price crash or a major downturn, and that's because of the supply and demand fundamentals, in places like Europe, where we've just talked about the major supply squeeze that is supporting prices going forward through to the end of the year at the moment. In associated markets like elemental sulphur, we have appeared to reach a peak in pricing, so that could aid in putting a ceiling on the acid prices as well.

Tim: And, Meena, what about the longer term? Are these influences going to last into 2022 and beyond? What are the main influences for sulphuric acid prices in your longer-term outlook?

Meena: Well, for the medium term, it's really the key end use markets that will be driving the market. So, copper demand on the metals side, for example, and with that healthy demand forecast, that is really aiding and supporting consumption and for long-term acid pricing. I'd say the processed phosphate sector as well will be key. We've looked a lot at the relationship in terms of pricing between DAP and sulphur and acid, and the correlation between DAP and sulphur does provide a bit of a baseline for the longer term. And so, our expectation is that, obviously, we've got the decoupling right now between sulphur and acid, but in the longer term, we expect to see some parity returning between the two. The very short-term market fundamentals will continue to drive each commodity, though, to see that decoupling. And we are expecting to see the correction, as I mentioned, but that will probably come in 2022, following the spike that we're seeing this year, before trending back up in the long term, driven by those key end use markets.

Tim: Excellent. Really good to get that basis understood in terms of the current pricing situation. Let's delve into supply. Europe is definitely an area of interest for sulphuric acid. I know, in particular, the market was quite surprised by the announcement of the INOVYN Runcorn plant closure a few weeks ago. Siobhan, Can you take us through what happened there, and just describe the situation?

Siobhan: Yeah, this did come as a surprise. The plant declared a force majeure in October, and acid for their customers was sourced elsewhere. The intention was always to bring the plant back, but unfortunately, after attempting a startup in February, the damage was just deemed too severe, and they made the decision to close the plant. I mean, they actually couldn't start it up because of a, I think, a heater problem. And they closed the whole business. They've exited the sul acid business, which has left a 200,000 ton per annum hole in the market, and it isn't one that can be plugged easily, as they produce quite high grades of acid. And so, these are compatible with food and pharma industry, so you can't just, you know, use any old acid. It has to be quite high grade for that. So, what we have now is a situation where there's a consumer market seeking tons, in a region which is already extremely tight.

Tim: That is certainly very dramatic. Meena, can you tell us what your expectations are for supply in Europe? Is there future supply coming onstream that could plug this gap? Where do you see new capacity coming in Europe, if at all?

Meena: Well, there's little change actually expected on installed capacity in NW Europe - smelters are capturing SO2 emissions at high levels already, because of existing legislation, and the technology that's in place. There are no new sulphur-burning projects in the pipeline either, so, total acid capacity is estimated at about 18mn t/yr, and smelter production in the region is about 6mn t/yr, and the outlook is stable throughout the forecast.

Tim: Okay, so, in that case, what about the broader market, the global market? Where do you see the main supply changes coming? Where do we see extra supply, incremental supply, coming to meet new demand?

Meena: In terms of smelter-based supply changes, we see global capacity growing by around 8mn t over the next five years, to around 133mn t/yr, and a lot of this is being driven by Chinese capacity additions. This is a real focal point for the market, with the number of projects that are in the pipeline. And that is being driven by investment in the copper sector, on the back of strengthening demand for copper, of course, and copper products. Elsewhere, there have been developments in Africa, in the Copperbelt region, with new smelting capacity added in the DRC, and there is further scope there for additional smelters to be constructed in the longer term in that region, such as the Ivanhoe Mines Kamoa Copper Project, with acid capacity estimated at about 300,000 t/yr. There are also several smelter projects proposed in India, on both the copper and the zinc side, that we are monitoring quite regularly, but these are currently assessed as speculative.

Tim: So, no shortage of new capacity, at least in the pipeline, at some stage of development. Has the COVID-19 pandemic impacted the outlook for these projects, or do you see any other factors that pose a risk to some of this new capacity?

Meena: Yes, there have been delays reported to project startups and investment, and I think that's to be expected. We've certainly seen the same in the sulphur sector as well, with refinery startups being pushed, and there's obviously a great deal of uncertainty with how COVID-19 will progress, and the global pandemic. Although it's clear we're starting to see signs of recovery in the economy, with the vaccine rollouts continuing, one of the risk factors, I would say, for acid capacity is going to be around copper concentrates, with the scale of operations being brought online in China, for instance. This could mean that some balancing does occur if there is continued tightness in the concentrate market as well. But we'll have to wait and see.

Tim: Thanks. This is a theme we've seen across all the fertilizer sector areas we follow. COVID has had impact on project timelines, for sure. Let's turn to demand, and we know from the start of this discussion that demand is strong. But Siobhan, can you tell us which end uses or which sectors are really driving that buoyant demand in the market currently?

Siobhan: Yep, certainly. Well, copper prices are at a 10-year high. The last time they were at this level was 2011, and sulphuric acid were at the levels we're seeing now. Mejillones contract prices were around $110/t to $130/t CFR. So, that's similar to levels...I mean, it's a bit higher now, but this was 10 years ago. Fertilizer demand is also rallying. Sulphuric acid is used in this industry to make phosphoric acid, and after a lull last year in planting schedules, we've seen a return there, and in fact, that we've seen bump seasons in Brazil and the U.S. So, there's a lot of demand from smelters, who want to continue and leach as much as they can, and from fertilizer consumption as well.

Tim: So, we have a convergence or a coincidence of strong demand from fertilizer requirements and those industrial uses. Meena, do you see the same factors driving the medium-term trends in demand? What do you see driving consumption beyond this year, towards the medium term?

Meena: Interesting question, and certainly mirroring some of those short-term fundamentals as well, and, I mean, the key underlying trends for the acid market are obviously linked to the global economy, the macroeconomic factors with rising populations, and so on, and that need for increased crop yields and fertilizer application. So, when we look at phosphoric acid-based demand, that's forecast to grow in areas like North Africa and the Middle East, but in terms of how that will be met from a raw materials perspective, that will be largely from captive sulphur-burning-based capacity. We're forecasting about a 14pc growth in this specific sector in the period to 2025, and that would add around 18mn t/yr of sulphuric acid demand. There are also copper projects in the US, such as Lone Star, and also Excelsior Mining. These are both in Arizona. And there have also been developments in the lithium sector, which are likely to lead to new projects coming to fruition that we're currently viewing as speculative.

Tim: I can understand the buoyant fertilizer situation, because we know that governments have prioritized food production, and, yeah, the crop prices have rallied, and fertilizer demand is definitely buoyant. But what's driving that metals demand? Because we've had economies struggle. Some GDP numbers are looking quite weak. What's driving metals demand for sulphuric acid?

Meena: Well, in the sectors I mentioned, that's really being driven by the electric vehicle market, so, ultimately, it's policy, and the shift to a greener economy, various regions implementing expectations of how many vehicles should be of this nature. And so, with that comes rising demand for battery materials, ultimately. Lithium and nickel become in higher demand, and is driving a lot of the investment there. Some of these projects would be using merchant sulphuric acid at the start, and already are, such as in Arizona, but there are plans to construct sulphur-based capacity a few years into project startups, so that will be also interesting to see how that impacts sulphur demand.

Tim: Yeah, fascinating. So, that drive up in metals demand linked to battery production, that's almost a structural change to the world economy. That's not really something that's being negatively affected by COVID, so, a good, important trend to be tracking. I'm sure you're keeping a close eye on those projects. Let's turn to trade, finally, because there's some really important trade flows that are shifting and changing, and Siobhan, can you talk us through some of the most important trade flows, or unusual trade patterns you've seen as a result of the current tighter market?

Siobhan: Yeah, so, as I mentioned earlier, the situation in Europe with supply isn't because there isn't any acid there. There are actually two big producers in Europe, but a lot of them are shifting acid out because of higher prices elsewhere. What we are seeing is because of these kind of global high prices and increased demand, is that we are seeing kind of different trade routes. We're seeing cargoes departing to destinations where previously, they may have had a long-term contract in place elsewhere. This month, for example, we've seen a cargo source out of Asia, I think it was a part cargo that went from Japan and China, and was bound for Turkey. We've also seen cargos exporting out of India, which is unusual, and other cargoes going to Brazil from Australia, as well. So, these are trade routes that haven't really been done, or haven't been done usually. I think we can safely say that China has become a big player, a very important player, in the market, and we're looking at more exports from smelters there, as well, and into Europe, as well as elsewhere.

Tim: Some really creative, opportunistic trades going on there. Just shows the level of engagement that people have in the market to place tonnage at the most beneficial price. But one of the most interesting disruptions, I think, to trade flows in the last six months has been the blockage at Mejillones. Can you talk us through what happened, and how that was resolved, and what it means for the current situation for imports into Chile?

Siobhan: This was actually very interesting, and unprecedented as well. Because of the swells, cargos couldn't unload into Mejillones, which meant there was a backlog. There were actually some tankers kind of going between Peru and Chile, back and forth, and it was closed, I think, for around three to four weeks. That meant that no one could unload, and then once they were able to disembark and unload, the process was very, very slow. It always is there. You know, it's not a fast process, and there was a big backlog. What that means, then, is that the market was tight, but no trade was able to be done, and then, the cargos that did unload then went into kind of domino effect, where the acid was then put into the market, and that affected the next cargo that could come, for example, because there was already the supply there. So, what we could see is, kind of, contracts being pushed to the end of the year, and maybe a bit of softness there, in terms of pricing towards the end of the year, because there could be a bit of oversupply, potentially.

Tim: Thanks. I think that's the only downside factor we've discussed during this whole podcast, so at least there's one thing in there we flagged up which points to possible weakness. Finally, just to wrap up this discussion and look at the longer term, Meena, what are the main trade changes you're expecting to see in the outlook, beyond the changes that Siobhan's mentioned? What are the structural trade changes you see coming?

Meena: Sure. Trade's an interesting one, because of the balance that needs to be maintained between production and demand for sulphuric acid, because of the storage limitations. I think it's important to mention China maintaining its net exporter status in the long term. That's been a recent change in the market in the last three years, and certainly adds competition to the Asian export market overall. Imports, meanwhile, into China are expected to remain diminished for the foreseeable future, with that rise in domestic smelting capacity I mentioned earlier.

Another region to mention is Latin American. We are expecting to see some significant changes in the longer term, with the potential startup of the Tia Maria copper project in Peru. That's currently forecast to start up around 2025. There have been numerous delays, and that would increase domestic acid consumption requirements, and then reduce availability for exports, and largely into Chile. And elsewhere in Latin America, also, Brazilian acid imports are expected to rise because of an increase in SSP and phosphoric acid production ramping up, and obviously, any shortfall from captive burner production would be met by the import market.

Tim: Yeah, Meena, you mentioned also, earlier, a possibility of some Indian smelter projects that you said, I think, were speculative, but what impact would they have on the trade balance if they were to come into fruition?

Meena: India is going to be a really interesting market to consider as far as trade is concerned, and a lot does hinge on the future of the metal smelter projects. So, there are two zinc smelter projects by Hindustan Zinc, one by Vedanta in copper, and another from Adani, for copper also. I mean, if none of these projects emerge, then our forecasts indicate that imports of acid would likely range between 1.5mn to 2mn t/yr. But even if one or any of these come on, then our expectation is that that would reduce the import requirements going forward.

Tim: Well, I'm afraid we've reached the end of our allotted time today. To our listeners, thanks very much for listening. I hope you've found this podcast useful. I've certainly found it really interesting. Sulphuric acid market updates and prices from Siobhan and her global team are available in the Argus Sulphuric Acid report, which is accessible in Argus Direct, and if you're a subscriber to Argus Sulphuric Acid Analytics, please go ahead and download the latest quarterly forecast report from Argus Direct. You can also access datasets in Excel, and our annual long-term forecast report, which was published at the end of last year, again, in Argus Direct. If you are not a current subscriber, we welcome you to visit the Argus Media website to find out more information about how to subscribe, and join our subscriber base. If you enjoyed this discussion, please do like, subscribe, or follow us, depending how are you listening, because we'd love to have you back. And until next time, goodbye.