Inside Fertilizer Analytics: Processed phosphates, Feb. 2021

Author Argus

Phosphate prices have been benefitting from tight global supply, because of the Covid-19 pandemic as well as the fallout of the potential duties which could be placed on US imports of Moroccan and Russian product.

With the final ruling pending and new capacity expected to come online in to 2022, what could future market prices and trade flows look like? Claira Lloyd, Phosphate and Phosphate Rock Research Manager, and Tim Cheyne VP, Fertilizers discuss.

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Tim Cheyne: Welcome to the latest issue of our "Inside Fertilizer Analytics" podcast. This is where one of our market experts here at Argus Media joins me, Tim Cheyne, to discuss the future of fertilizer markets and our view of future prices.

We try and schedule these near the end of the week when most of the number crunching and the heavy lifting is done, the customer calls are finished, and we can sit back and reflect on the biggest developments that have happened and what they mean for the future.

Today, I'm very glad to be joined by Claira Lloyd, who leads our phosphate fertilizer research here at Argus Media. She's, I guess, somewhat of an industry veteran. She ran our sulphur desk and editorial team before switching over to the consulting team a few months back to take on the phosphate lead for our forecast services. So a switch of a work type and market, but probably good to move into a downstream market, I guess. So welcome, Claira. Really good to have you on. How are you today?

Claira Lloyd: Thanks very much, Tim. It's good to be here and good to be here talking about the phosphates market now that I've hopefully found my stride.

Tim: How have you found that change, switching over to you to a role which is looking towards the forecast and analytics area and also switching from the raw material sulfur to processed phosphates. Has that been interesting?

Claira: I think as I was coming to the end of my period looking after the sulphur market in editorial, I was finding that looking at the more forward-looking picture and being able to analyze and interpret market shift patterns and the fundamentals was something I was enjoying more and more every day. Just to have that opportunity to move to the consulting department was one I was really, really grateful to have offered to me.

And I think when it came to phosphate, that having that new challenge with the sulphur market and sulphur industry being my working career from Day 1, being involved in it for 13 years, that change was also very welcome to me as well. But it's not a million miles away, obviously, with sulphur being that key raw material for the phosphates industry. So I was always monitoring it very closely on that day-to-day basis. So it's not completely unfamiliar, but it's also still been very much a new challenge and also quite a steep learning curve, but I'm enjoying it, definitely.

Tim: Well, it's been great to have you on board, and let's dive straight in. I guess there's so much we could discuss in the phosphate market currently. There's lots going on. But let's start with the obvious thing, with prices. Looking back at prices, you know, were at a real low at the beginning of 2020 before the coronavirus epidemic was even really an issue for any of us, but then we've seen prices really increasing all the way through last year and really rallying more so in the last weeks and month or two. So, how do you explain that rally in prices, and what do you think is the key driver behind what we've seen in terms of that market strength?

Claira: I think really sort of when I'm looking at it, I think I want to look at it, I would say, in a fourfold, a four-prong attack, shall we say, of why these prices have been moving. I think, obviously, when we came from the middle of 2018, phosphate prices had not been having the easiest of rides and not been having the easiest year. Obviously, a lot of that led as well and knocked on to that raw material market, and we saw as a whole that commodities, fertilizer commodity sector, in the phosphate-sulphur-sulphuric acid area really did see prices diminish and fall.

But I think when we talk about, obviously, the start of 2020, and Covid wasn't necessarily outside of China that big a problem, but obviously, it hit China very hard and very fast, and we saw that phosphate market for those guys completely shut down beyond the usual closure of, what, two, three weeks over Chinese New Year. And that really did sort of start to spur the worry about the supply side of the phosphate industry.

Obviously, then, when we look at another big hub of the world when it comes to phosphates is India, and Covid very, very abruptly shut down the Indian, well, economy to an extent in India as a country from the end of March all the way through to the end of April.

I mean, luckily, for the phosphates production side of things, it did coincide with periods of planned maintenance and the likes of Fact, but at the same time, it did last pretty much that full six-week period. So again, there was that sort of halting liquidity, with India being the biggest import market, and also the production side of things for India, again, a huge phosphate market, was a problem.

So I think Covid was that sort of limiting side of things early on, but to linger with Covid as time has gone on, I mean, you look at the Chinese market as an example, I think, is one, for me, I find interesting their policy was to become less reliant on using fertilizers by now, and zero growth by 2020. Also looking at not expanding agricultural land volume across any further and relying on import agricultural commodities, such as grain, for example.

But now with this worry of Covid, of the pandemic, they've removed that side of their policy for the short term, at least it seems. And now they're looking at producing more of their own agricultural products and crops, and therefore we will see that bigger use of fertilizer.

So Covid has moved from a panic about, you know, the lack of trade and shortage of production to now being a factor that we are seeing that tightness shift because people are in fact using more because there is that emphasis on agricultural policy and food security of supply. So I think, for me, that's one factor to think about.

I think another factor to consider, which is one we've seen follow a trend across this year as well, is the soaring cost of raw materials. You look at the sulphur market, you look at the sulphuric acid market, you look at the phosphoric acid market, all three of these very key raw materials have seen prices rise. And sort of drawing from, well, let's say, my sulphur days in, again, using China as that sort of rule of thumb, China sulphur should cost no more than a third of DAP fob.

And when you think of sulpfur prices now, we're looking at upwards of 170, 175 cfr. And, you know, I remember when I left sulphur back in, you know, sort of end of October, we were barely scraping three digits. And we haven't seen a price over 100 in sulphur until last year plus, you know, 12 months. So I think the raw material side of things is pushing that up as well.

But I'd say sort of a third factor, which, for me, is one which I think is broaching and impacting quite a large portion of the market in different ways, is the Mosaic wanting the tariffs placed on US imports from Morocco and Russia.

And obviously, with the US being blocked, shall we say, with these import tariff discussions still going on from Russia and Moroccan phosphates, we are seeing that there is a shortage of supply there, and they are turning to non-traditional markets, like Jordan, and Egypt, and Saudi. So that's causing this misbalance in the global balance trading system.

And finally, the one I'd say is, of course, for me, in the nearer term, I think we're looking at this sort of more tightness in supply to help boost prices, is maintenance, particularly because OCP is under maintenance for this quarter. They're producing about 800,000 tonnes a month of granulation capacity, but that's obviously not just MAP and DAP that goes down to them, to the NPKs and NPS.

And obviously, they have got a bit more of a focus on the side of NPS at the minute, just because of the fact that the Ethiopia tender is up and running for them. And they've got 1.1 million tonnes to fill on that side. So in that, hopefully, I was a bit of a nutshell. Those are the four parts, I would say, is why we've been seeing these price rallies build over these last 12 months and to now.

Tim: Excellent, Claira. It sounds like a coincidence of factors have come together during the course of the last 12 months, especially more recently. You pointed to the shortness in the North American market for phosphates being a real driver at the moment, given that the lack of...well, the restricted supply from Morocco and Russia based on those potential tariffs.

I'd like to delve into the tariffs in more detail because I think that's something I really want to pick your brains on. But before we do that, can you just look ahead and think of the next few months and perhaps even as far as the medium term, how do you think prices will develop in the future? Do you think this premise in the market will continue, driven by the factors you've described? Or do you think things will ease in prices in the next few months? Where do you think prices are heading?

Claira: I think on that near-term side of pricing, I've been discussing this, obviously, with my colleagues in editorial because they look at that immediate market with great detail as I used to. And, you know, discussing with them, until April, we are seeing that tightness in supply dominating the market, and we are seeing that trickle down to provide that support with pricing.

There is that seasonal deficit in the market when it comes to the DAP/MAP side of things. Obviously, still, there is those concerns with lingering with Covid, which is putting that pressure on people to continue to buy fertilizers, continue to push towards food security, with agriculture being an essential industry. And that's encouraging, you know, in some areas of the world and an unseasonal level of purchasing. We're still seeing, for example, in Southeast Asia, and in India, buyers are still trickling in when really now we should, to an extent, be winding down.

But beyond April, talking to our guys at editorial and also talking about the market a bit more widely, there should be some correction in pricing, you know, on the softer side of things. It's not necessarily going to be steep, it's not necessarily going to be sudden, but there should be that more sort of softening led in the market, going with the seasonality, and possibly back to that little bit more cyclical adjustments we're used to.

I mean, we're not going to see their prices drop off that cliff edge. We don't expect as they did here back in July 2018, but definitely, we are seeing possibly when it comes to at the moment looking like that balance will return a bit more April onwards, which should allow a bit of a slowdown and an easing in prices compared to what we've been seeing.

But when we look a little bit further along, I mean, 2022 at the moment, we are expecting to see a correction in pricing and a bit more dramatically, shall we say, and a bit more softening, as we will return, we hope, to a post-Covid world, and the normal market ebbs and flows will return.

But also I think...but we won't see, you know, as steep a softening as maybe was expected, just because there are some delays in new projects and new capacities coming online, which we'll see, for us anyway, in the 2023 to 2025 period, a bit more of a plateau in pricing.

I mean, there will be gains to make because, obviously, there is still that increasing expectation of the requirement for fertilizers, requirement for phosphates, but new project capacities are expected to come on in a very concentrated period of a few years. So that price plateauing across the 2023-2025 period is a little bit more likely from our side of things as project evolution stands at the moment.

Tim: I got it. I guess there's a short-term picture, which remains quite firm in terms of pricing and then things easing slightly over the seasonal bowl we normally see out in the summertime. But good to know, to understand the longer term with that new capacity coming on stream, which would affect the longer-term pricing.

I'd like to delve into this issue of duties because it's one of the most interesting things that's happened in the last few months in the phosphates markets. Trade defence and anti-dumping duties are less and less usual feature of phosphates than they have been in the nitrogen fertilizer sector. But we have seen this action from the US where the US Department of Commerce issued their preliminary decision, I think, late last year, to place tariffs on Moroccan and Russian imports of phosphates. And I think even in the last few days, there've been some confirmations of more detail of those duties.

So can you explain what the impact of these new tariff barriers, these new anti-dumping duties, have been on the market? Because the trade between Russia and Morocco to the US has been a key feature of the processed phosphates business. So what's been the impact?

Claira: Yeah. I mean, I think when it comes to this topic, it's been one that has been hard to avoid. I think it's been a huge area of interest for the whole phosphate supply chain, be it from raw material down to end-product, even, obviously, to the farmer as well.

And when we saw, obviously, Mosaic first petition to have these duties put in place, immediately, there was that reaction where we started to see Moroccan and Russian deliveries of phosphates to the US drop off largely with that fear of retroactive additions of the tariffs. So obviously, it would cost people money for what they'd previously shipped.

And I think because of that, we saw, obviously, the US very, very quickly result to...I want to search a better phrase than scrabble around to fill the gap, but there was very much that concern, and we saw it in Nola prices on fob basis grow very, very, very rapidly.

And I think what we have to consider, too, is really China was a loss to the US even before that because of tariffs placed between products across commodity trade between the US and China. So really with the additions of these other tariffs looming, the US has been blocked from the world's three biggest phosphate exporters. So this is another blow to that market where you know things have encouraged that tightness.

So really it's been a lock-off in trade in the lack of deliveries from Russia and from Morocco. And July to December, we've seen more non-traditional markets try and fill that gap, be it Saudi, Jordan. Even, I think we've seen a couple of Egyptian cargoes go there. And all this has done is helped, as I said, boost the prices. Nola fob prices, if I recall correctly, went up to nine-year highs at one point. And we've also seen, you know, buyers turn to the TSP market for purchases because it is that better price, more competitively priced than MAP and DAP.

But obviously, the DOC, as you said, Tim, in the last couple of days, I believe it was the 9 of February, finalized their thoughts and their tariffs. So it's going to be just under 20pc, they have proposed, for Morocco, around just under 10pc for PhosAgro in Russia, for EuroChem in Russia, we're looking closer to 50 from what was, you know, 75, and other Russian producers around 17, 18.

And what we have really seen in that is whilst at these higher levels of tariffs which they did put in place would completely detract MAP and DAP deliveries from all these producers to the US, the fact that MAP prices in the U.S. have increased so significantly and the tariff on PhosAgro is now closer to 10pc, this now is looking a little bit more likely that MAP won't be as heavily impacted.

So depending on what happens with that final decision from the International Trade Commission, which is, I think, due by the 25 of March, we could see it will be more Morocco that's cut out of this trade route, and that's what we're expecting to linger. And Russia could have a bit more of a window of opportunity for sale, but obviously, this will be price dependent. Even if prices drop, that 10pc will still be applicable.

Tim: So do you think, then, that there could be some changes coming in the final ruling coming in March in terms of the scale of the duties for each country, or do you think the numbers we've seen just recently released will be where they settle? And what do you think the impact will be of these duties further out for the rest of this year and into next year?

Claira: We took a bit of a deep dive into the duties as they stood in the preliminary ruling in the analytics of the last processed phosphates in January. And then we had started to consider that with this change of government leadership in the US, obviously the inauguration of Joe Biden, there is this possibility that is lingering in the backs of people's minds that a compete U-turn could be made, and these tariffs could not be approved, and no harm could be found to be done by the International Trade Commission.

And obviously, that would be for Morocco and Russia, that perfect world. And we could see things slowly...I'm not saying it will be changed overnight, but slowly returned to normal and that progress back to the previous trade and pre-June way of business that we'd seen. But obviously, the Morocco tariff was edged up on as it was previously revised twice, and the Russian tariffs were significantly reduced.

And obviously, this is making...if these are levied, which is, you know, I would at the moment hesitate to say they'd be altered beyond this, this would be the levies put in place if they were, it is a bit of better news for Russia. And I think as well, if we do look at it, it will be the Saudis, most people are expecting, who will plug that gap that will be left by Morocco, that will, to an extent, be left by the Russian side of things.

But it's not just, I think, really we have to look at that trade between the US, Russia, and Morocco. We have to look at the impact that will be seen on the wider market. Obviously, we know when it comes to it, OCP has a very flexible product base and flexible product portfolio. They have the NPK, NPS, MAP, DAP flexibility within their units, particularly their new Jorf Phosphate Hub. But, you know, they will still have a certain production quota of each.

So Brazil could benefit, for example, from seeing a wider availability of Moroccan and Russian MAP, which would allow Brazil to have very competitive product. But I think the thing that I'm really seeing is that, and remember this from my days in the sulphur in market, and when it comes to the tariffs, it's the Chinese phosphate producers that have been very concerned about the decision and what will happen.

OCP, over the last few years, has been chipping away at gaining market share in the Indian market, with India being the biggest DAP importer. And that has been eroding Chinese producers' share into India. It has been meaning that prices have been softening. It's what aided that price softening we saw in mid-2018.

And I think this is something that does need to be considered. It's going to be that potential longer-term shift, where we see Russia and we see Morocco pushing more product toward the Indian market. And that will damage the business, potentially, damage the margins definitely for these Chinese producers who already do have those higher costs, particularly compared to OCP, who have that raw material pool of phosphate rock on their doorstep. They have a huge ability to pool sulphur and sulphuric acid from many markets, but also that ability to switch between the two, which allows them to really perform that raw material product arbitrage.

So it's not just that US-Morocco picture to consider at the moment, it is that broader impact, particularly on what it could do to prices in the East, and also what it can do in the end to those Chinese phosphate producers.

Tim: Wow. It does sound like the implications of these duties are quite far-reaching. It's almost like the card deck gets thrown up in the air and we have to wait to see where the cards land because trade patterns could get disrupted. And certainly, there'll be shifting markets for the leading suppliers to focus on depending on the level of those tariffs and how they get configured.

Claira, there's so much else I could ask you today. You mentioned India and the role of the Indian market for buying raw materials versus finished products. You mentioned Saudi coming as a global force in phosphates in the next few years. You mentioned Morocco and their strategy, which is really important for global phosphates. But I think we should probably wrap it up for this issue and leave those juicy topics for the next time.

So thank you very much for joining me and for sharing your insights. The way the market's developing is fascinating, and it's good to speak to you and just get under the hood and understand some of these drivers. So thank you for your time. We really appreciate that.

Thanks to the listeners. Thanks for listening to this issue of the "Inside Fertilizer Analytics" podcast. If you are a subscriber to Argus Processed Phosphates Analytics, then, of course, please go into Argus Direct, our delivery platform, and download the latest reports.

There's two recent reports available. One is the quarterly processed phosphates report, which is a PowerPoint slide deck really focused on current issues and updating our forecast. And then there's the annual long-term report, which we published in December, which is looking much further ahead and has a lot more detail on our long-term fertilizer demand and phosphate demand forecast, also our long-run marginal cost forecast, and more information about long-term costs. So a real deep dive and very valuable for you if you need that information.

And, of course, if you're not our subscriber to Argus Processed Phosphates Analytics, then please visit Argus Media, the website, to find more information about how to subscribe. And don't forget to like, or subscribe, or follow this podcast that you've been listening to today so you can get the next issue and get further updates on the phosphates market. So until next time, goodbye.

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