Inside Fertilizer Analytics: Processed phosphates, May 2021

Author Argus

At the start of the year DAP prices were on firm footing and increasing, MAP showed more stability – particularly in Latin America, while US duties on Russian and Moroccan phosphates were proposed. How have things developed since then?

Join Claira Lloyd, Phosphate and Phosphate Rock Research Manager, and Tim Cheyne, VP, Fertilizers, as they begin with a discussion on the return of firmness in the MAP market, and the reasons for this change. We then move on to the impact of US duties on Russian and Moroccan phosphates and the resulting change in trade flows. We review legislation in China (the Yangtze river protection law) and assess its potential impact on key Chinese phosphate producers within the Yangtze river economic region. We review how seasonality of purchasing in India has evolved, India’s DAP subsidy and our view of its influence. We cover India and Pakistan’s potential DAP capacity additions and their expected impact on East of Suez market dynamics in the medium term. We finish with how we see processed phosphates prices developing in the medium term.

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Tim: Welcome to the latest issue of our "Inside Fertilizer Analytics" podcast. In this podcast series, we talk about developments in the key fertilizer markets, be it nitrogen, phosphate, potash, sulphur, ammonium sulphate. We've had a whole range of different discussions recently, but today we're going to return to processed phosphates and phosphates industry as a way of exploring some of the latest key trends.

So, today I'm very glad to be joined again by Claira Lloyd. She leads our phosphate fertilizer research here at Argus Media from our consulting team. And she has just recently published the Processed Phosphate Analytics report, which contains all kinds of interesting information, updating us on where the market's been heading and some of the key issues for the future. So I'd like to welcome Claira to the podcast.

And, Claira, you spoke to us a couple of months ago, and we had a really interesting discussion about the market firmness and the fact that prices were increasing, and were looking like continuing to increase. So, how about updating us with how things have developed since then? What's happened in the market? What have you seen in pricing, and what have the key drivers of those prices been?

Claira: Hi. Thanks very much, Tim. And, yep, it's good to be back to talk to everyone again. Yeah, as you said, we did see, obviously, at the start of this year, prices were on that very firm footing when we look at the DAP and the MAP market. MAP, however, we did, sort of, see that little bit of stability, shall we say, particularly in Latin America, and even a bit of softening as the Brazilian market decided to turn to other forms of P2O5 rather than MAP. But that changed, and that story has changed up to this immediate moment where we've started to see a lot of firmness return in the MAP market.

Partly, US buyers have been in ahead of schedule for their summer fill program, and also Brazil has needed to step back into the MAP picture as well. On the DAP side, things are still looking pretty confident and pretty...I say stable, too firm when we look at our short-term picture of the outlook, but that is, you know, the seasonality which we were expecting.

And, obviously, I think the reason why we're seeing this still slightly elevated prices is the fallout sill of the pandemic. People are continuing to try and play catchup, I think, when you look at things in a nutshell.

Tim: Yeah. Thank you. Just looking at the price developments and looking at our DAP index earlier today, I just noticed that prices are reaching almost eight- to nine-year highs. So there is certainly a firmness in the market. But I wanted to actually delve into a topic which we discussed last time, which was the US duties on Russian and Moroccan phosphates. And last time we spoke, you were waiting for some final decisions from the ITC or the other parties that rule on duties in the US But can you tell us what happened in the end? What's the final situation?

Claira: So, yes, we were all waiting, and waiting not so patiently, I think, in some instances. And, of course, duties were levied. And they were levied in slightly different increments from the original preliminary ruling and preliminary proposal from the Department of Commerce. So we saw OCP, in the end the duties were up to nearly 20pc.

And for Russia's PhosAgro, they dropped under 10pc, and EuroChem, as well, were down, but about 47pc duties. So we did see that significant cut in PhosAgro and EuroChem. Particularly we looked at EuroChem, which was 72pc in the first place. So, unsurprising, they were levied, just maybe slightly surprising in the levels in which they were, I would say.

Tim: Okay. So, we have seen the duties come into place even if the levels are not quite what we expected, but has that changed your view of the future? Has it changed your view of trade patterns or even production in any exporting countries, or indeed in the US?

Claira: I think it boils down to most of what we are still seeing being the influence of these duties is that change in trade flow and that change from the supply side, but not when it comes to production. And still we are seeing that for, not 100pc of the time, shall we say, Russia and Morocco being able to ship to the US. But I think what the biggest change has been is that drop for the PhosAgro duty down to under 10pc. Considering the premiums in MAP we have seen on the Brazil price, in particular for US for the NOLA delivery price, and also the premium we have seen now, and we were seeing new highs even for the MAP price when it comes to the spot market over in NOLA. This is actually going to allow PhosAgro to step into the market and actually to ship to the US. As we have seen, we did a bit of analysis on, sort of, historical pricing in the start of the first quarter, and the netback from the the Baltic compared to Brazil to the Baltic saw a better netback of between $5 and $53 a tonne.

So, now Russia is possibly, and will be periodically at opportunistic moments, an option for the US import market. So that means Brazil is maybe not as likely to benefit from that increased level of Russian deliveries of MAP in particular. And this, I think, is why we're seeing that rally today, is because Brazil is no longer being flooded with product because those options are appearing again in the US. So there is that little bit of change on the trade flow aspect, but still not production impacts, I would say.

But the saga, sort of, hasn't ended at this decision as we all thought it would, as on the 12th of May, Mosaic has now sued for a review of the duties levied alleging miscalculation by the DOC, saying there should be a review to accurately represent, if I remember correctly, the raw material and financial subsidies both Moroccan and Russian companies receive from their governments. And so, with this now, then the US International Trade Court side of things, it's one of those "watch this space" moments yet again when we're coming to this story of duties which has been around for nearly a year.

Tim: Fascinating. I guess the fact that US prices have been sufficient to draw in some Russian material has probably prompted Mosaic to consider that challenge because it doesn't have the full effect that they expected. Wow. So we'll keep watching that development, and there's certainly more to come. I wanted to talk about legislation, change country or change the focus, because, just reading through your latest Processed Phosphates Analytics, I really enjoyed the spotlight section you had on China, looking at the new Chinese regulation to do with environmental protection. Can you talk us through what's happened there and what that means for production of phosphates in China?

Claira: Yep. Sure thing. So the Yangtze River Protection Law kicked in on March 1. This covers the Yangtze River economic region, and under this there are two clauses that we've seen which will, from what we can interpret and from our understanding of the legislation, impact of the phosphate market.

One legislation is that no new chemical plant may be built within a kilometer of the river shoreline. And the other one is that tailings ponds can't be built or expanded within three kilometers.

So, for us, the Yangtze River economic region covers an area which is home to China's seven biggest phosphate producing plants. And so far, the biggest fallout we've been able to tangibly monitor is that Guizhou-Changheng have had to suspend their plans to build a 600,000 t/yr phosacid plant as a result of this because of the proximity, should we say, to the shoreline. And the other one is that there are two well-established, shall we say, phosphate plants that have also been told they have to relocate from their position within, you know, the distance to the Yangtze River.

This is a little bit more dramatic, shall we say. These guys have nearly 1.7 mn t of MAP capacity, and 300,000 t of DAP. So we don't know a time frame, but this will take these guys the significant portion of phosphate capacity out of action. And there are also some implications on the rock side of things, which I'm currently working on, is the "Rock Analytics." The next one comes out next week. So, hopefully, we can talk about those again when we chat again about the rock side of things. But it's definitely an interesting side of the market which is impacting everything from the rock production right up to the finished product.

Tim: Wow. We do know that environmental regulation in China can have a big impact. We've seen that in other fertilizer sectors, so I'm sure you're right in the sense that we will see some consequences from this legislation rather than it just being hot air. And so we look forward to keeping up to date with that. Looking to India, given how important India and the subcontinent's been in MAP...well, especially DAP pricing in particular, tell us what's happening in India in terms of the seasonality of purchasing, and how that's evolving as we go, you know, into the next season.

Claira: Well, for India, it's been a bit of a saga in that market, I think could be the thing to say at the moment. And it's been a source of much debate and discussion and within the industry with, being internally within Argus with other phosphates colleagues, albeit when it comes to clients and contacts we speak to outside. And this is now, sort of, full import swing season for the DAP market for India. And we've only really seen, though, Indian importers really being very active for the last maybe three weeks, and really we could have possibly seen them be active already the last six.

We were waiting for a lot of things to happen in order for buyers to step in. The first was that we were waiting for the Nutrient Based Subsidy to be announced, which was delayed and then announced at a rollover. We were waiting for clarity on the maximum retail price, which was originally upped and then it was kept flat on last season for old stock and upped only for new stock. And then we were waiting for the phosacid price to be settled between OCP and its Indian partners. And that was settled in the end at $998 cfr P2O5, India, which is the highest, you know, we've ever seen that price settled.

And that is what really, in the end, was the straw that broke the camel's back and pushed importers into the market. That high phosphoric acid price in combination with low operational rates in domestic producers, and the fact that it was so high on the raw material side in combination with ammonia, which we've seen prices firming as well.

Domestic producers are making huge losses, so they haven't been producing too much, which has forced those importers to the market despite, you know, as we said, DAP prices being on that flat-to-firm trajectory. So India is at a lag, but India still needs product. It's just this pricing idea and the fact that prices have climbed so much when initially the NBS was rolled, MRP was held, sort of, flat-to-firm depending on what age, shall we say, your product was? And the big concern has been all along that demand destruction at the farmer level. So it's been a very long process.

Tim: Yes. We always need to watch India in terms of the trade-off India has between buying DAP and buying raw materials. So it sounds like there's still an open question. But I know there was a recent decision on the DAP subsidy, which will have an impact, just recently. So, tell us what's happened and what that means.

Claira: Yep. So, just yesterday. And we were hearing from initially when the NBS was set at a rollover on the last fertilizer season that there were likely, or possibly, or hopes and expectations of it being increased. And just yesterday, there was a government meeting and it was more than doubled, which really, I think, took everyone by surprise, not necessarily the increase, but the fact it was more than doubled on the last NBS for that side of things.

And the problem with this, though, that, yes, the NBS being increased is great news for farmers when it comes to affordability of DAP, but in order for the NBS to be increased, there is there a clause an agreement that the maximum retail price would be reverted to the previous season. So the increase for the new product which was discussed is now void. That's not happening.

And what this now means is, whilst the demand destruction at the farmer level is not looking like it's going to be necessarily a case, or necessarily a thing to look into the future because now things are far more affordable, even considering the increases in pricing. This is not so good news for the importers of the overseas DAP. And if you return the maximum retail price back to the 24,000 rupees which we saw before, this means that prices in the mid to high, sort of $560s cfr, are where we're looking at breakeven for these importers, and that is where spot prices are at now.

And, as we said, we're seeing more firming coming because India still has appetite which is now more facilitated because the NBS has increased, Pakistan is still buying, and also Bangladesh's tender is open for the private sector imports. So now we're looking at that problem where the farmers are in a happier position, but not necessarily those importers and distributors of imported DAP.

Tim: Okay. So that decision is gonna support consumption because farmers will be able to afford purchases, but it sounds like we may see the decision favouring domestic production rather than fresh imports or higher imports of DAP. Is that a good interpretation?

Claira: I think it will benefit just the farmer demand and the consumption, but, again, I think the thing is we're looking at is that domestic producers, obviously they can go down the phosacid route, which is obviously importing the phosacid from OCP at $998 cfr P2O5, or they can go down the sulphur and phosphate rock route. And when we do a bit of, sort of, the calculating side of things, the phosacid guys still won't necessarily be encouraged to do this because the maximum retail price is on last year's fertilizer season price.

Now that reversion has come, the increase is not there. So it's more likely to be, you know, where possible. It'll be those guys who have the pleasure of having a sulphur burner who will possibly be looking to ramp up that production because they can go down the cheaper route of sulphur and phosphate rock compared to phosacid. So it is a little bit of playing that balancing game. And, you know, the burner capacity in India is not as great as those producers without the burner who need the phosacid. So it's appealing for some, but not necessarily, again, benefiting all.

Tim: Okay. That is a complicated situation, really, those three options you mentioned for delivering DAP within India. If you look further ahead, let's say in the medium term, do you think there'll be any changes in India, structural changes or other changes which will affect the markets, or do you see this current trade-off continuing, you know, into the medium term?

Claira: I think the interesting thing now when we look at India is we have been expecting new DAP capacity and the combination of DAP and NPKs capacity to come online from PPL, from MCFL, and from Greenstar. And in total, you know, depending on the flexibility of product, we could see 1.4mn t of new phosphate capacity coming in India, and this would be between 2022 and 2023. It's a very concentrated period of time because there have been delays in projects which have been pushed back. We were expecting some the end of last year and some this year, partly the pandemic, partly financing.

So they've been concentrated into this now two-year period. And, obviously, that 1.4mn t of capacity is a substantial portion of, you know, the 5 to 6 mn t/yr of DAP India imports. So this could change the function, change the dynamics, the fundamentals of the Indian market for the medium term, particularly when we look at how reliant on imports they are and how India really is a dictator of prices, almost, when it comes to DAP. But, also, I think that the next door, Pakistan is one we have to consider as well.

There are, at the moment, not firm plans, but they possibly will become planned from Pakistan and Fauji to build a 1mn t/yr DAP plant by about 2024. And if this comes online, then we're looking at Pakistan as well having, you know, 1.8mn t of domestic production capacity, which will cover 80pc of domestic demand. So if you think about up to 2025, considering India and its DAP imports, and Pakistan and its DAP imports, and them having, you know, an extra in 2.4mn t of production capacity between them, we could really see the east of Suez DAP market fundamentals change.

Tim: That could have a big impact. So you're talking there about quite a substantial investment in processed phosphates in India and Pakistan, which, I guess, would certainly increase demand for raw materials for the rock and the sulphur or acid, and change the downstream demand for DAP in particular. So, I guess that leads me to my final question which is, what is your view of medium-term prices beyond this year and beyond the season, going forward three, four years? How do you see prices developing? Do you think we'll continue to see the current firmness in processed phosphates, or do you see certain things weakening slightly? What's your view?

Claira: I think when it comes to looking at what's happening in that medium term beyond this year into next year, two or three years' time, we have to obviously consider this new Indian capacity, which is firm capacity, the potential of this Pakistan capacity, but also we've got to add into that, you know, OCP's extensive plans when it comes to the Jorf Phosphate Hub, Saudi and Ma'aden when it comes to through their Phos 3, which is 2025, ramping up over probably 2025 to 2028. And the fact that, you know, we are expected eventually to return to our post-Covid world.

So we are expecting prices after this year to start to correct downwards and experience pressure, particularly 2022 to 2023. As while the market returns to more of a normal, it'll have to get used to absorbing this new capacity from OCP, this new capacity from India. We're seeing new capacity in Brazil as well when we look at the MAP side of things.

And this is all coming in one go. It's all coming in a very compact and concentrated period. But, really, when we look at maybe beyond 2025, when these tonnes are, sort of, more embedded in the market, we've overcome the price adjustment and price correction downwards, and that's the plateau that we're expecting, we will start to see prices slowly eek back up again.

And, really, this will be as demand will start to pick up more ahead of the new capacity that's coming online, particularly as beyond that 2027, 2028 period. We don't see any embedded firm projects coming online, so capacity would be relatively steady, shall we say? It'll mainly be variants in operational levels that will provide more product, but nothing new that's fundamentally changing. So we will start to see that demand outstrip supply once more, but it's going to be a couple of interesting years with recovery from Covid and a concentrated amount of new production capacity coming.

Tim: Okay. Yes. That makes sense. And as you say, OCP's role is so important. We'd not be surprised to see OCP stepping up and expanding capacity even beyond 2026-27 if market requirements were there. So there's always the OCP role in the background for us to consider. We're up at the end of our time, so I'd like to say, Claira, thanks very much for sharing some of those really interesting insights with us today.

And if you're listening to the podcast, thank you for listening today, I hope you enjoyed the content. If you're a subscriber to Argus Processed Phosphates Analytics, then please do go and download the latest report. It's available in Argus Direct, or you may have received it by email. There's some really interesting sections in there to do with the China environmental regulation that Claira mentioned. Also, dive into the US trade duties.

And, also, I'd mentioned the PPL project profile at the end, Claira, was very interesting, looking at the DCF and a full financial model including sensitivity analysis of the proposed PPL investments in processed phosphates, but also with the attached proposed ammonia plant. I found that really fascinating. So I'd encourage readers to go and download the report and read up on the latest analysis.

Also, Argus Phosphate Rock Analytics was published in February, if that's something of interest to you. If you aren't a subscriber, of course, please visit the Argus Media website for more information, or contact your account manager to subscribe. And, please do like the podcast. If you'd like to hear more from Claira in the future or any of our other experts, we'd love to keep you on the list and keep you informed. Thank you for listening. Until next time, goodbye.