Russia is a major supplier of mineral fertilizer to global agriculture and it will be difficult to replace should ratcheting western sanctions begin to restrict the country's access to the world's markets.
It possesses substantial potash and phosphate reserves, as well as one of the largest natural gas resources in the world, providing the country a large N, P and K production base. And while Russian supply is vitally important to the global fertilizer market, we believe that individual fertilizer commodity exposure to western sanctions will vary substantially for structural reasons.
We have assessed the potential impact of the military conflict between Russia and Ukraine on each of the eight major fertilizers we track, using six measures to quantify each commodity's exposure to sanctions.
The first five measures are designed to assess the direct exposure of each industry to sanctions on Russian fertilizer in the near term. They measure the share of global supply operated within Russia and share of Russian exporters in the global and OECD markets, and their access to them. Our assumption is that most OECD markets — except for Turkey — are likely to limit access to Russian fertilizers should the EU or US sanction specific HS codes or companies in the way that measures are currently enforced against Iranian urea or Belarusian potash.
The last metric is our attempt to gauge the level of disruption to longer-term fertilizer supply that restricted capital flows will have on ongoing Russian fertilizer construction and planned Russian investments.
Based on our early analysis, the ammonia industry is going to be the most exposed, followed by the potash and urea industries, while the sulphuric acid industry looks like it will be the least affected. The other major fertilizers fall along a spectrum between those two extremes.
Sanctions so far…
The initial impact has been limited in terms of physical supply disruptions but huge in terms of psychological shock, greatly increasing the risk profile of fertilizer trade. Booking freight from Russian ports is looking to be an early and growing problem and may result in Russian producers offering discounts on fob sales to offset from risk premiums faced by vessels loading at Russian ports.
Ammonia has been the most affected in the early days of the conflict. Around 2.4mn t of ammonia shipped from Pivdenny port (Odessa) in 2021, of which only 150,000t were Ukrainian. The balance is Russian ammonia shipped through the pipeline from TogliattiAzot and Rossosh. Typically, these Russian exporters move 1.8mn t/yr and 0.5mn t/yr, respectively, through Pivdenny.
The conflict in Ukraine has forced the closure of the Togliatti-Pivdenny ammonia pipeline and all ammonia has ceased shipping from Ukraine. This will have huge implications for supply and prices west of Suez. The largest offtakers from Pivdenny last year were Morocco (800,000t), Turkey (600,000t), India (360,000t) and Tunisia (190,000t). This means that non-integrated (with ammonia) DAP and MAP producers in north Africa will be the most disrupted in the near term.
Potash is also in a uniquely difficult position given the disruption to trade that the industry has already experienced from the sanctions against Belarus' potash sector. Direct sanctions on Russian potash would cause a combined 40pc of global exports to become unviable for Europe and the US, as US sanctions' extraterritorial effects have seen buyers in both regions largely move away from Belarusian supply.
The impact of the removal of Russia from the Swift financial transaction system and the sanctioning of Russian banks on Russian fertilizer sales is uncertain. Many Russian producers process fertilizer transactions through Swiss trading subsidiaries and we are unsure of how these will be affected in the short run.
But despite no direct sanctioning of Russian fertilizer trade and EU ports remaining open to Russian cargoes, we are already seeing impacts on fertilizer shipping decisions. Nominated vessels are loading as normal, but the fixing of future fertilizer cargoes appears increasingly problematic for Russia.
We are already hearing reports of ‘self-sanctioning' as some western companies that would normally be importing Russian fertilizer pre-empt tighter sanctions. Only sales to those European or American buyers worried about the optics of taking Russian fertilizer cargoes are likely to be affected by this, but others outside of the EU may be growing concerned about the extraterritorial effects that tighter US sanctions are likely to have.
Gas markets already pricing in risk premiums, with implications for nitrogen producers
So far, we have only considered the impacts of direct sanctions on Russian fertilizer trade and indirect effects from sanctioning of Russian financial institutions.
The European gas market has pre-emptively priced in a risk premium of around $10/mn Btu, moving from the mid-$20/mn Btu range to the mid-$30/mn Btu level. This will disproportionally affect the nitrogen industry given the industry's gas-based cost structure and that EU nitrogen producers have been setting the industry's marginal cost over the last year.
Our risk analysis in Figure 1 is focused on trade and does not include this risk premium on European gas. Nor does it consider any future increase to European gas prices should gas flows to the EU from Russia be physically disrupted by the conflict or EU sanctions.
In Figure 2, we have analysed the impact of the premium that EU gas markets are currently pricing in at the Dutch TTF hub on European nitrogen producers. We have assumed pre-conflict TTF gas pricing at $25/mn Btu and post-conflict at $35/mn Btu and $45/mn Btu, with carbon priced at $80/t CO2 equivalent (CO2e) in all instances.
Initial thoughts as US and EU sanctions ratchet up
As sanctions on Russia expand, all fertilizer products will face upwards price pressure should sanctions directly target fertilizer HS codes, fertilizer producers or their owners. Any limits on Russian exports will make global fertilizer markets less efficient. This means that buyers within the sanctioning jurisdictions — primarily the EU, US, UK and Japan — will lose bargaining power as the pool of available sellers decreases with the enforced absence of Russia and Belarus, while longer journeys to less-optimal markets will also reduce Russian producer netbacks.
In addition to any trade disruption, ammonia and other nitrogen fertilizer prices will undergo a substantial cost-push as the risk premiums on gas increase the industry's marginal cost of supply. Actual disruption to Russian gas flows has the potential to push gas prices and nitrogen costs higher still.
Ammonia is already facing both outcomes, with the loss of almost 2.4mn t of supply from Ukraine — and Russia through Ukraine — and the substantial increase in EU gas prices as European markets attempt to price in Russian risk.
And potash buyers in the west that are already adapting to the sanctioning of Belarusian exports face the prospect of losing access to Russian supplies, should the conflict continue and western sanctions begin targeting Russia's physical trade flows.
