Ammonia most exposed fertilizer to Ukraine conflict

  • Market: Fertilizers
  • 03/02/22

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.

Figure 2

Figure 1

Sharelinkedin-sharetwitter-sharefacebook-shareemail-share

Related news posts

Argus illuminates the markets by putting a lens on the areas that matter most to you. The market news and commentary we publish reveals vital insights that enable you to make stronger, well-informed decisions. Explore a selection of news stories related to this one.

News
02/27/24

Japan’s Idemitsu joins US low-carbon ammonia project

Japan’s Idemitsu joins US low-carbon ammonia project

Osaka, 27 February (Argus) — Japanese refiner Idemitsu will participate in a planned low-carbon ammonia production project at Lake Charles in the US state of Louisiana, aiming to export the cleaner fuel to Japan. Idemitsu has agreed with Japanese trading house Mitsubishi and Swiss methanol producer Proman to join their ammonia project that is targeting exports to Japan , the refiner said on 27 February. Tokyo expects domestic demand for fuel ammonia to continue rising to meet the country's net zero by 2050 goal, which has prompted companies like Mitsubishi and Idemitsu to seek fuel ammonia supply opportunities. The US project is targeting to produce around 1.2mn t/yr of low-carbon ammonia by the April 2030-March 2031 fiscal year, using natural gas and carbon capture and storage technology. The amount of ammonia that is planned to be shipped to Japan from the project is unclear. The investment ratio of the three partners is also undisclosed. Idemitsu is pushing forward with a plan to set up an ammonia import base using the existing infrastructure of its Tokuyama complex at Shunan in western Japan's Yamaguchi prefecture. It aims to supply over 1mn t/yr of low-carbon ammonia by 2030 to industry consumers, such as in the chemical and steel sectors, in the Tokuyama complex and nearby areas. Mitsubishi is aiming to import around 1mn t/yr of ammonia by 2030 for delivery to its Namikata terminal, where existing LPG tanks will be converted to store the cleaner fuel, in western Japan's Ehime prefecture. Mitsubishi is developing the Namikata project together with utility Shikoku Electric Power, carmaker Mazda, refiner Taiyo Oil, industrial gas firm Taiyo Nippon Sanso and terminal operator Namikata Terminal. The goal is to supply the cleaner fuel to customers in Japan's Shikoku and Chugoku regions by coastal vessels from the Namikata hub. Japan's demand for ammonia as a fuel is likely to hit 3mn t/yr by 2030 and 30mn t/yr by 2050, according to the country's trade and industry ministry. This will help Japan reduce its greenhouse gas emissions by 46pc by 2030 from 2013 levels, before it achieves net zero emissions by 2050. By Motoko Hasegawa Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

Read More
News

Houthi missile hits Saudi fertilizer vessel off Yemen


02/20/24
News
02/20/24

Houthi missile hits Saudi fertilizer vessel off Yemen

London, 20 February (Argus) — The crew members of the Belize-flagged Handysize bulk carrier Rubymar , carrying a cargo of Saudi fertilizer, have abandoned ship off Yemen after it was hit by a missile fired by Houthi militants late on 18 February. The British-owned vessel was in the Gulf of Aden near the Bab el-Mandeb strait when it was hit by at least one missile while another missed its target, according to US Central Command. The UK Maritime Trade Operations (UKMTO) said it had received reports of an attack 40 miles (about 64.4km) south of Mokha, Yemen, on an unnamed vessel. US Central Command confirmed that the Rubymar sustained damage and then issued a distress call that was answered by a coalition warship and another merchant vessel. The crew was evacuated safely and have been transported to the port of Djibouti, according to the Djibouti Ports and Free Zones Authority. The Rubymar was last located on vessel-tracking data in the Bab el-Mandeb strait between Yemen and Djibouti. The UKMTO said the vessel was at anchor and had been abandoned. A Houthi social media statement said the ship was at risk of sinking. The vessel departed the Saudi port of Ras al-Khair on 8 February and was bound for Varna, Bulgaria, on the western edge of the Black Sea, vessel-tracking data show. It was due to arrive on 27 February. There has been no confirmation as to what grade of fertilizer was on board, although vessel-tracking data do list fertilizers as the cargo. Bulgaria in the past has imported NP grades from Saudi Arabia. A spokesperson for the Saudi producer declined to comment on any aspect of the incident. The size of the vessel would indicate a cargo of about 30,000t. This is the second confirmed major strike on a vessel carrying fertilizer in the region. In mid-January, the US-owned Genco Picardy , carrying a cargo of 30pc P2O5 phosphate rock from Egypt to India, came under drone attack by Houthi militants. This caused a fire onboard that was extinguished and the vessel proceeded to Thoothukudi. By Mike Nash Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

Egypt’s Helwan signs deal to produce black urea


02/20/24
News
02/20/24

Egypt’s Helwan signs deal to produce black urea

London, 20 February (Argus) — Egyptian urea producer Helwan has signed an agreement with SML-INNO UK to produce 130,000 t/yr of black urea. Production is expected to start in 5-6 months. The agreement was signed on 18 February. Helwan said that black urea, a slow-release fertilizer, should boost crop growth while using 25-30pc less nitrogen than conventional urea. The Egyptian producer did not provide additional details regarding the production process. The project, which will target European and UK markets, is likely to cost $5mn. Helwan currently operates a 635,000 t/yr granular urea facility. By Dana Hjeij Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

Phosphates: Indian DAP stocks mostly steady


02/19/24
News
02/19/24

Phosphates: Indian DAP stocks mostly steady

London, 19 February (Argus) — Indian DAP stocks were drawn down by the equivalent of one import cargo in January, according to Fertilizer Association of India (FAI) data, keeping stocks steady. But imports were very low, partly reflecting a lack of Chinese exports. India produced 346,600t of DAP in January, FAI data show, down from 390,600t a year earlier. Imports were just 44,000t — a Saudi vessel — compared with 562,000t in January last year. Sales were down by 16pc to 417,900t from 499,300t a year earlier. The stockbuild/stockdraw (production plus imports minus sales) was modest at a 27,300t draw. This implies that stocks are still 1.9mn-2mn t, as estimated by the Indian government. Stocks have fallen continuously from August as sales have outpaced lacklustre imports. Stocks dropped by 2.2mn t in July-October last year. Argus estimates February-March 2024 imports at nearly 540,000t, coming entirely from Saudi Arabia and Morocco and reflecting the lack of Chinese product owing to customs inspections and the onset of the Chinese domestic season. This compares with just over 700,000t of DAP imports in the same two months of 2023. Looking at the fertilizer year to date (from April 2023), production is 5pc up at nearly 3.8mn t but imports have fallen by 13pc to nearly 5.1mn t. Sales have risen by 5.3pc to 10.1mn t. By Mike Nash Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.

News

Iran’s KPIC issues another urea sales tender


02/19/24
News
02/19/24

Iran’s KPIC issues another urea sales tender

London, 19 February (Argus) — Iranian fertilizer producer KPIC has issued a tender to sell 20,000-25,000t of granular urea, closing on 21 February. KPIC did not request a minimum bid but prices are to be on a bulk fob Bandar Imam Khomeini port basis, for loading by 5 March — similar to another tender issued last week . KPIC is carrying out a turnaround at its 600,000 t/yr granular urea plant and expects it to come back on line in around two weeks. By Upasruti Biswas Send comments and request more information at feedback@argusmedia.com Copyright © 2024. Argus Media group . All rights reserved.