Fertilizer Matters EP46: Middle East Conflict - Impact on Sulphur & Ammonia Markets

Mike: Hello. Ammonia markets have risen by as much as $170 a ton since the 28th of February. Middle East FOBs are up nearly a quarter, $650 a ton, and the market has lost about 4 million tons a year of supply from the Middle East region. That's about 20% global supply, with freight costs up by nearly a third. For sulfur, prices are also up by nearly a third, driven mainly by the closure of the Strait of Hormuz, which handles about 45% of global seaborne sulfur trade. And spot offers are at their highest since 2008.

Now, I've covered the fertilizer markets for over 20 years, and I can remember the 2007-2008 boom and bust cycle, the impact of COVID, gas price spikes in 2021, and the onset of the conflict in Eastern Europe. But it's safe to say I don't think any of us have ever seen anything quite like this. So, in the next 30 minutes or so, we're going to break down what is really happening in the markets we cover. And this is the first of a two-part series on the conflict in the Middle East and what it's doing for fertilizer markets. So, today, we're going to concentrate upstream on raw material supply and the impact on sulfur and ammonia markets, and what it means as it ripples out across the globe.

So, welcome to another episode of Argus' "Fertilizer Matters" podcast. My name is Mike Nash. I'm a senior editor with the Fertilizer team based in London. And today on the show, I'm delighted to welcome back Maria Mosquera, global editor for the Sulfur Market, and Ruth Sharpe, our editor for the Ammonia report. It's great to have you with us, and a warm welcome to the show.

Maria: Thank you, Mike.

Ruth: Yeah, thanks, Mike. Good to be here.

Mike: So, there are multiple strands to this story. What I want to do is break it down into the following segments. So, we're going to put this into some context. Why the Middle East is so important to sulfur and ammonia supply. Then we'll get onto what production has actually been physically affected. We'll talk about the logistical constraints in the region. And then we're going to talk about the bottom line, how the price has been affected. And then we will try to anticipate, as difficult as that may be, what might happen next.

So, just to set the scene for anyone who's been living under a rock the last month or so. Since the 28th of February, tensions in the Middle East have escalated sharply following U.S. and Israeli strikes on Iran and Iran's response across the Middle East region. Crucially, Iran has effectively restricted or closed the Strait of Hormuz, one of the world's key shipping choke points, with vessel traffic dropping sharply, and many shipments delayed or rerouted. And that matters for fertilizer markets because the region is a major export hub for ammonia and sulfur, and the strait itself handles a significant share of global energy trade. So, disruptions are already tightening supply change, impacting trade flows, and driving price volatility. So, Ruth, if I can come to you first, just how important is the Middle East as a source of ammonia supply?

Ruth: Well, it's extremely important. It's probably one of the most important supply regions that impact all destination markets. I think we estimate it at just over a fifth of global trade, so that's somewhere between 3.5 million to 4 million tons comes out of the Middle East. And that's predominantly through Saudi Arabia, Qatar, Bahrain, Kuwait, Oman, all those regions. And it supplies ammonia to just east and west of Suez markets. Obviously, the majority of it goes to India, but it delivers everywhere, and it's developed an even more important role since we've lost all of Russian ammonia supply as well. It's kind of developed into this hub that can cover all markets, and probably the key global benchmark that's used in most contracts as well. So, yeah, it's huge for ammonia.

Mike: And Maria, I guess it's a similar story for sulfur as well.

Maria: Absolutely. I would echo a lot of that for the sulfur market as well, Middle East being really a key region, a key benchmark for the global market, and more than 20 million tons, I think it's around 22 million tons of sulfur per year moved through the Strait of Hormuz from the Middle East to export markets. Markets such as India, Southern Africa are heavily reliant on Middle East supply. And also it's the major supplier to large import markets like China, Indonesia, North Africa. Around 50% of Moroccan imports typically come from the Middle East. So, this is a significant supply shock for the sulfur market.

Mike: And I know it's a fast-moving situation, but back to you, Ruth, what actual production facilities have been physically impacted so far as a result of this conflict?

Ruth: Yeah, I mean, essentially everything, the other side of the Strait of Hormuz is trapped, and you can't get any ammonia out of there. So, the big ones in Saudi Arabia are Maaden and SABIC. We know that Maaden has at least two plants down, and the third one is just serving downstream phosphates. SABIC, we understand, is offline because our energy obviously sustained some damage, that's offline. All of the other smaller ones in the UAE, Kuwait, and Bahrain are all down. The only one that is...there's only really one region that can export and that's from Oman where we're seeing some shipments from Salalah. And then probably one of the things is there's three ships had just loaded...or two that were fully loaded that were just about to go through the straits that have actually been trapped for this whole time fully loaded and are unable to get out.

Mike: And presumably Oman can move because it's the other side of the strait.

Ruth: Yes, yeah. I mean, the Salalah port did have some strikes on it. So, initially, it couldn't because of security reasons, and they curtailed production, but they have since resumed production and some ammonia is coming out of there.

Mike: So, the majority of production that's down is not because it's physically damaged. It's because it can't actually get out. Is that right?

Ruth: Yes. Yeah, correct. Yeah.

Mike: I think, Maria, that the story is slightly different with the refineries for sulfur now. I think there's been quite a bit more material damage inflicted.

Maria: There is a bit more, I would say, but still I think the biggest story is the closure of the strait. And also, on the sulfur side, there are several vessels sitting, they're loaded ready to go. So, much of what was going to come out of the Middle East during the month of March, did load and did continue to load and is sitting there waiting for exit. We've seen a couple of sulfur cargoes, I believe it's been about two, maybe two vessels that have made it through since the closure, and then it became a bit too risky again for vessels to actually come out. But we have seen one vessel to North Africa and one to China come out since the closure.

But the damage, I think that the largest one is the Qatar Ras Laffan gas production facility, which will then take some time to ramp up, obviously, even after the strait does get opened. So, that will mean that sulfur output will be slower to come back. There's also, in Kuwait, we've seen a couple of two out of the three oil refineries in Kuwait sustained damage as well, and there have been force majeure declarations there with the third operating as normal, but that's knocked off some production there in Kuwait a significant part. Also in Bahrain, the Sitra refinery as well has sustained damage, and that will also be significant enough to mean that bringing product back online will take some time.

Saudi Arabia, the damage there has been on relatively small parts of the huge production capacity they have. There's been damage at Ras Tanura and also SAMREF refinery in the Yanbu region on the Red Sea side. But in the grand scheme of things, fairly small out of the overall production they have. And in the UAE also the Shah gas field sustained some damage as well. But the overall impact is difficult to know exactly and quantify until the strait does open. I would say also that Oman situation relevant for sulfur, some quantities also load out of Oman and also on the Red Sea side of things, Saudi Arabia does have a couple of ports that continue loading sulfur. But again, that's a fairly small part of the overall production that we would expect to see out of the Middle East.

Mike: We haven't actually mentioned Iran as a supplier, so what does that mean for the market? Ruth?

Ruth: They do export a lot to India and to Turkey. It's not key, they kind of come in and out of the market as conditions needed. They don't have particular contracts with some regions. We were in a situation just before the war broke out where a lot of the Iranian-flagged vessels were getting sanctioned anyway, so they weren't actually allowed to deliver to even Turkey and India. So, that would have kind of been factored into the market just before the conflict started. I mean, they do have an important role, I would say, but it's probably not what everyone's been focusing on. It's usually like the market has been able to usually function relatively in a balanced way without Iran, but I don't know if it's different for sulfur.

Mike: Maria?

Maria: On the sulfur side, it would be about 3% or 4% of global supply out of Iran, so it is significant. Particularly, it would be mainly the Chinese market that would be typically receiving Iranian tons at a discount compared to mainstream tons, and that's now been removed. And also before the conflict already, Turkmen sulfur that would typically flow out through Iran's Bandar Abbas port and also to the Chinese market, typically that reduced. And that prior to the conflict already was not moving toward Iran, and now we are seeing some further flows coming west via Georgia, and coming to export markets from that direction. But due to logistics bottlenecks on that route, it will be reduced also...availability of sulfur from that particular supply region will also be reduced as a knock-on impact.

Mike: What does this actually mean to the market? How has the market reacted? So, you know if we're looking at key price points, by how far and how fast have they actually risen? Maria, if I can come to you first, if you can take a snapshot of key benchmarks, what kind of price hikes are we talking about?

Maria: So, prices have come up significantly in the last four weeks since the crisis. And Brazil and Southern Africa are really the 2 premium markets where we're seeing prices move as high as kind of the $720, $740 CFR even, and that's still well above the $600 CFR barrier that a lot of the larger fertilizer producers are saying is there a maximum limit and now under negotiations for the second quarter contracts. These kind of huge numbers that we've seen in the spot market for these couple of particular markets have really been driven by low liquidity. There's very little liquidity in the market. Much of the available spot volume has been removed so we are really seeing more smaller quantities and part cargoes, and I think a lot of the consumers have moved toward taking hand-to-mouth purchases.

We've seen the larger ones kind of pull away from the market, larger consumers with a bit of stock and availability to kind of...the ability to wait and see where the market will develop. And then we've seen some of the smaller consumers, and particularly the metals producers who are buying for the refining of nickel, copper, or uranium who have a different economic and are able to pay these higher prices more comfortably compared to the fertilizer producers. And we've seen them kind of pay higher prices on these smaller quantities, and that really being centered around the Southern African ports, East and West African ports there on the southern tip and for the Copperbelt in...sold, then on from port stock in smaller quantities for delivery to the Copperbelt. So, that's really the impact that it has had on the market.

Mike: Yeah, it raises a very interesting point because I get asked this a lot in my conversations with the market. And people say, "Oh, is this like February 2022," when we saw crisis spike, obviously, what happened in Ukraine. And the answer I give is that the fundamental difference is that the affordability for fertilizers is fundamentally different. It's nowhere near as favorable for farmers. So, this idea of demand destruction and affordability because of crop prices is very different to where it was four years ago. And I see that a lot. But it's interesting, what you're saying essentially is you've got a two-tier market which actually, A, makes pricing very, very difficult, but also gives you a very, very wide spread presumably as well.

Maria: And this is exactly what we expect to see in the market, that we'll have contract prices at a lower level, and then probably small quantities of spot trading at a much higher level for some buyers, those that are able to continue operating. And probably some other consumers making decisions to lower operating rates, and looking at the economics and not seeing it as workable.

Mike: Yeah, thanks. Ruth, can I just ask the same question of you? I mean, you both publish daily pricing as well for ammonia and sulfur. I mean, how do you see these prices actually moving on a daily basis? Just give me a flavor of by how far, how fast, and where the key benchmarks are now.

Ruth: I think, so far, it's big increases. We are up about $160, I'd say, since the beginning of the war across most regions. So, the Middle East, we've gone from like $495 to $650. [inaudible 00:14:34] gone up to $775, up $160 as well for the next month. But over that period, it's been quite gradual increases, it probably has averaged about $40 a week or something like that, as the market kind of slowly figures out how it's going to replace these tons. I mean, it's quite restrained, it's quite cautious in a way.

I think there's quite a few elements why that's happened, but the market had just moved into oversupply just about a month ago. So, there was a lot of excess ammonia that could be bought and soaked up pretty quickly, and has covered all these near-term requirements, and that probably has resulted in quite a gradual increase in price ideas. That's changing massively now. We can maybe talk about it later, but the outlook for ammonia, there's gonna be a huge shortage for next month. And I imagine it will spike probably closer to where we might have been post-Russia.

And then the final element is the demand destruction question. People don't want to spike the prices and cause demand destruction. And there are a lot of different markets it's going into, but it's turning into more of an availability issue with ammonia. At the moment, I think it's hard to figure out exactly where the price is because there's not actually any ammonia to really buy on a spot basis at the moment.

Mike: Yeah. That's a good point. I think that's a common factor across both markets, when there's a lack of liquidity, actually assessing the number becomes very, very difficult. I appreciate that. I guess, as well, Maria, just coming back to you quickly, if there was an oversupply in ammonia before the crisis, it's fair to say that wasn't the case in sulfur, isn't it?

Maria: Well, prices were actually starting to come off. We were at historical highs already, and that's something that people need to bear in mind as well when looking at the sulfur price evolution since the crisis hit. We were already at a historical high level. We'd seen very consistent rises in sulfur prices since mid-year 2024, so we were already looking at affordability issues really from November, December time last year. It was already getting to those levels compared to the relationship that typically sulfur and DAP prices would have, and already a lot of consumers were citing these issues with the pricing, and we were starting to see pricing come off. And then this kind of happened only kind of three weeks into price softening.

And now, again, we are reaching those historical highs seen in 2008. We're not far off from that now today after all the price rises that we have seen. But I think also the sulfur availability will also obviously be constrained for some time, but also I think there's the link to the ammonia market. If there is no ammonia for fertilizer producers also, then it doesn't make sense to buy sulfur either. So, I think we need to look at all of those knock-on impacts, and obviously the high energy costs. Freight rates have moved up hugely, and those sort of knock-on impacts as well that will be also playing in the equation are quite complicated as well and will factor into that final calculation in terms of how high prices can actually go until affordability becomes the key issue.

Mike: From what you're saying, it sounds like the market response has been quite measured, because one of the questions I was going to ask was, you know, quite often market's driven by sentiment and drama, and missiles going in and drones attacking ships tends to have a disproportionate effect on the markets. But from what you're saying, it sounds like the markets haven't overreacted. Is that a fair question, Maria, if I come to you?

Maria: Yes, absolutely. I think that is correct, and I think those highest prices that we've seen, where markets have reacted a little bit faster and stronger, have really been in those small markets where typically we see quick reactions. And we did mention the daily prices that we have in the Chinese domestic market. We've seen the domestic price react, and I think we're seeing that in the above $700 CFR equivalents for these very small quantities traded from port stocks, where import demand, particularly from the fertilizer producers, has been a much lower level than that, and they've really not been interested in entertaining those discussions at anywhere near those levels for the larger quantities. But that's been an interesting market to follow. But I would say, overall, it's been quite a measured response, as you say. And the other market being the Dar es Salaam port warehouse stock, where we've seen, again, these very small parcels sold at very high prices, even reaching three digits now in some of the 1-ton to 3000-ton sales from port stock.

Mike: Thanks, Maria. And Ruth, would you have a sort of similar view in terms of the market response has actually been fairly measured considering just how much has been taken out of the supply chain?

Ruth: Yes, in my opinion, I've been quite surprised, especially in some certain regions, how slowly the price reacted. I mean, I guess it could be because no one really knows the timeline, was hoping maybe this might be over quicker and, you know, not overreacting. But now it's just getting more and more acute. The supply tightness is...I think there's...well, there's certainly more offline, a lot more offline now than there was post Russia. We've seen knock-on impacts in other regions that no one was predicting, like in Algeria, where this would have replaced a lot of ammonia that was lost. We've seen Algeria decide to take its ammonia production down sharply and then sell the gas on into Europe because they can make more money.

We've seen big outages in other regions, in Australia and Trinidad, and we've got question marks over whether China might impose an ammonia export ban. So, all these replacement regions don't look like they're actually going to have any ammonia. So, there's like suddenly...like after three or four weeks of the market trying to be quite measured and see how we can kind of get around these issues, all the other options that just seem to be evaporating, and the supply looks really dire. And I think now is where you're probably gonna see some serious reactions, and people are shifting.

Indications are starting to go up. People are now preparing for these prices over 1000 tons, and I think post-Russia you got to 1600 in Europe. It's slightly different then. I think the differences in Europe is production is still online there. The gas price hasn't gone up as much as it did after Russia. But it's probably going to impact different markets. But two, four years ago, I think places like India and East Asia, and yeah, so there's going to be some kind of shortage and demand destruction. So, maybe the price reaction has just been a bit more delayed this time.

Mike: Yeah. I think also what happened in 2022, it had a tremendous impact on, say, ammonia supply into Morocco, for example. But the impact was all localized. It did spike gas prices. You know, this is the common misconception about the fertilizer market at that time. It was actually the gas price that torpedoed European production, and hence spiked prices in North Africa, say, for urea, for example, because it was just uneconomic to produce it within Europe. But the actual availability of fertilizer didn't diminish. It was very much a cost-push thing, and actually, Europe and the markets adapted relatively quickly. And I guess this probably leads into my sort of next question, which is the hardest one of all, really, because none of us know how long this is going to go on for. None of us know what form it will take.

Obviously, the longer it goes on, the more acute the problem becomes in terms of supply. But we saw Europe change its flows dramatically in fertilizers, in ammonia, but also in gas after what happened in February 2022. If I can come to you first, Maria, do you sense...well, at some point this has got to end, you know, all wars do end, and the market will go back to some sense of normality. But, you know, once bitten, twice shy. Do you sense that there will be permanent changes in trade flows, and that importers will look at where they source their sulfur from and think, "Actually, we're going to diversify, or we're going to change our patterns of importation," Maria?

Maria: Well, arguably, we are already seeing some changes. We're seeing U.S. flows to Southern African ports and Black Sea tons moving to East Africa, which are unusual routes now. Also, another change to kind of price structures is that we're seeing Vancouver FOB levels now above the Middle East FOB levels. There have even been some sales actually concluded since with some consumers that have a large consumption. They know that at some stage they will have that requirement for Middle East tons as well, and they have been willing to actually book tons without knowing when those will arrive.

But now, Middle East, you will have to factor in the extra additional insurance costs. You will have to factor in you don't know when the product will actually arrive. So, now tons from another supplier would probably be more attractive immediately to buyers, and able to command a higher FOB price netback.

Also, I think we might continue to see some of these unusual supply routes continuing beyond. We even might see Russian tons that have been effectively out of the market, or FSU, Kazakh volumes that might then be attractive to further markets, and potentially even crushed lump tons that have been a little bit marginalized from the mainstream markets, again, look more attractive to buyers who would be less concerned about quality in a very tight market. But it is very difficult to see that once things start resolving in the Middle East that we wouldn't very quickly then go largely back to the old model. The Middle East is just such a large supplier and so important for the market as a supply source that it's difficult to imagine, on the long term, the market finding alternatives that would bypass the Middle East. So, expect that it will then slowly probably return to pre-war and pre-conflict situation once things start resolving.

Mike: Thanks, Maria. And Ruth, is it the same situation? Because I think, again, after 2022, there was, I think, greater movement of ammonia from West to East. We saw that more Trinidad and more U.S. and all this sort of stuff. Do you see a permanent change in trade flows possible?

Ruth: No. I think I agree with what Maria just said there at the end, that it's just too big a region that covers too many destinations that it can effectively be replaced in the long term. The caveat on ammonia is, I guess, we've got some really...like, a lot of new capacity about to come online in the U.S. Gulf. And if this does come online, hopefully, even in the next month, ramps up, this could potentially replace one million, maybe more, of the supply loss. So, we'll see a lot more U.S. coming maybe to Morocco, maybe to Europe, but it won't be enough. That's the problem. I think you're always going to need this additional capacity from Middle East producers to cover all the various demand hubs in the west.

And the likelihood is what we were kind of predicting before is when this U.S. capacity came on is that we'd see the natural east of Suez and west of Suez divide kind of come back, where Middle East generally served India and East Asia and Trinidad and U.S. did Europe and Morocco, because that's obviously what changed post-Russia. Middle East started serving everywhere because it kind of replaced some of the Russian volumes. But for me, I mean, at the short term, I guess the shipping costs and all the premiums from the Middle East may be so expensive that no one wants to take as much from the Middle East. But in the longer term, you feel like it's just got to stay there. It's so important. So, I wouldn't really be confident that it will have a long-term impact on trade flows.

Mike: Sure, understood. Okay, just to close things up, just sort of final thoughts. What are the sort of key takeaways here, and what, in terms of the markets that you cover, what are the next big calendar events that we should be looking out for? Ruth, if I can come to you first.

Ruth: That's a good question. So much uncertainty. It's so difficult. There's been so much uncertainty in ammonia market for years, and I'm sure in all the other fertilizer markets. But if we get the new capacity ramping up in the U.S., if Trinidad manages to increase its production, that will be a key factor behind sentiment. I guess we've got to be watching what happens with gas prices in Europe and how European importers choose to proceed with their imports. Like I said at the beginning, the main thing which is really shocking everyone is just how acute the shortage is now, how quickly we've flipped into that situation, and how many different regions will probably have to announce some force majeures, or come out of the market and have a lot of demand destruction.

So, it's really difficult to say. Even if the war ended quite soon, I think the knock-on impact on replacing lost tons and getting logistics moving means it's going to be a pretty turbulent year and probably higher prices. I guess people just don't know. When there's so little ammonia, they're just kind of in a bit of a shock about where prices could go. So, unfortunately, beyond that, I think everyone's just bracing for more uncertainty.

Mike: I think also you've got to look at the timing of this as well, because, I mean, talking to colleagues in India, I mean, India, this is around the time of the nutrient-based subsidy announcement in India. We've already seen urea tenders pushback, you know, and this is going into the downstream, I know. But already you've seen phosphate producers in India curtail output because they can't get the feedstock. This is impacting two of the biggest markets in the world. Look at what China's done with its export policy this week alone. It's stopped more exports. It's stopped more soluble exports. You can't move NOP anymore. You can't move calcium nitrate anymore for export. You know, this is having a real effect on supply of fertilizers. So, if you're sitting in India and you're trying to ascertain what the subsidy is going to be for DAP or urea, good luck. It's not a pleasant position to be in. Maria, what are the next big-ticket items that are on your radar in terms of where the market might go next?

Maria: Well, I think it's really the thing we're all looking at, obviously, is whether vessels can actually make it through the strait. Those vessels that have loaded and are there just waiting to be able to move through and to transit through, I think that is the first thing that the market is waiting for. And then beyond that, it will be the quarterly contracts, of course, and whether we see this larger scale demand destruction from the large fertilizer producers and how that impacts the overall pricing, with the understanding that those smaller quantities to metals companies will probably see Indonesia continuing to buy to some extent. Also, the African market will probably continue to see them able to pay higher prices than the fertilizer producers will be able to pay.

We'll probably see shortages not only as long as the conflict lasts but also beyond that, following the damage that we discussed to the actual production sites. Prices will probably stay elevated as a result of the longer-term tightness, where it will take time to ramp up. And we've got it...from the FSU, we've got shortages as well. There aren't really other supply sources that can, in any significant way, up their production, certainly. So the market will be structurally shorter for longer.

And also, additionally to that, the capacity additions that we were expecting to see already this year, really from the Middle East region, it is very difficult to see them now coming in that timeline. So, probably then it will have even a longer-term elevated pricing, where consumption growth will continue in other regions, where the production growth that we were expecting to see will probably not come in the same timeline, because much of it is in the Middle East region.

Mike: Yeah, I think the whole idea of trying to second-guess how long this goes on for, it is pretty thankless. But the general point is even if it does stop tomorrow, the market needs to feel confident, A, that the Strait of Hormuz is safe to navigate again, and that the proof of the pudding is in the eating, as they say. But also it's going to take many months for this damaged production to come back online. Thank you, Ruth, thank you, Maria, as ever, for your time today and for taking us through a rather complex and very fast-moving situation. I know it's been a tough and demanding few weeks covering these markets, so thank you for that. Clearly very unprecedented times, but I thank you again for your expertise and explaining it so clearly.

Ruth: Thanks very much for having me on.

Maria: Thanks, Mike.

Mike: And that wraps up today's episode of our "Fertilizer Matters" podcast. A big thank you to Ruth and Maria for joining us today. And, as always, thanks for listening to you. We will be recording another episode very soon on the impact of the war in the Middle East on the downstream Finnish fertilizer market, particularly nitrogen and phosphates, so don't forget to look out for that. And if you want to get in touch with us, feel free to email your thoughts or questions at fertilizer-m@argusmedia.com. Until then, this is Mike Nash for Argus Media saying bye for now. See you again soon. Thank you. Bye-bye.