Nitrogen producers optimistic on long term price advance

Nitrogen fertilizer producers are optimistic regarding the long term prospects for global urea prices. Indeed, Bert Frost of CF Industries recently noted in an article for CropLife that the market was “in a period of generally rising global urea prices.” Producer optimism is not unfounded. As was the case in 2018, several supply side factors are expected to aid nitrogen values this year.

Iran remains heavily sanctioned by the US; domestic production in Brazil has been reduced amid plant closures and China remains largely out of the global markets with exports for 2019 estimated at 2-2.5m. tonnes.

Brazilian production cutbacks bolster import demand

One of the main points underlying producer optimism is anticipated extra demand from Brazil. In 2018, Petrobras laid out plans to mothball two large fertilizer plants with a combined urea capacity of 1.1m. tonnes per year. This obviously creates extra room for imports with some estimates pointing to 600-700,000t of additional import demand this year.

However, this may be overstated. The two plants had not been producing at capacity for the best part of the second half of 2018 and possibly longer. As such, the shortfall in supply was already met with additional imports. Urea imports were 2.5% or 136,000t higher year on year in 2018 at 5.56m. tonnes. This figure also likely understates urea shipments of Q4 that were delayed into January 2019. Urea imports were 66% or 230,000t higher year on year at 580,000t in January 2019.

In addition, more supply can be found from regional producers like YPFB, Bolivia and Profertil, Argentina who have the capacity to supply extra volume to Brazil and are limited on other outlets.

The impact of sanctions against Iran

Another significant factor underpinning supply and demand forecasts for 2019 are the ongoing US sanctions on Iran. These affect up to 5.5m. tonnes of urea capacity.

As Iranian producers and suppliers wrestled with these sanctions in Q3 2018, urea prices hit $340pt fob Arab Gulf. Iran’s inability to sell directly to India was a major factor in supporting the Q3 rally.

However, Iranian material has been finding outlets, including markets in Turkey, Eastern Europe and SE Asia. Iranian producers continue to seek ways to supply India through future tenders, possibly through rupee-denominated accounts. Yet, should the international political landscape remain unchanged, the impact of sanctions appears factored in to market mentality providing little basis to spur a major rally in global prices comparable to that seen in Q3 2018.