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A significant impact

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World Fertilizer,

Fortunes are won and lost betting on what China will do next in the fertilizer markets. Over the past decade and more, the People’s Republic dramatically increased its production capacity for the three main nutrients essential to maximise crop yields. While the prices of urea, phosphates and potash have slumped along with other commodities since mid-to-late 2015, China’s influence on the global markets is undiminished.

“There’s a special reverence for farming in China,” CRU Principle Nitrogen Consultant Alistair Wallace said. “They wanted to achieve self-sufficiency in fertilizers, to decouple domestic prices from overseas markets, and they overcooked it.”

China is the world’s largest producer of urea – the most commonly used nitrogen-based industrial fertilizer that stimulates foliage growth in plants. In 2015, the People’s Republic exported a record 13.75 million t of urea, up 1% on the previous year, driven by almost 6 million t of exports to India – a 15% rise from the previous calendar year.

China’s urea capacity now stands at 83 million tpy and may rise to 88 million tpy by 2020, according to CRU’s latest analysis. But as global fertilizer production has increased, prices have fallen.


Clamouring to export


As of 25 February 2016, the spot price for Chinese prilled urea was US$210/t FOB, which marks a 31% fall from its peak last year of US$305/t FOB. Where will it stop?

China imposed higher export tariffs on urea from 2011 in an effort to discourage exports during the domestic application season. These tariffs have been reduced and the seasonality of the duty was abolished last year when a flat RMB 80/t (US$12/t) rate was imposed. Faced with a huge domestic surplus, producers clamoured to export their product and now China is the key supplier of urea globally.

For traders in the physical or financial urea markets, one key indicator to the future direction of prices is the operating rates of plants in China. Last year, they ran at about 72% of capacity. When prices drop below the marginal cost of production, the least efficient plants begin to shut down and prices correct. That’s the theory. Urea producers in the US were forced to cut production rates and permanently close some units during a global urea glut about 18 yr ago. Two decades ago, US natural gas feedstock costs were among the highest in the world. Times have changed and now even Chinese urea producers find it difficult to compete for US business.

Some urea producers in China are already loss-making and CRU has identified declining operating rates in January. But a sizeable chunk of the domestic industry is state-owned. Trying to second-guess commercial decisions that are not necessarily 100% commercially motivated is a risky game.


Trend towards lower tariffs


Diammonium Phosphate (DAP), the most widely used phosphate fertilizer, is in a similar situation. China is again exporting record volumes, no longer constrained by the country’s export regime. The export duty for DAP currently stands at RMB 100/t (US$15/t).

“Chinese fertilizer export tariffs are subject to changes on an annual basis,” CRU Principal Phosphate Consultant Juan von Gernet said. “While it’s difficult to pinpoint what will happen each year, recent trends have tended to be in favour of lower tariffs, which have benefitted the exporters’ competitive position.”

The impact of this has reached the US. Mosaic, the world’s largest phosphate producer by capacity, curtailed production this year in a bid to arrest the decline in DAP prices. DAP at Tampa, a US benchmark, has fallen 26% since its 2015 peak to be assessed at US$360/t FOB on 25 February.

China’s role in 2015’s bear market is clear. The country’s DAP and MAP production during 2015 hit 14 million t P2O5 – roughly 28 million t of product – driving China’s share of the global total close to 50%. Given flat domestic demand, Chinese phosphate exports exploded, as suppliers desperate to avoid inventory increases in the domestic market looked elsewhere.

Chinese phosphate producers exported 8 million t of DAP during the 2015 calendar year – a record level and 64% higher than the country’s DAP exports in 2014, according to customs data. China sent almost half of these volumes, or 3.9 million t of DAP, to India, more than double the level to India in 2014. China also increased volumes to Vietnam by 31% to 904 000 t and raised DAP shipments to Thailand by 77% to 425 000 t.

The huge increase in export volumes pushed international DAP prices lower, although returns from India were more profitable than many other alternatives, including the Americas. Overall, the 2015 DAP export price from China during January – December fell from US$470/t to US$395/t FOB. The export price tag lost another US$15/t during January 2016. Unfortunately for China, India still has about 2.5 million t of DAP stocks in warehouses across the country, a high volume even for India. The chances are slim that China will replicate its 2015 shipments to India this year, further pressuring global DAP spot prices.

China managed to export 365 000 t of DAP and other granulated phosphates in January – only marginally lower than its January 2014 volume. Still, just 22 000 t of that DAP went to India. Furthermore, global bulk freight rates have declined substantially during the last few months. Assuming rates are more likely to rise than fall in the future, Chinese exports to India will be at a disadvantage to some other suppliers, particularly DAP produced at Saudi Arabia’s Ma’aden complex.


Supply of potash controlled by a few


China is not just in the fertilizer export business. It is also a major importer of potash, as well as a growing producer.

Potash is essential to improving yields as it helps boost plants’ ability to take up nitrogen from the soil. It also supports a strong root system. The PRC had 8.8 million t of potash production capacity in 2015, up from 3 million t three years ago. Globally, the supply of potash is substantially controlled by a small number of large producers in Canada and the Former Soviet Union.

Nevertheless, China has successfully pitted them against each other over the last few years.

There is a flourishing spot market in the US for potash, but again China is a crucial industry player; the PRC traditionally helps determine the price many other countries will pay for potash each year when a group of the country’s importers gets together with overseas suppliers to negotiate the annual supply contract. Last year’s China contract price was agreed at US$315/t CFR. A significant drop from this level is expected when the next contract is signed this year, given the weakness in spot prices. Potash for delivery to Brazil, an important spot benchmark, plunged 43% from a peak of US$375/t CFR in late 2014 to US$215/t on 25 February 2016.

China imported 977 338 t of MOP in January this year, according to customs data, a 35% increase on the same month in 2015. Given the high stocks, analysts have been surprised at just how much potash China still appears to be sucking in. Some speculate there may have been early agreements at prices below the contract rate.

“China’s production will rise again this year and it will import less as it has huge inventories,” CRU Principal Potash Consultant Paul Burnside said. “Destocking is crucial – when and for how long the Chinese walk away from the market.”


Ben Farey, CRU, UK.

This article first appeared in Dry Bulk Spring. To read this and much more, register to receive a copy here.

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