Fertilizers analysis: winners and losers in Covid-19 pandemic

When external shocks hit markets, there are winners and losers. And while pessimists understandably point to downstream demand destruction in the fertilizer markets, the effect on crop prices and logistical issues, there have also been arbitrage trading opportunities and a switch to other products.

The good...

The most notable example this week has been India.

As the lockdown there has impacted domestic NPK production — falling by 12pc year on year in March to 560,000t — this has raised import demand dramatically to offset lost local output. Argus identified 170,000t of NPK import business this week alone, bringing total imports for April-June — the current kharif season — to 345,000t, up by 80,000t year on year. These deals include a world first — the sale of 25,000t of 12-32-16 by Moroccan phosphates and NPK producer OCP. This is a market traditionally dominated by Russian producers. Producers in Morocco, Russia, and Jordan have all benefited from the uptick in demand.

This is partly driven by necessity. As Indian DAP production has been hit, OCP's shipments of key feedstock phosphoric acid have slowed, in part pushing it to new sales outlets, including finished DAP into India this week.

On the supply side, there are other positives to take. Peruvian phosphate rock producer Misko Mayo partially restarted production as the government recognised its services as "essential", a common label globally applied by many governments to fertilizers and raw materials to ensure production and logistical safe passage.

In China, lower energy prices as a result of Covid-19 have pushed down production costs for urea producers and the consequent breakeven price for exporters.

The bad...

The main impact on the fertilizer market is logistics.

To take one example as to how this can distort fertilizer markets, the recent fall in oil prices has increased demand for floating tankers to use as storage. One knock-on effect has been lower availability for UAN vessels in the Baltic. Russian producers have had to switch to sourcing smaller vessels as freight rates have risen dramatically — by nearly 50pc in one week.

Southeast Asia has been particularly hard hit by the lockdown. In Malaysia, standard MOP prices have fallen as palm oil plantations are shut down owing to the national lockdown. Domestic urea demand in Myanmar has dried up as the national lockdown is extended to the end of April. And the Kenyan Ports Authority has suspended bagging operations at Mombasa because of social distancing, which will cause some bottlenecks in the supply chain.

...and the ugly

Of course the biggest concern is the long-term effect on downstream demand for agricultural output.

And as ever, it is often the least robust economies that are most vulnerable to these external shocks. In West Africa, the substantial cotton industry — which starts its fertilizer buying late in the third quarter and fourth quarter each year — could be hit hard by the downturn in textile demand as a result of Covid-19. This will lower demand for fertilizers and hit farmer cash flow. In a comparatively small market — Africa represents a fraction of global fertilizer demand owing to myriad historical, structural, economic and logistical reasons — the fall out could be huge. Argus estimates that west Africa tenders for around 850,000t of various NPKs from August onwards — it is a disproportionately important market in the NPK sector. This will be of major concern to producers everywhere. And while many aspects of the coronavirus pandemic are yet to play out, the effects will be felt for a long time to come.

By Mike Nash