Our market drivers

The basics

• Nitrogen fertilizer sales remained stable, increasing from 99.1 MMT of nutrient (N) in 2008 to 99.8 MMT of nutrient in 2009 despite the economic disruptions. Stable application of nitrogen fertilizers is characteristic of this segment.
• Phosphate fertilizer production is estimated to have decreased year on year by 5.4% to 35.3 MMT of nutrient (P₂O₅).
• Potash producers attempted to hold prices high throughout the year, which contributed to a significant decline in production from 33.2 MMT of nutrient (K₂O) in 2008 to 21.7 MMT of nutrient in 2009.
• While the highly consolidated nature of the potash market made prices less volatile for most of the year and the average price for the majority of 2009 was $636/mt. However, several producers began selling at lower prices toward the end of 2009, and prices eventually bottomed out when BPC signed a major contract with China for $350/mt CFR.

Demand

• Extraordinarily tight credit markets in 2009 affected several key Latin American markets like Brazil and Argentina: fertilizer purchases in these countries were dependent on debt financing. Subsidized markets like India and Pakistan, however, continued to purchase high volumes of fertilizers.
• One of the primary price and volumes drivers in 2009 was the after-effect of unprecedented price increases in 2008. The entire supply chain ground to a halt as the financial crisis worsened in late 2008. Traders, importers and distributors were caught with warehouses full of goods purchased at record-high prices, but with no one willing or able to buy. Whether due to stop-loss policies or simple financial need, these supplies were liquidated throughout the year, as prices were driven lower.
• At the same time, new purchases did not follow the stock liquidation, which left the supply chain largely empty by the fall of 2009.
• This increased volatility at the end of 2009, when fertilizer purchases by farmers began returning to normal levels. This, combined with production interruptions at several key suppliers, led to a nearly 50% increase in the price of phosphate fertilizers from $280-290 FOB in December 2009 to $450 FOB and higher by January 2010. Nitrogen fertilizer prices likewise showed significant strength in November and December 2009 and into 2010.
• Despite the global economic crisis and debt market freeze, Russian Federation fertilizer use increased 5% to 2.38 MMT of nutrient in 2009 according to the RF Ministry of Agriculture. EuroChem, which has a growing distribution network in Russia and the CIS, saw significantly faster growth on the Russian market, increasing fertilizer sales by 20% from 1.0 MMT to 1.2 MMT of finished product in 2009.

Key inputs

• Prices for several key inputs to phosphate fertilizers like sulphur and sulphuric acid declined significantly in 2009; prices for phosphate rock also declined. On the other hand, input prices for natural gas, the key input for nitrogen fertilizers, increased for Russian producers, as Gazprom continued its policy of gradually increasing domestic gas prices to European netback equivalent.
• While the crisis led to a precipitous drop in fertilizer prices, the price of natural gas for Ukrainian and Eastern European nitrogen fertilizer producers, which are among the highest-cost producers globally, did not decrease; this led to a significant decline in their production volumes and made them swing producers that set the floor price for the nitrogen fertilizer market. Ammonia exports from Ukraine declined from 1.4 MMT in 2008 to just 0.35 MMT in 2009. For Q1 2010, Gazprom has set the natural gas price for Ukraine at $9.45/mmbtu, which is significantly higher than prices in the US and on European spot markets.

Looking ahead:

• Major new players entered, or have announced plans to enter, the fertilizer market, possibly driven by the understanding that the long-term fundamentals of growing food demand remain unchanged.
• After the unprecedented rise in fertilizer prices in 2008, the governments of several key importers Brazil, China and India appear to have an increased interest in ensuring access to fertilizer production through national companies to help ensure “food security” and to cushion their agricultural producers from a repeat of the price increases seen in 2008.