Sounding the price klaxon
Editorial from the May/June issue of?Fertilizer International
The war in Ukraine has caused 9,000 civilian deaths and created 5.7 million refugees. If this immense and spiralling human tragedy was not enough, the unprecedented shock inflicted on commodity markets continues to unfold.
“I’ve been covering the market for 20 years and have never seen anything like the last 2-3 weeks,” Mike Nash, senior editor for fertilizers at Argus, told delegates at Fertilizer Latino Americano in Miami at the end of March. At that time, the Argus fertilizer index had moved upwards by 100 points in the several weeks since the conflict began.
In fact, the rise in average fertilizer prices has been so precipitous they have now exceeded their previous 2008 peak.
CRU’s fertilizer price index, for example, reached 390 on 25th March – well above the previous record of 360 set in 2008. The index, although it subsequently fell back in the first three weeks of April, remains above 2008 levels at the time of writing.
This unfolding fertilizer price shock has been a white-knuckle ride. Urea, ammonia, phosphates and potash all charged upwards in the days following the invasion of Ukraine, as an already tight market faced further supply constraints.
This upwards spiral accelerated in mid-March. In a single week, prices across the board – from nitrogen through to phosphates, potash and sulphur – all surged dramatically, in some cases by triple digits, staggering rises which exemplified March’s commodity market mayhem.
The economic fallout intensified as March progressed – upending energy, freight, agricultural and financial markets. Baltic ammonia prices surged by almost $400/t in a single week to join urea and potash at new records. By March 21st, CRU’s fertilizer price index surpassed its previous 2008 high to set a new all-time record of 377, having climbed 30 percent since the start of 2022.
With prices now in uncharted territory, the index reached another new high (390) by March 25th. Potash exceeded all previous price norms as buyers in Brazil and Southeast Asia panicked at the lack of exports from Russia and Belarus. Urea prices also jumped in the Baltic, Black Sea and China. Phosphates prices in Europe and Latin America, meanwhile, approached record levels too.
As the fertilizer industry gets ready to gather in Vienna for IFA’s annual conference at the end of May, there is some irony in the fact that the last time IFA convened in the Austrian capital the market was at the very pinnacle of the 2008 price rally.
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The 2008 fertilizer price spike (and its aftermath) is not necessarily a reliable guide to the current price surge – or what will happen next. In 2008, it was a combination of strong demand, rising crop prices, high farm profits and good access to credit which spurred a price rally that accelerated fast towards the middle of the year.
Whereas it is supply scarcity, both real and imagined, that is the key price driver currently.
Analysts like to talk of price signals. And March’s off-scale prices certainly sent a loud and clear signal – a klaxon to warn the market of the high risk of supply shortages. The problem for the fertilizer market is that this price klaxon – no matter how deafening – can’t instantly address a fundamental lack of product.
As CRU’s Peter Harrisson rightly said: “Higher prices are not going to solve the problem. They’re not going to fill the market up with new supply.”
Even if the underlying drivers are not the same, the events of 2008 do illustrate what happens when an unsustainable price bubble bursts. The fertilizer industry, in common with other commodity markets, suffered a cataclysmic reversal in fortunes between late 2008 and mid-2009.
The downturn that came, as 2008 ended and 2009 began, was swift and brutal. With the global economy faltering, fertilizer demand collapsed as cash-strapped farmers stopped buying inputs. Prices predictably plummeted as sharply as they had risen, leaving a supply chain choked with over-valued and unwanted stock. The resulting collapse in sales led to widespread production shutdowns.
14 years on from those events, high agricultural commodity prices are helping maintain farm profitability. Yet some still view demand destruction as increasingly likely due to high fertilizer prices and supply shortfalls.
While there were signs of the market stabilising in April, and even some price softening, ratings agency Moody’s is forecasting that some fertilizer benchmarks will remain above $1,000/t well into 2023. That suggests the current price rally is beginning to look less like Everest and more like Table Mountain.