Explaining the 2021 and 2022 turbulence in nitrogen fertiliser markets

Market overview

In this special five-minute ‘long read’ blog we highlight some of the factors that have caused enormous turbulence in the Autumn 2021 and Spring 2022 nitrogen fertiliser markets and examine prospects for the rest of the season and beyond.

Fertiliser prices for all nutrients have reached unprecedented heights not seen for many years but what’s caused it all? In essence, global fertilizer prices soared to multi-year highs following surge in prices of key feedstocks natural gas and coal, and certain export restrictions put in place by supplying countries.

Global Markets

Fertiliser is an internationally traded commodity and supply and demand are balanced by large scale international trade flows connected to energy markets and, by extension, ammonia prices. Ammonia is the basic feedstock for nitrogen fertlisers but has many other industrial uses. Competition for this important chemical feedstocks is high as the global economy rebounds from Covid repression.

The UK has had a domestic nitrogen fertiliser industry located in Billingham on Teesside and at Ince near Chester since the 1960’s. Those plants have relied on generations of cheap North Sea gas as a feedstock to produce about a million tonnes of Ammonium Nitrate per year. Domestically-produced volume has been supplemented with imported ammonium nitrate, urea, sulphate of ammonia and, increasingly, liquid nitrogen which collectively amount to the 2.2m tonnes of  nitrogen fertiliser used in the UK each year.

Energy Intensive

Fertiliser production is remarkably energy intensive. We have heard it said that just one of the domestic production facilities consumes 11pc of the UK total gas consumption. Britain is at the end of pan European gas pipelines and distribution costs have recently been hiked as North Sea gas production has diminished. UK fertiliser production from aging factories is particularly vulnerable to gas shortages, price hikes and competition from the power generation, domestic heating and other higher-value industrial uses.

The current energy crisis has seen the price of gas increase dramatically across Europe as a result in the increases in requirement for power generation. This is partly as a result of intended denuclearisation in Germany and unintended shutdowns and retirements of nuclear plants in France & the UK. The contribution from wind power has been less in a mild winter. As a result gas has been needed to pick up the generation slack at a time when output from solar panels is at its lowest. Geopolitical concerns have magnified underlying increases in demand for energy. And the Nordstream2 pipeline remains dormant restricting supply that many users had been counting on.

Geopolitical Overlay

Political tensions arising from political uncertainty from other pipeline routes from gas fields in the Russian steppes to Europe passing through Belarus and Ukraine have aggravated an already fragile situation. Immediate prospects of conflict in Ukraine have not helped a febrile trading situation. The normal market safety valve of ship-borne Liquified Natural Gas [LNG] cargo imports have been impacted by supply problems in Hammerfest. Exceptional LNG demand from the Far East has left European consumers either at the back of the queue or paying substantially more.

The consequence of all these factors according to World Bank data has been that the average natural-gas price in Europe for the October-December 2021 quarter has been consistently 10 times as much as that for the year of 2020. The knock-on is that fertiliser production facilities, which rely heavily on natural gas, have had to pay high natural-gas prices, which has inevitably flowed through into fertiliser costs. The compensating increases in the value of the carbon dioxide by-product have done little to cap on-farm prices.

Finally, a further difficulty has been that fertilizer producers including China, Turkey, Egypt and Russia also curbed exports in the second half of 2021 and into 2022. This has pushed up global fertiliser prices still further, whilst import tariffs into the EU Trade block have also added to already high landed costs into stores.

Logistical Complications

Focusing at home, CF’s Ince factory remains closed and that company has scaled back some previously contracted sales from Billingham to trade customers. If all that wasn’t bad enough, the ‘lost months’ from September to December 2021 when inventory stockpiles  are normally built-up and early-bird deliveries made to farm, coincided with plant shutdowns. It’s difficult to catch that up.  

So, as February approaches the industry is having to meet habitual early spring demand whilst attempting to remedy the backlog of deliveries from the autumn without customary stockpiles. For ammonium nitrate users, the shortage of lorry drivers more generally has been further disrupted by a dearth of suitably qualified ‘ADR’ drivers legally capable of transporting hazardous goods.

In times like this, higher prices would normally draw out hidden supplies but shippers with long memories have been sitting on their hands afraid of ‘holding the baby’ in a suddenly falling market. A shipload that might have previously cost £600,000 is now marked at £2.5m. Risk avoidance is fuelling a reluctance to trade that is preventing speculative cargoes from reaching UK shores and damping demand. Unsold inventories sitting in UK ports are less than normal levels.

Immediate Outlook

Even if it were possible to secure purchases in the late spring shipment market against huge seasonal Chinese and Indian tenders, it’s difficult to contemplate the ability of the global supply chain to make up that shortfall logistically with less than a month to go to the point of use… especially as even higher prices still are traditionally achievable in the much larger French market. It’s a simple fact that most primary production was sold-out months ago with ships chartered and fixed in booming dry-cargo markets.

The combination effect of all these factors, according to informed industry estimates, is that there is a UK shortage of 250,000 tonnes of fertiliser… with only a month to go to the moment of peak consumption. That assessment takes into account on-farm reductions in application rates as the optimum rates fall from 220kgs/ha N to, say 180kgs for wheat in the light of on-farm prices well north of £500 per tonne – three times previous levels.

Immediate Prospects

Large autumn plantings will require feeding so farmers who bit hard and took early delivery at what seemed to be high prices in September should be well placed to take advantage of higher wheat prices at harvest. British Farmers who have waited for prices to fall could miss out this spring with yield penalties and crops fed sub-optimal amounts.

Looking Ahead

Looking ahead, traditionally there is a price ‘reset’ in the summer. Whilst industry commentators expect incentives to take out-of-season delivery throughout the summer to remain, the size of the price drop in June may be less than hoped for and, if the geopolitical situation in Ukraine spirals out of control, all bets will be off. Future gas contracts remain high, fuelled by insatiable industrial demand. For next season, possession at any price could become the rule for the most significant and responsive agricultural input.

Read more about Nitrasol here.

Read more about liquid fertilisers here.

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