Phosphate Outlook 2021: Price Rally Expected to Continue

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Phosphate prices began to rise in mid-2020, reversing a year of losses. Tight supply and an uptick in demand benefited the fertilizer amid pandemic lockdowns.

By December, the value of US diammonium phosphate (DAP) had added 58 percent to its value, rising from US$245 per metric ton (MT) to US$388.50. Much of that growth occurred in the second half of the year, when prices were at US$273.

Chinese DAP also registered a year-over-year gain, adding 45 percent to its value for the calendar year.

“Price started 2020 at decade-long lows,” explained Chris Lawson, head of fertilizers at CRU Group. “All global benchmarks increased significantly through the year.”

COVID-19 was a significant factor in moving phosphate prices, as top producer China was disproportionately affected in the first quarter of 2020. Chinese lockdowns led to supply challenges, ultimately pushing prices higher from April onward.

“Most of the major phosphates producers in China, a significant global supplier, are based in Hubei, where the pandemic first broke, and plants started closing in the region at the end of Q1,” Sylvia Traganida, senior phosphates editor at ICIS Fertilizers, told the Investing News Network.

“As a result, most other phosphates producers, like Morocco, Saudi Arabia and Russia, increased their DAP offers due to the tight availability out of China.”

Subsequent shipment and transport disruptions continued to weigh on supply, adding tailwinds for DAP prices.

“The coronavirus outbreak in China escalated shortly after the Lunar New Year holiday amid the start of the domestic fertilizer season, which was pushed back due to the virus and constraints in transportation and logistics,” said Traganida. “There was a knock-on effect on logistics, especially in China and India, as port and factory workers stayed at home during the pandemic.”

Lawson also cited the impact of the coronavirus as a significant catalyst for phosphate price growth.

“Hubei province in China, the epicenter of the virus, has over 30 percent of China’s phosphate capacity (China is comfortably the largest producer, consumer and exporter of phosphate globally). So there were some short-term supply shocks, but these were quickly recovered,” said Lawson.

“There were also severe supply chain disruptions in India, a large phosphate producer and importer. This occurred when demand was surging, tightening the market and supporting prices.”

Despite being the hardest-hit country initially, China was able to chart the road to recovery by H2 2020, a factor that aided phosphate price activity during the last six months of the year.

“The phosphates market has seen a steady export of product from China in Q2 following the resumption of production in the country,” said Traganida. “Phosphates producers focused for most of 2020 on the domestic market and also increased prices for exports. The appreciation of the yuan discouraged exports for awhile and suppliers focused on the domestic market, which offered better netbacks.”

Lawson pointed to a recovery in livestock farming as opposed to agriculture out of China as one of the by-products of Chinese recovery.

“China’s swine herd was depleted over 2018/2019, with farmers having to cull large numbers to control the outbreak of the African swine fever,” said the head of fertilizers for CRU.

“China is now in the process of rebuilding its herd. In doing so, the swine industry structure is changing, with larger industrial-sized farms starting up. This has increased compound feed demand.”

Conversely, crop output has been on the decline in the Asian nation.

“At the same time, stocks of corn and other feed ingredients have been drawn down, continuing a trend seen over recent years,” said Lawson. “This has significantly increased domestic and imported corn prices. This benefits phosphate markets because it increases the incentive for farmers around the world to plant corn, a phosphate-intensive crop.”

Lawson also noted that soybean prices are elevated due to the same factors. Soybeans are another crop that is heavily reliant on phosphate as fertilizer.

Phosphate trends 2020: Subsidy investigation propels price

COVID-19 wasn’t the only large-scale event to impact the phosphate sector in 2020. In June, US producer Mosaic (NYSE:MOS) filed petitions with the US Department of Commerce, requesting a countervailing duty investigation.

The petitions requested that the agency look into phosphate fertilizer imports coming from Morocco and Russia, both of which are top five phosphate-producing countries.

“Imports from these two countries have increased over recent years and taken some market share,” explained Lawson. “The Department of Commerce specified preliminary duty rates in November, and final determinations are set to be made in February and April of this year.”

In its statement, the company claims imports from the countries are being subsidized by the respective governments.

“Mosaic took this action because large volumes of unfairly subsidized imports from Morocco and Russia are causing significant harm to Mosaic’s operations,” reads the press release. “Mosaic’s phosphate fertilizer business employs approximately 3,500 U.S. workers and operates mines and production facilities in Florida and processing plants in Louisiana.”

The price of US DAP was US$273 in June; after the filing, prices rose to US$305 in July and continued to trend higher.

“As a result of the petition and the preliminary duties, phosphate trade flows have shifted, and prices in the US and elsewhere have rallied sharply,” said Lawson.

Traganida also cited the US investigation as a continued sector catalyst. The senior phosphate editor at ICIS expects the US-imposed duties to also open the market to more producers.

“The US duties are expected to give an opportunity to more producers to ship product to the US, like from Egypt, Mexico, Jordan, Saudi Arabia and China,” she said. “Also, new production capacity is expected to come onstream in 2021 in Morocco and Egypt.”

Phosphate outlook 2021: Strong demand supports prices

For the remainder of the summer and fall, DAP prices ticked higher, driven by increased demand earlier in the year and more stringent rules and duties on US imports.

Chinese production interruptions in H1 also paved the way for the higher price environment. As Lawson pointed out, even though the output hiccups were short-lived, there was also growth in domestic demand.

“Concerns around feed security there did help to boost demand,” he said. “We saw an increase in Chinese demand for the first time in over five years.”

Farmer aid programs and packages in the US and India helped the agriculture sector in those nations, and contributed to higher calls for phosphate fertilizers as well, offsetting minor declines earlier in the year.

“Phosphates demand has been steady in 2020 despite the pandemic. Especially in India, DAP arrivals have climbed to 5.6 million tonnes,” said Traganida.

She went on to explain that Indian DAP imports were supported by a steady rise in phosphoric acid prices, a raw material for finished phosphate.

“During the year, phosphoric acid prices rose by close to US$100 per tonne, which meant that it was cheaper to import DAP rather than produce it domestically using phosphoric acid,” she said.

Phosphate outlook 2021: Prices expected to stay elevated

From December 2020 to mid-January 2021, the US DAP price rose 7.73 percent; it is up 64 percent since January 2020.

“Prices moved higher throughout 2020, but we have seen a very sharp rally in prices over the past month,” said Lawson in a January 15 email. “This is owed to a tight supply and demand outlook in the shorter term, and positive sentiment from corn, soybean and the wider commodity complex seeping through the phosphate and fertilizer markets.”

Traganida expects to see more shipments of Moroccan and Russian phosphate to Latin America and India as a result of US duties. This will precipitate increased need for phosphates globally.

“Demand is expected to increase in the next five years, in line with the rise in the world’s population,” she said. “Global population is projected to climb above 8 billion in the next five years, together with an increase in arable land.”

Simultaneously, new projects are expected to become operational in Egypt, Morocco, China and Saudi Arabia in the coming years. New output will be important in the years ahead, as Lawson anticipates another year of increased buying.

“Very low prices at the beginning of (2020) encouraged buying, but so too did improving agricultural commodity prices and better growing/fertilizer application conditions,” he said. “We saw big jumps in Chinese, US, Brazilian and Indian demand. This theme is continuing in 2021 as crop prices continue to rally.”

Longer term, the head of fertilizers at CRU is forecasting cyclical activity in the phosphate market.

“We expect demand to remain robust over the next five years, but it is expected to cool from what we are seeing in the market right now (incredibly strong demand),” he said.

Sector-wide capacity growth mixed with overcapacity out of China is anticipated to hang over the space as well.

“This will keep prices moving in 18 month cycles, as we have seen over the past five years,” added Lawson. “But generally we see prices moved modestly higher on an annualized basis.”

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Securities Disclosure: I, Georgia Williams, hold no direct investment interest in any company mentioned in this article.

Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.