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Indian phosphate fertilizer demand is the lowest it has been in recent years, but it could indicate a return to stronger pricing.
Recent phosphate delivery contracts signed by two unnamed Indian customers provided a clearer view of current market sentiment as buyers agreed to purchase between 500,000 and 700,000 tonnes of diammonium phosphate from US exporter PhosChem last week.
PhosChem has a deal to supply the buyers with 2 million tonnes of phosphate per year for three years at prices that are renegotiated each year. The relatively strong price for the transaction, US$580/tonne FOB US Gulf according to PhosChem, is seen as a precursor of a potential rebound within the market after months of sagging prices, demand, and fertilizer sales.
Russian-based PhosAgro CEO Maxim Volkov announced last month that PhosChem reaching $550 a tonne would be seen as a “positive” development that “may lead to an upward correction in prices.” Phosphate fertilizer prices have been sliding since fall 2011, sitting consistently below the US$600 mark and hitting a recent low of $502.50/tonne in March of this year.
Prices have been under pressure in recent months in part due to an excess supply of resources becoming available to the market, including available Chinese exports and a steady pace in the development of a new Saudi Arabian phosphate project. Saudi Arabian Mining (Ma’aden) announced plans in February to invest 21 billion riyals (US$5.6 billion) in the project as part of a new industrial city in the country’s north. The project recently received more than 7 billion riyals in bank commitments in support of its phosphate and aluminum operation expansions.
The missing (weak) link
India has been held as the missing piece of the phosphate puzzle and is a country on which many analysts have pinned their hopes for the start of a rebound in phosphate markets. Though it is the world’s largest consumer of phosphate fertilizer imports, India’s demand has weakened in the past months.
Reductions in government fertilizer price support announced last year are beginning to impact producers’ margins. India also announced that GDP growth in the most recent quarter fell to 5.3%, the lowest level in nine years.
Citing uncertainties in the global economy and rising oil prices due to increased tensions with Iran, Indian Prime Minister Manmohan Singh said that “[t]hese are difficult times for our country and for our economy, caused to a very large extent by circumstances over which we have little or no control.”
North American phosphate fertilizer sales have remained robust despite the increase in supply. Like the potash markets, which have been strong in the second quarter after a slow start to the year, strong volumes of phosphate sales have been one of the few bright spots for phosphate producers PotashCorp (TSX:POT,NYSE:POT) and Mosaic (NYSE:MOS), which have hit 22-month lows in stock markets.
Soft commodities soften
Beyond the macroeconomic forces working against phosphate, soft commodities prices have fallen hard off recent highs and have given farmers little incentive to invest in future crop implements.
A recent Seeking Alpha article highlights this slump in soft commodities, noting declines in corn, wheat, sugar, and soybeans over the past two months; soybeans dropped by 10 percent and sugar declined by 23.6 percent.
But despite price declines, weather may prove a confounding factor as heat and a lack of rain have left many US Midwest corn crops in “abnormal dryness” or “drought” conditions. Challenging growing conditions have led investment bank Morgan Stanley to caution that corn yields will be 14.1 billion bushels, more than 700 million bushels lower than an initial US Department of Agriculture estimate.
Wheat markets also appear to be in for elevated demand in the coming months as numerous analysts have projected a sharp fall in Russian wheat exports from their 2012 crop. European wheat markets are also expecting lower-than-average export frequencies on lowered yields.
With these dynamics, phosphate fertilizers are likely to see continued demand to make up for weather and demand-induced crop shortages. However, supply dynamics will be a key area to watch closely alongside maturing summer agriculture yields.
Securities Disclosure: I, James Wellstead, hold no direct investment interest in any company or resource mentioned in this article