Have fertilizer prices peaked?

Recent developments suggest the worst may be over, though prices are likely to remain high relative to the period prior to the Ukraine-Russian war.

Russia and Belarus are major players in the global fertilizers market. In 2021, Russia exported a total of 37.6 million tonnes of fertilizers, including 14.5 million of nitrogen, 11.9 million of potash, and 11.2 million of complex fertilizers, for a total of $12.5 billion, the Russian Federal Customs Service estimated.

Russia delivers nearly 20% of mineral fertilizers to the global market, primarily serving farmers in the European Union and Latin America.

In June 2021, Belarus stopped sharing official statistical information pertaining to the mineral fertilizers industry operation in a bid to countervail US sanctions imposed in August and September of that year. In the previous years, Belarus exported potash for $2.5 billion per annum, primarily to Brazil, China, India and the European Union. In early 2021, Belarus accounted for roughly 17% of the world’s potash export, the Belarusian government estimated.

Over the past few years, Russia and Belarus have shared a common export policy, including in the mineral fertilizers market, with a large share of Belarussian mineral fertilizers being exported through Russian seaports in the Baltic region.

“Russia is a very powerful player in the global fertilizer market,” said Mark Goykhman, chief economist of the Moscow, Russia-based TeleTrade Information and Analytical Center. “Our country is the leader in the world’s nitrogen fertilizers exports, accounting for about 18% of the global supplies. It is closely followed by China (16%) and the EU (9%).

“In the list of the largest phosphate fertilizers exporters, Russia ranks third, holding a 15% market share after China and Morocco, while in terms of potash fertilizers, its share used to be close to 24%, compared to 38% of the largest supplier — Canada.”

Fears of skyrocketing prices

In part due to Western economic sanctions introduced against Russia following its invasion of Ukraine in February, Russian and Belarussian fertilizers exports have plunged into chaos.

Andrey Guryev, head of the Russian Fertilizer Producers Association (RAPU), estimated in June that though fertilizers had not been subjected directly to the Western sanctions, supplies nearly halved in April-May, owing to a logistics crunch and problems Russian suppliers experienced with collecting payments for delivered products.

Belarusian state potash fertilizer producer Belaruskali found itself in a similar situation, being stripped of part of the foreign sales markets, Guryev said.

If Russian and Belarussian fertilizers do not reach their customers, the 2022-23 grain harvest is likely to be in trouble, Guryev said, predicting this would spark a tremendous food crisis. The European Union imports 25% of mineral fertilizers from Russia, Norwegian-based producer Yara estimated.

As estimated by RAPU, prices for mineral fertilizers jumped by 30% on average from February to April 2022, reaching all-time highs.

“It is unlikely that it will be possible to quickly replace the volumes (of fertilizers) supplied by Russia and Belarus to the European market; the supply quantities are just too big,” said Dmitry Puchkarev, an analyst of the Moscow-based stock exchange firm BCS World.

If Russian fertilizers exports stop, the market prices will “fly up into the stratosphere,” said Leonid Khazanov, an independent Russian analyst, estimating that the price of carbamide, which in Europe already has surged to nearly $1,000 per tonne, could soar above $2,000 or even $3,000 per tonne.

The price rally in the mineral fertilizers market also is linked to the turbulence in the natural gas market, where prices have been hitting new highs this year as Russia curbs supplies to the European Union.

“Against the background of the high cost of natural gas, we should not expect a drop in prices for carbamide and other types of nitrogen fertilizers in Europe,” Khazanov said, adding that European companies suffer from high prices and have to decrease production.

In this scenario, the European grain industry will see a domino effect: farmers will have to reduce purchases and use of fertilizers, the yields of their crops will fall, food production will drop, and prices will soar, Khazanov warned.

Pushing through restrictions

Today, Russian and Belarusian mineral fertilizer exports primarily are hampered by logistics issues. Many foreign transport operators have refused to work with Russia, explained Sergei Grishunin, managing director of the Moscow-based NRA rating service.

International transport companies refuse to provide vessels for the transportation of cargo of Russian origin even if the cargo itself or the cargo owners are not under sanctions, Guryev said. Besides, foreign businesses refrain from providing insurance for cargo transportation from Russia, and there are difficulties with financial clearing for transactions due to time-consuming banking compliance procedures.

“These artificially have created barriers destroying established logistics schemes and supply chains used to deliver fertilizers to end consumers, and therefore further escalated the food crisis,” Guryev said.

Grishunin added: “Important factors that put pressure on the export supplies are sanctions (imposed) against the owners and managers of particular companies.”

Khazanov recalled when EU authorities introduced sanctions against Andrey Melnichenko, a co-owner of the Russian major fertilizer company Eurochem, the bank accounts of its subsidiaries Eurochem Antwerpen and Lifosa plants were immediately blocked.

Currently, Russian ships are prohibited from entering European ports. In addition, problems with cargo insurance and sanctions against the financial sector hamper supplies, not just to the Western countries. Khazanov said traders in Nigeria and Bangladesh urgently had to seek more expensive potash fertilizers on the global market, having no ability to place an order with the Russian companies.

Guryev warned that amid strong uncertainty, Russian fertilizer producers had to downsize their investment programs tremendously. Last year, RAPU forecast investments of over 2 trillion rubles ($35 billion) to be allocated in the expansion of Russian fertilizers production in the course of the next several years.

Loopholes created

However, some loopholes have been created to ensure the world market would not be denied Russian and Belarussian fertilizers.

As of July 20, the EU has allowed the partial unfreezing of some funds of Russian banks with the requirement that the money is used toward the global trade of food and fertilizers. The decision has been welcomed by the Russian mineral fertilizer producers, who called for European leaders to adopt concrete rules facilitating the mineral fertilizers trade.

“We hope that an EU directive, resolution, authorization or another document will be issued in the near future that will guarantee banks, insurance companies, shipping companies, and suppliers of technologies and equipment for the mineral fertilizer industry in the EU and third countries that their relations with Russian fertilizer producers will not be looked at through the prism of sanctions legislation,” Guryev said.

In addition, the US government reportedly is urging agricultural and transport companies to buy and ship more Russian fertilizer as fears of sanctions caused a sharp drop in supplies, fueling a rise in global food prices. Some European farmers called on their authorities to establish clear rules for importing fertilizers from the east.

Rules for purchasing fertilizers in Russia should be the same for everyone, said Indulis Jansons, board chairman of the Latvian agricultural company VAKS.

“The same rules must be observed all over the world,” Jansons said. “It is wrong that the US, as well as some European countries, allow the import of fertilizers from Russia, but we remain firm in our position.”

Relief on the horizon?

The Russian Fertilizer Producers Association (RFPA) expects the export issues to gradually wind down in the second half of the year, securing price relief on the global market. The RFPA estimates phosphate prices will fall to $750 to $850 per tonne (from a high in April of $1,047) while it forecasts the price of potash fertilizers dropping to $560 per tonne (from a record high of $875).

Khazanov forecasts that by the end of 2022, carbamide could fall to $900 per tonne, DAP to $850 per tonne, and potassium chloride to between $700 and $750 per tonne.

BCS Global Markets expects fertilizer prices to gradually decline in the second half of the year but remain near historically high levels.

The current crisis in the mineral fertilizer market also is expected to spark an interest in green fertilizers. Norwegian chemical company Yara said it would produce, starting next year, green fertilizers that will have an 80% to 90% lower carbon footprint than the ones made with natural gas.

It said production would be spread between Norway, the Netherlands and Australia, with expectations to produce 60,000 to 80,000 tonnes of fossil-free green mineral fertilizer. This amount is unlikely to change the market situation in Europe dramatically, but there are chances that green fertilizers will start playing a more important role on the continent in the future.