Outlook: Good News From Upstream
May 10, 2013
I've read a lot of encouraging news from upstream this week. A complete breakdown of it all paints an optimistic picture for NPK in America. The Chinese urea oversupply is expected to continue through 2013 by almost everyone in the know. India's latest subsidy numbers continue to favor urea and the resulting price imbalance will keep India on its present urea-centric course for the foreseeable future.
Downstream supplies of NPK are very healthy in North America, and feedstock is presently priced to encourage production.
Domestic nitrogen production has been strongly encouraged over the last several months. Spiritwood, ND, Wever, IA and an expansion to CF's Donaldsonville, LA facility among others are a bit of a wild card, but are not expected to make the U.S. a net exporter of N until 2020 at the outside.
North American phosphate production has been robust as reported by Mosaic. Feedstocks are exploring the downside in wholesale markets, and record sendouts in the first ten months of Mosaic's fertilizer 2012/13 have the phosphate market well supplied downstream.
Greenfield potash projects are no longer a possibility for companies who expect to turn a profit, and this may become problematic if China and India decide to remedy their NPK imbalance with increased K demand. They eventually will, but PotashCorp has made mention of some brownfield expansions, and North American K producers are confident they will be able to satisfy N.A. demand for the foreseeable future. Meanwhile, K from the Former Soviet Union (FSA) will be eager to service Asian and Indian markets with the convenience of rail.
Belarus Potash Company --
BPC reports an increase of 21% in potash exports from Belaruskali during the first quarter. BPC, which was founded in 2005, accounts for 43% of global potash exports from Uralkali and Belaruskali, shipped by rail to Asian and Indian markets by partner, Belarusian Railways Company. Strength here should encourage good relations between Belarus, Ukraine and the Putin Administration.
As FSA nations walk the tightrope of international export relations, some hard lessons have been learned. The glut of North American natural gas has diminished U.S. reliance on coal which is now sent to the E.U. which in turn, is less reliant on natural gas piped from Russia, through Ukraine. In 2006 and 2009, Russia closed the natural gas valve, stopping the flow of natural gas to the E.U. through Ukraine as part of a strong-arm approach to FSU relations.
But countries like Bulgaria and Poland, who typically aren't considered big players in international energy, have found new sources of energy, forcing Putin to play nice. This will encourage stable FSU/E.U. relations and a steady flow of natural gas through Ukraine where urea and ammonia production can continue, uninterrupted. (click here for the Monitor's "Capitalism Ain't Easy")
If BPC can keep it together and provide potash to Asian, Indian and South American buyers, Canadian potash will be plentiful in North America and encourage low K pricing here in the U.S.
CF Industries --
CF released glowing news in their first quarter report this week and confirms what we have expected -- this fertilizer season will be spelled out in sidedress. CF cites favorable ammonia and UAN price realization and record shipments of UAN in Q1 2013. That means that CF is 'in the money' and this will encourage production of nitrogen, build N supplies, and keep a lid on pricing for the end user. Meanwhile, storage strategies downstream are in place to keep product on-hand where it is most in demand.
CF has a favorable natural gas margin locked in at its suppliers until July, and the way nattie pricing is headed, their next contract will likely carry a similar price tag to its current contracted $3.57. The report, however states a natural gas price anywhere between $3 and $5 would still allow acceptable returns on production.
CF also announced 41 years without a 'lost time' incident at its Huntington, Indiana Terminal, 12 years at the Courtright, Ontario facility and 4 years accident free at Port Neal. Fertilizer has been demonized a bit since the Texas explosion, but, thankfully, the American attention span is short. Safety and compliance is a priority here, and successful production depends on the welfare of the individual workers.
Mosaic disclosed last week that 16.4 million tons of P&K had been shipped during the first ten months of fertilizer 2012/13 in anticipation of transport difficulties and increased corn acreage. That constitutes a year-over increase of 15% -- an increase Mosaic calls, "the largest by a long shot since the formation of Mosaic in 2004." Only 3.4 million more tons need to ship to the U.S. in order for Mosaic to realize projected demand. The result is a potential surplus of DAP in the United States.
Steady ammonia prices based on quiet waters in the Black Sea Region, and robust export production in Trinidad will encourage P production not just in Canada, but also in Florida and North Carolina. Phosphate rock from Morocco continues to be a favorable source, and sulfur rounds out the hat trick of phosphate production at the low end of its pricing range.
This is an awful lot of good news all at once, but producers around the world seem to be waving the same flag. Natural gas will continue to rule these markets and encourage good relations between producing nations and their customers. The situation becomes even more positive with each acre that does not get planted to corn.
Upstream fertilizer producers had been expecting high planted U.S. acres to corn, and produced enough product to satisfy that demand. Shaving off a few of those acres would leave a little NPK in the bin as a hedge against future price spikes, and that is what we believe will be the case. We don't expect a return to the high inventories of pre-2008, but producers seem to have caught their breath, and the market is showing signs it has partially righted itself after that defining year.
This may lead you to wonder, Is it Time to Book Fall Inputs? Click to read more from this week's Monitor...