Friday, March 29, 2024

Urea prices surge

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Increasing Indian demand, lags in global production capacity and government policies have all contributed to a surge in urea prices in recent weeks.
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The latest announcement by Ravensdown that has it lifting its urea prices 5.5% to NZ$507 a tonne puts it almost on a par with Ballance’s pricing as companies face almost a 40% rise in US priced urea costs since November.

The price increases were a rapid turnaround from July last year when commodities tracker Index Mundi had July prices at US$177 a tonne, the lowest level since July 2004.

The same index has urea prices rising at a rapid clip, up 11.5% in January alone from December 2016 and now sitting on US$241 a tonne.

In a letter to shareholders last week Ravensdown stated the increase came off the back of falling global urea prices in 2016, brought about by increased production capacity in North America and North Africa.

This had then caused a number of less efficient plants, particularly in China to close, in turn reducing production and therefore supply.

Ravensdown general manager Mike Whitty said the urea market was prone to volatility because it was such a heavily traded product.

“It has been a bit overcooked, but we are even starting to see that come off now.” 

He said when prices fell to US$180 a tonne, some major producers dropped out including Indonesia and China.

“Around US$200 a tonne marks the point where countries will stop exporting.”

Over 2014 and 2015 China was responsible for exporting 13.5 million tonnes a year, but last year this slid back to 9.5m tonnes, with estimates another 10-12m tonnes of capacity still existed but has been idle.

Mark Wynne, Ballance chief executive said expectations were this year that China would move from being an net exporter of an average of 5m tonnes of urea, to importing about 3m tonnes.

He anticipated in the short term some supply driven spikes may still occur, but longer term there may be a more stepped approach to any price movements.

“If you take a 10 year view prices are at their lowest, so they have a long way to climb before reaching their average.”

The price hike has caught some analysts off guard, given global supply was anticipated to continue increasing following the commissioning of three new urea production plants in the United States.

But those plants had taken longer than expected to come on stream while there remained a squeeze on Chinese capacity.

Wynne said Ballance’s Kapuni plant was back on stream after major maintenance and its future was under consideration by the company.

“Our ultimate challenge is to say do we invest in a new one, or do we run the one we have for a few more years yet?”

He confirmed there was no concern over gas supplies in Taranaki running out in the near term.

India’s extensive use of urea has impacted on urea demand as the government focused on increasing domestic agricultural productivity, but it has a stagnant level of domestic production totalling 22 million tonnes.

Subsidies keep prices at about US$80 a tonne but India was eight million tonnes short of product last year.

Whitty said a tender in October for over one million tonnes followed by another, since cancelled, drove market optimism.

Over use through subsidisation has pushed the Indian government to run “soil health cards” to promote more balanced use of fertilisers.

With oil prices bouncing around the US$50 a barrel market, it was not a driver for price rises and Whitty said prices appeared to be starting to settle in the US$200-$250 range which should bring some stability over coming months.

“It is a good place to be. It keeps marginal producers involved. The big unknown from here is the demand from US, China and India over the coming spring months.”

Wynne said the NZ exchange rate was the other variable to watch, as pressure came through United States interest rate increases.

“Any weakening in our dollar will lead to more expensive urea, but it will also contribute to stronger commodity prices for farmers which will be welcome.”

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