Aleksey Kalachev: ‘The position of fertiliser producers looks strong’

Analyst of FG Finam about what is happening on the fertiliser market in Russia and the world

The global fertiliser market has a long-term upward trend. The demand for them continues to grow already due to the increase in the population of the planet with a limited space of acreage. While the intensification of agricultural production and increasing yields require more and more fertilisers, says Aleksey Kalachev, an analyst at Finam. In the author's column for Realnoe Vremya, the expert discusses Russia's place in the fertiliser market and a possible increase in prices for them.

A price correction in global fertiliser market

Price increases never occur uniformly, experiencing ups and downs. But in the last 2 years, there has been a phenomenal rise in fertiliser prices. Since 2020, they have soared 2,5-3 times, which is the result of a global deficit caused by a number of reasons.

A sharp rise in natural gas prices, especially in Europe, has led to a reduction in the production of ammonia, which is the main starting component for the production of nitrogen fertilisers. Besides, China, the largest supplier of phosphates, has restricted their exports to ensure the domestic market and food security. The potassium chloride market has suffered a big blow due to the imposition of sanctions against Belarus after the harsh suppression of popular unrest in the republic in 2020. Before that, Belarus accounted for about 16% of world production and more than 18% of world exports of potash fertilisers.

Against the background of rising prices and in order to meet the needs of the domestic agro-industrial complex, quotas for the export of nitrogen and nitrogen-containing fertilisers have also been introduced in Russia, limiting the volume of supplies abroad at the level of previous years. Besides, since the second half of the year, fertiliser producers have frozen prices for Russian consumers.

The beginning of the Ukrainian events and the wave of sanctions imposed against Russia have also affected the export of fertilisers. Although the sanctions were not directed directly against the industry, problems with supply logistics and settlements in foreign currency have affected export volumes. According to the Institute for Natural Monopolies Research (IPEM), for 5 months of 2022, the shipment of chemical and mineral fertilisers by manufacturers to the domestic market increased YoY by 20,1%, and to the external market — decreased by 21,8%.

Despite the continuing shortage, in recent months, the global fertiliser market, as well as other commodity markets, has seen a price correction. Prices for urea have dropped by 30% since April peaks in 3 months, and prices for DAP (diammonium phosphate) have rolled back by 20%.

Potassium chloride prices remain stable, but this is a specific market. Long-term deals with large volumes and fixed conditions are concluded on it, so prices change discretely. They started rising later than the others and are in no hurry to go down.

In general, fertilisers on the commodities market behave in the same way as other commodities, that is, they are losing their price against the background of the strengthening of the dollar following the increase in US Federal Reserve rates. Probably, such a correction can also be supported by a seasonal factor — harvesting is in full swing in the Northern hemisphere, and a new sowing campaign is still far away. It is possible that by the next sowing quotes will resume growth against the background of a new increase in demand and a continuing shortage of fertilisers.

Position of Russian fertiliser producers looks strong

Russian fertiliser producers as a whole have found themselves in a more stable position both in relation to foreign competitors and in comparison with other industries. Their advantage over competitors is that they are not being affected by the global energy crisis. There are plenty of raw materials and energy in the country and they do not have to pay for them at market prices. This maintains high profitability of production and, at the same time, win in price competition in the foreign market.

Besides, part of the sales is provided by the domestic market, although this imposes some restrictions. In particular, the prices of fertilisers for supplies to agricultural enterprises were frozen by producers a year ago, and this freeze lasted until the end of May 2022. By the end of the year, it is planned to hold three rounds of domestic price increases, which have already been agreed with the Ministry of Economic Development, the Federal Antimonopoly Service, and the Ministry of Agriculture. The first indexation was to take place from June 1 — by 5% for all types of fertilisers, except saltpeter, the second — from September 1 — by 5%, and saltpeter — by 10%. And the third indexation will be on December 1 — by 8,4%, for saltpeter — by 8,6%.

Against the background of other industries that have been seriously affected by sanctions, such as ferrous metallurgy, the position of fertiliser producers also looks more strong. Direct sanctions against fertilisers in conditions of shortage have not been introduced and will not be introduced. In the USA, fertilisers and other agro-industrial products have been added to the list of essential goods, the import of which is not subject to a ban.

Moreover, having closed settlements in dollars for Russia back in March, in July the US Treasury issued a general license authorising settlements for the supply of fertilisers and agricultural products. In addition, just a few days ago, the European Union intends to unblock the assets of some Russian banks for settlements on food and fertilisers.

This exceptional attitude is due to the place that Russia occupies in the world fertiliser market. Our country accounts for about 10% of the world's production of chemical and mineral fertilisers, including about 8% nitrogen, about 7% phosphorus-containing and about 16% potash. At the same time, the country is not among the largest consumers of fertilisers, unlike China, India, Canada and the USA, which are not only the largest producers of fertilisers, but also their largest consumers. Therefore, Russia's weight in global fertiliser exports is even greater than in global production. Russia's share in global exports of chemical and mineral fertilisers is about 16%, including about 13% for nitrogen, about 16% for phosphorus-containing and almost 18% for potassium chloride.

It can be said that the chemical and mineral fertilisers industry is in the most advantageous position among other industries, which should affect the financial results of the year. The difference is clearly noticeable in the stock market.

There is a small number of producer shares on the Moscow Stock Exchange. The most liquid of them are the shares of the main producer of phosphorus-containing fertilisers PhosAgro and the supplier of nitrogen and nitrogen-containing complex fertilizers Akron. Suffice it to say that since the beginning of the year, against the background of sanctions, the value of PhosAgro's shares has increased by 23,5%, and the price of Akron's shares has risen by 35,9%, while the Moscow Stock Exchange Index has fallen by 45%.

Aleksey Kalachev

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The author's opinion may not coincide with the position of the editorial board of Realnoe Vremya.