Fertilizer Matters EP17 Urea Global supply and demand Aug 2024

Mike: Hello and welcome to another episode in the Argus' Fertilizer Matters podcast. My name is Mike Nash, and I'm the senior fertilizer editor based here in London. And today on the show, we're getting out the big guns as we are going to be talking about the global urea market, the largest and the most important market out there. As there have been several interesting developments both in India on the demand side and also in Egypt on the supply side. And today I'm delighted to be joined by Harry Minihan who is the global editor to the nitrogen weekly and daily market reports.

And just by way of quick introduction, Harry started his career at Argus eight years ago initially as a reporter, rising through the ranks to become phosphates editor in January of 2020, replacing my good self. And as of January this year, he's taken on the ultimate challenge of covering the nitrogen market. Harry, welcome to the podcast.

Harry: Thanks very much, Mike. Thanks for having me.

Mike: A pleasure. So, Harry, the big news has been the Indian urea tender. It's a big thing in the urea market. Tell us what happened.

Harry: The tender closed on 8th of July, Mike, and prices into the West Coast were slightly lower than some of the expected at just over 350 CFR. We had two counterbid rounds from IPL for the West Coast and then a final counterbid round for the East Coast. Prices into the East Coast were at a slightly higher than usual premium of $15 to the West at 365, and IPL in the end bought 434,000 tonnes of urea, most of it for the East Coast.

Mike: That on paper doesn't sound like an awful lot. The Indians typically...well, I mean they can buy 750,000. I can remember them even buying 2.2 million tonnes. What are the implications of that Harry in terms of, A, India and, B, the global market?

Harry: Yeah, indeed. You're absolutely right. It was less than usual. The key driver behind that really has just been the very high inventories of urea that India's got at the moment. Stocks as of mid-July are about 10 million tonnes. So, India's got plenty of availability, and they've been well insulated by increased domestic production. That's been keeping those urea stocks elevated, but they have been issuing tenders just to make sure that there's enough product coming into the country for the summer kharif season because consumption is really jumping and there's a likelihood that they'll, again, return to the international market pretty soon after having secured just over 400,000 tonnes in the run-up to rabi just to make sure that there's no hint of a shortage.

The overall implication for the global market is an interesting one. I've never seen a market so split on how to interpret an India tender like this before. It's almost been a 50-50 split between participants as to whether this is bullish or bearish. The bulls are saying that India is going to have to come back. The producers, sort of, rejected these prices and that, sort of, points to less product that's available than some had expected. Whereas the bears are saying that India only bought 400,000 tonnes, and they've got plenty of stocks and they don't need to buy too much more. So, the market is, sort of, really stuck as to how to interpret it. I think that the medium-term macro direction is going to be determined by the timing of the next tender. I think that's what it's going to hinge on amongst other factors.

Mike: This is a, sort of, more philosophical question, and this just occurred to me. I remember talking to you, I think it was at IFA. And you made a comment about historically the Indian tender was always a big thing and the market reacted. And there was lots of speculation about when it would happen and how much they would buy. And I remember you saying something along the lines of it's not quite as big a deal as it used to be. Maybe you can just expand on that a little bit. And what was your thinking when you made that comment?

Harry: Yeah, what I meant by that comment, Mike, was that India has really taken a step back from the international market this year and really that's just down to the increased domestic production that we've seen. Producers like HURL and Matix have really ramped up their output this year. If you look at the most recent month's data from April, May, June, we're looking at around just over 2.4 to almost 2.6 million tonnes per month of urea production. And on an annualised basis, that's around 29 to 31 million tonnes a year versus Indian consumption of between 35 up to 37 million tonnes a year.

So, the Indian government is really keen for producers to bridge that gap with the domestic consumption. And because of the increased output, we're seeing less of a reliance on the international market. That's being borne out on the latest data. If you look at urea imports from 2019 to 2020 when arrivals were over 3 million tonnes a year, and then in 2022, when it was 10 million tonnes a year, last year it was sort of just over 8.5 million tonnes a year of urea imports. And this year if you look at the figures between January to June, we haven't had a single month's imports higher than 375,000 tonnes of urea. And overall imports in the first half of the year were 1.9 million tonnes.

So, India has, sort of, really shown that they're dead set on increasing their domestic production, which is increasing their inventories, and bridging that gap between their domestic production and their consumption, and reducing their reliance on imports. But that's not to say that people still don't enjoy the theater of an India urea tender. It is still a big event in that there's lots of excitement in the run-up to it. There's always speculation as to how much India is going to buy, what's the price going to be. There's still plenty of offers being submitted into tenders. It's just this year, the Indian government has, sort of, really reduced the volumes that they're paying on the international market. So, it is having less of a knock-on effect on the supply and demand balance from that perspective just because the volumes are lower, but everybody feels a bit of drama. It's still a bit of theater for the traders, but it's more reflective of the Indians' reduced reliance on the global market.

Mike: It's interesting. Just turning to the supply side, obviously been following nitrogen the last few weeks, and we have this sort of periodic issue with gas supply in Egypt. It's on, off again, on again production. Maybe, Harry, you could just, sort of, expand a little bit on that and particularly what's been happening in the last few days.

Harry: Urea production has been hampered in Egypt really going back to the 20th of May because of gas supply issues. On the supply side, Egypt's domestic gas production has been dropping annually because of the natural decline at its Zohr gas field and on the demand side in the summer months when temperatures are now up to as high as 40 degrees in Cairo, the government has been prioritising gas flows for power generation for cooling and away from the industrial sector, which has been impacting urea production. Plants have been going on and off this week. We had another outage of three plants. You know, Helwan and Qena's granular plants were off. And Abu Qir's drill plant went off on Tuesday. The granular plants actually came back pretty quickly, but it just, sort of, highlights the precarity of the production situation in Egypt at the moment. And most producers are still running at reduced rates of around 80% on average at the moment.

To be fair to the Egyptian government, they're taking pretty active measures. I think Egypt has now swung to being a net LNG importer this summer for the first time in six years. I think they've bought over 20 LNG cargos, and they're in the market for another two for August to September. So, they're, sort of, taking active steps to reduce, sort of, the rolling blackouts that they've been experiencing all through the summer so far this year. And in the wider international market, urea supply has been very tight in general. There's been no hint of Chinese urea exports so far this year. There's been production issues in Malaysia. In the summer, we've now got the maintenance season in Russia, which is also limiting supply under the Baltic and the Black Sea. And Nigeria's also sort of largely stepped away from coming back to the market with any spot export cargos for the second half of July and first half of August. So, in general, supply is very tight in the international market, and the on and off again nature of the Egyptian output is really causing a lot of stress on the supply side.

Mike: And I guess as well it seems to me in urea that whenever a production plant goes down, the reaction in the price is almost immediate. I mean, has that been the case with the Egyptian FOBs? Have you seen those firm in the last week or so?

Harry: Initially there were pretty strong reactions, especially towards the end of May when this first started. Whereas the market is, sort of, priced in these issues now. There wasn't an enormous spike in Egyptian FOB prices this week. Suppliers were offering what little tonnenage they had available at, sort of, 380, 390 FOB Egypt. But we actually ended up having trade happening in the 360s FOB, which was a little lower than some had expected. I mean, it's still a very high price for the European destination markets, but there's a little bit of sort of fatigue on the buy side from all these sort of rolling supply outages. And most of those outages have already been priced into the market in July.

Mike: And just lastly, Harry, I mean, in view of what's been happening on supply and demand, in short term view, how do you see the urea market going forward through say the rest of the third quarter?

Harry: Well, the issue at the moment is that because there's not really a whole lot of spot availability coming to the market, we've had a real halt in liquidity. There's not a whole lot of FOB tonnenage that's trading. And on the demand side, very low corn and wheat prices have been really constricting demand at all the major destination markets. End users are just looking at their corn futures below four dollars a bushel on the CBOT, and black seed wheat in the 210s up to 220 FOB. And urea is just looking increasingly expensive right now, and that's killing off a lot of demand at the end user side of things especially in the Americas.

So, there's a little bit of cat and mouse between importers and suppliers at the moment. There has been some spot demand coming from Pakistan and Ethiopia, two tenders emerging for around 150,000 tonnes each, which is set to, sort of, mop up some of the spot availability. A lot of the availability out of the AG for August is going to be tied up with commitments for India, for Sri Lanka, for Australia, for Southeast Asia. So, the market East of Suez is looking particularly tight as long as China stays out. There hasn't been a hint of any Chinese product coming into the export markets. At the moment, nobody is really expecting cargoes to come out in September. There's always the risk that there could be a re-emergence of exports, but at the moment, we haven't seen anything from China.

So, the market is very tight in the east. In the west, there's just been a lot of delayed and deferred demand because of the poor affordability on crop prices. But we should start to see some of the supply issues unwinding for September loading cargoes once temperatures in Egypt lower, the Russian maintenance season starts to come to an end. There should be more Nigerian exports. I think maybe once we get through what's looking like a tight August, there might be room for prices to move to the downside for September loading.

Mike: That's a brilliant summary of the global situation, Harry. Maybe just a quick explanation, the China situation for our listeners, this is the result of customs inspections and just a general non-desire to export urea out of China, which is traditionally a huge supplier. Maybe just a quick phrase of the situation there.

Harry: Yeah, sure. It's been a very strange situation this year. Initially at the start of the year, we had been anticipating urea exports of maybe 3 to 4 million tonnes in May to September-October export window. But obviously now here we are coming into the second half of July, and there hadn't been any urea exports at all. The situation stems going all the way back to October 2021 when the authorities took certain measures to emphasize food security and energy security for China and raised the barriers for exports through inspections in a bid to keep fertilizer prices lower for the Chinese farmer and the energy security reasons when natural gas prices were spiking in 2021. And we're still seeing the hangover from those measures, and we haven't seen any urea coming out of China at the moment.

Domestic prices have been comparatively very high, and it seems to be largely driven by increased acreage and stronger than usual industrial demand, which is, sort of, keeping most of the urea in the Chinese domestic market even though there hasn't been any change on the production side. Production rates are still at around 180,000 tonnes a day. So, there hasn't been any sign that there'll be any Chinese urea exports for the foreseeable future.

Mike: Yeah, this is an extraordinary supply side change, isn't it? Harry, that was fantastic. Really appreciate it. Thank you for taking us through the issues on the supply side and the demand side. Interesting times to come. And that brings us to the end of this particular Argus' Fertilizer Matters podcast. My sincere thanks to Harry Minahan, Global Nitrogen Editor here at Argus. Thank you, Harry.

Harry: Thanks very much, Mike.

Mike: And as always, thanks for listening and don't forget to look out for the next episode which we will record in a couple of weeks. Until then, this is Mike Nash for Argus Media saying bye for now. Bye-bye.