Wednesday, August 21, 2019 /12:14PM / By Fitch Ratings / Header Image Credit: Fitch Ratings
Fitch Ratings fertiliser pricing assumptions have been revised, reflecting underlying market dynamics, but we do not expect any rating changes as a result of these revisions. The reduction in ammonia and diammonium phosphate (DAP) prices incorporates seasonal weaknesses and increased long-term supply risks. Mildly positive short-term market pricing trends for urea and phosphate rock are reflected in small upwards assumptions revisions.
Our lower ammonia price assumptions reflect both existing and long-term oversupply risks. In contrast with 2018, when prices increased on capacity outages and feedstock cost push, ammonia prices have underperformed our previous 2019 assumptions. Poor weather conditions in the US and delayed ramp-ups in ammonia-fed capacities in the Middle East were compounded by the commissioning of EuroChems Kingisepp plant. The pressure on prices should ease from 2H19, aided by US fall applications, some production curtailments and gas prices bottoming out. We assume a gradual recovery beyond 2019 as the pace of capacity additions moderates, but have rebased our prices at a lower level to capture the supply risk stemming from shorter lead times for new capacity than other nutrients.
The small upward revision in urea prices in 2019-2020 reflects the strong rebound observed in late 2018 partly due to US sanctions on Iranian supply. Market prices are above our previous assumptions, despite a decline in 2019. In the medium term, increased supply from marginal cost producers benefiting from lower input costs is likely to curtail price growth. Pressure could also come from higher Chinese exports boosted by the regulatory focus on reducing the overuse of domestic fertilisers, lower feedstock costs and the depreciation of the yuan. Slower-than-expected Chinese capacity closures could further compound oversupply. We consider further long-term potential for urea prices growth to be limited.
The USD5/tonne increase in our short-term phosphate rock price assumption reflects OCPs increasing use of rock volumes in its growing downstream production and reduced merchant supply. Our long-term prices remain at USD95/tonne, which assumes that modest demand increases, primarily from non-integrated phosphate fertiliser producers, will be met by gradual capacity expansions from phosphate rock exporters.
DAP prices have fallen below our previous 2019 assumptions as poor weather conditions in the US, weaker application rates in China and lower ammonia prices exacerbated the effect of the Maaden capacity ramp-up. We expect DAP prices to bottom out in 2H19 as oversupply starts reducing and high inventories in import markets are liquidated. From 2020, higher ammonia input prices should push non-integrated producers costs up, supporting higher DAP prices. Our long-term prices of USD390/tonne assume capacity additions aligned with demand growth and 30%-35% of Chinese DAP capacity kept idled beyond 3Q19.
Our higher potash assumptions in 2019 reflect prices to date. Long-term prices remain unchanged. Potash supply contracts with major Chinese and Indian buyers - previously a price floor for the global spot market - have not been renewed since 3Q18, limiting price visibility for 2H19. New capacity in the CIS expected after 2019 is also likely to put pressure on prices. Furthermore, although not our base case, higher potash prices beyond 2019 may encourage Canadian producers to restart idled plants and add new capacity (e.g. BHPs Jansen facility), which would limit price gains in the medium term.