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The world markets are currently reeling from the effects of the
Covid-19 pandemic that is sweeping the globe. The fertilizer sector
has been affected since the outset, primarily in China, the most
significant producer and consumer for phosphates, sulphur and
sulphuric acid, while going forward it could be Brazil and India
that hit the headlines. The reaction on prices however has been
mixed with tighter supply of phosphates, due to the production
constraints in China, prompting a reversal in the downward trend
while the price of sulphuric acid, already weak, has all but
collapsed. In response to the increase in domestic phosphate prices
since the outbreak, the Ministry of Agriculture and Rural Affairs
has stated that it will closely monitor supply and price movement
of chemical fertilizers to prevent the "unreasonable increase of
prices". The outbreak of novel coronavirus in China has to date had
the most critical impact across the Chinese fertilizer sector,
affecting the movement of both fertilizers and raw materials moving
in, out and around the country and particularly in Hubei province,
the initial epicentre of the virus. Large swathes of industry were
shut down from the end of January, limiting both demand and supply
for all relevant products as transport and storage constraints
presented mounting challenges across the sector.
The experiences of China over the past few weeks will be
analysed closely as the virus increases its hold over other parts
of the globe. In this vein it is worth looking more closely at
developments in the Chinese market since the outbreak began in
January to help try and gauge the potential impact to the wider
fertilizer sector.
Production in China
The province of Hubei plays a pivotal role in the Chinese phosphate
industry as some 45% and 27% of the country's MAP and DAP capacity
respectively is located in Hubei. With a clear freight advantage
being located on (or close to) the Yangtse river and its barging
system, Hubei phosphate fertilizer producers have some of the
lowest costs for exports and for domestic shipments to NorthEast
China. The province also has around 30% of China's total phosphate
rock production, accounting for between 25-30 million
tonnes/year.
For nitrogen and potash, the region is less significant in terms of
production with just three urea producers in Hubei with a total
capacity of 2 million t. Nevertheless, annual demand ranges between
2.7-2.8 million t resulting in up to 1 million t urea is delivered
into the province each year. It has no primary potash capacity but
has high demand for MOP & SOP to supply large NPK compound
producers in the region.
As of mid-February, only four of the larger DAP and MAP
producers in the Yichang region of Hubei were producing: Yihua,
Xingfa, Sanning and Xangfeng, along with a few medium sized MAP
plants. All other Hubei based phosphate plants had suspended
production (or else were not allowed to resume production after
winter turnarounds), representing approximately half of Hubei's
phosphate industry. Producers elsewhere in the country had
sufficient stocks of product to meet the emerging localized
shortages in key demand areas ahead of the spring application
season, meaning that operating rates outside of Hubei (e.g. in
Guizhou or Yunnan) did not increase to compensate lower output from
Hubei during this period.
Production rates fell to around 20-30% of total capacity causing
a significant impact not just on the supply of phosphate
fertilizers but also on demand for raw materials such as sulphur
and sulphuric acid. Hubei accounts for some 25-30% of all sulphuric
acid consumption across China. The lockdown in Hubei has caused
severe bottlenecks in the delivery chain for sulphuric acid leading
to storage constraints for many smelters all over the country. This
in turn led to some smelters having to reduce production levels to
contain the sulphuric acid inventory situation while reducing
ex-works prices of sulphuric acid to zero and below.
While demand for sulphur from the phosphate industry declined in
accordance with the curtailment of production, domestic sulphur
supply has also declined as refineries and gas plants in the
affected regions have cut back or suspended production in response
to a lower demand from the wider industrial sector. At Sinopec's
Puguang plant, production of sulphur was running at a lower rate
through February and much of March. With the uncertainties over
freight combined with lower domestic availability and anticipation
of improved domestic demand, delivered sulphur prices into China
have found some much needed support in recent weeks.
As of 10 March, those phosphate fertilizer plants that had been
shut down since January have been allowed to start proceedings to
resume production. Operating rates will be low to begin with while
production is ramped up and as such, normal activity is not
expected until April. This is providing much needed relief to the
copper smelting industry which has been faced with sulphuric acid
tanks reaching capacity against a backdrop of falling demand.
Wuhan, the epicenter of the Chinese Covid-19 outbreak, will finally
end its two month lockdown on 8 April, according to a statement by
the Hubei Provincial government while travel curbs for other parts
of the province will be lifted from 25 March.
Logistical Constraints
Logistical constraints have been the main challenge for all sectors
of the industry. During the peak of the outbreak the country was
divided into thousands of islands by the isolation policy. In a bid
to contain the virus, people and cargoes were separated between
provinces, cities, towns or even villages. The railway system has
continued to operate but loading & unloading have been
constrained by a shortage of labour resulting at one point in the
transport capability dropping by some 50%.
Trucking has been hit the hardest. Cross-border transport would
require drivers to be quarantined for two weeks if the road hadn't
already been blocked. Most adjacent provinces refused to admit
vehicles from Hubei. The option to barge product through the river
system remained viable but ports in Jiangsu, for example, refused
barges from Hubei to dock.
Logistics continue to remain a challenge for the industry and
although overall conditions have improved with roads no longer
blocked by local governments, there is still a shortage of labour
both for transportation purposes and at the plants themselves.
It will take some weeks still before normal activity across the
whole industry is resumed, assuming there is no second wave of
infection, and the effects will be felt for longer as the phosphate
fertilizer plants try to capture what is left of the domestic
spring season against a backdrop of still challenging logistical
issues. In the meantime, supply of Chinese phosphates has tightened
prompting prices to firm both in the domestic and export
markets.
Global View
While the situation improves in China, CoVid-19 is moving across
the world, having now been declared officially a pandemic by the
WHO, creating a ripple effect through the global markets. The same
logistical issues are now being felt in other regions where the
virus is escalating, such as Europe, Asia and the Americas. The
emergence of confirmed cases in India is of major concern for many
industries and phosphate plants in India are already starting to
shut down. All over, borders are closing, vessels are being
quarantined and the movement of people and product is being
steadily constrained- including fertilizers and their raw
materials. As such further disruption is anticipated in the
fertilizer industry across other parts of the globe over the coming
weeks and months.
Looking across the globe, many countries have now put into place
similar restrictions on movement as China in a bid to arrest the
spread of the virus. As mentioned in the update above, the Chinese
trucking sector was the worst affected form of transport due to the
combination of higher labour requirement as well as the incidence
of road blockages in a bid to quarantine whole regions.
Going forward it will be those countries more reliant on
trucking that could be worst affected in terms of logistics
constraints and the one that shines out is Brazil. The Brazilian
transport system is heavily reliant on transport by truck and
unlike China, has no back up in the form of a reliable river
(barge) or rail system. The agricultural sector uses a backhaul
system to transport crops across vast distances by truck to the
ports and take back fertilizers and raw materials. After the
general shutdown of truck freight in 2018, several companies
acquired their own truck fleet, such as Bunge, Cargill and
cooperatives, reducing the impact of a possible shutdown. According
to data from the IHS Automotive, in the first bimester of this
year, the sale of heavy trucks (bi-trains) used for handling grain
has increased in relation to the last few years, as companies
continue to acquire fleets. In relation to the ports, a standstill
of independent dockers can generate a migration of cargo to own
terminals, such as Coopersucar and Rumo, minimizing the impact.
To date, the logistics sector in Brazil has not yet been
affected. A union of dockworkers in the port of Santos requested a
halt to activities, but in a meeting on March 18th, decided to
continue operations and periodically monitor the progress of
Covid-19. The Brazilian government has since come out to state that
logistics channels including ports will not be closed due to the
spread of covid-19 and that it will endeavour to do all it can to
prevent any disruption to the flow of key commodities and goods in
the coming weeks.
There is now concern over the potential impact on a market such
as India given its high population and from a fertilizer
perspective, given its prominence as an importer, producer and
consumer. In terms of logistics, India does not rely on trucks and
instead uses its widespread rail network for the transport of goods
across the country. In response to the outbreak, the government has
just announced a lockdown in more than 80 cities and districts
across the country including all domestic flights and passenger
rail until the end of March. As yet inland freight transport does
not appear to have been unduly affected although there will
undoubtedly be some disruption to the transport system in the wake
of current restrictions. However Indian ports have put in place a
number of stipulations including strict 14-day quarantine rules for
vessels arriving from affected areas. If the virus spreads and a
more widespread lockdown is enforced, there will inevitably be some
disruption to the movement of fertilizer and raw materials to and
from ports and plant. Some plants, including Zuari, RCF and GSFC
have announced curtailments or closures while many fertilizer
plants are taking annual maintenance and therefore any disruption
in the coming weeks could be mitigated accordingly but if the
situation persists beyond April, it could affect the start of the
Kharif season. All major ports have been advised to issue force
majeure clauses in the event of circumstances preventing loading
and discharging of cargo.
In the meantime any further weakening of the INR against the USD
will further erode margins for imported fertilizers and raw
materials.
Using the China model seen earlier this year, labour constraints
could cause most challenges going forward with transportation at
the forefront of this issue. Production is the other key area and
the Jordanian government is already reported to have already shut
down all industrial facilities until at least the end of March to
curb the spread, including JIFCO and JPMC's phosphoric acid/DAP
plant at Aqaba. Although JPMC was about to take its annual
turnaround at this time, there is no guarantee that the plants will
be allowed to resume production from early April. In contrast, OCP
has stated clearly it aims to maintain normal activity across the
platforms in the coming weeks.
Nevertheless, it should be remembered that over half the
phosphate industry in Hubei was forced to suspend production at the
peak of the outbreak in China and there is now concern over how
plants in other parts of the globe may weather the crisis and there
remains the real possibility of further curtailments in certain
regions going forward. Any production curtailment and/or
disruptions in supply chains and logistics will obviously have the
effect of tightening the demand/supply balance and increasing the
upside risk for fertilizer pricing. For raw materials the situation
remains more complicated with additional moving parts but demand
from the fertilizer side is likely to be compromised for the
reasons above while supply, if generated from the energy sector,
may also see some reduction.
This analysis is taken from our Sulphur Fertecon Futures report -
part of IHS Markit's Agribusiness coverage. Fertecon offer in-depth
analysis of varying Fertilizer markets, including current
information, trade data and forecasting for prices, costs, supply
& demand.