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By: Josh Linville, Vice President- Fertilizer
Since the July update, India approached the global urea market with yet another purchase tender. The first few pieces of information appeared to be very bullish once again. The number of tons offered was relatively small (only 1.65MMT). The price differences were extremely wide. Both of those factors in recent tenders had combined to push values higher.
However, at this point in the tender, the wheels started to come off. China had not been a big export participant in previous months/tenders and was only expected to offer 200 - 300KMT. However, as the deadline drew near, that number was revised higher to 500KMT. When negotiations were thru, China had sold approximately 700KMT.
This caused many of the very high priced offers ($20 - $30+ higher than the price to sell at) to negotiate down. In the end, India secured a huge percentage of the offered tons (1.2MMT of the 1.65MMT offered)
This will allow India to drag their feet on their next purchase announcement rather than being forced to call another tender quickly following the previous one.
Plant repairs have been anticipated following many delays due to Covid. This backlog was expected to cause available inventories to be lower than normal as everyone "caught up". However, with urea values where they are, some producers might opt to roll the dice!
Current urea values are significantly higher than anyone could have imagined 12 months ago. For most producers, these are massive margin potentials. Rather than missing out on those high prices, some may opt to see how long their plant can run. If they are successful, the plant will not break and they will continue to produce and profit in this high cost marketplace. If they are not successful, the repair/turn-around may take a little longer but at least they gave it a shot.
If enough plants continue to operate, it could help sway the urea market from under supplied to over supplied. It will be a subtle shift but very feasible.
Normally, during this time of year, NOLA urea is a $10 - $25 discount vs Arab Gulf replacement. This summer, that differential has been in the $70 - $80 discount range.
We continue to believe a large part of the current discount is due to vessel freight changes. In the past, vessel freight from the Arab Gulf to NOLA ran in the $15 - $30 range. The first week of January 2021 saw the rate at $25.50. Because of this, many looked at the price spread between fob Arab Gulf and fob NOLA. In fact, if vessel freights were back in "normal" ranges, the difference would fall right in line with recent years. That is why that approach has clouded the POV.
The current Arab Gulf to NOLA rate is $73.50 which puts the current discount at just over $70. While it may not correct in the coming weeks, eventually this gap will need to close. The North American market will likely need more imports this year than normal due to lowered urea production rates. There are several other destinations around the world that will pay higher prices than NOLA....
Will China export or not? That seems to be the lingering question.
For a while now, China had been a reluctant exporter as they focused on domestic demand. With Chinese values somewhat stuck at lower pricing and the global urea market continuing to rally, it seemed producers there were poised to start exporting heavily again.
That POV was disrupted on the news that the Chinese government was calling in urea producers for a meeting. Details are scarce but it seems the underlying message is that they expect producers to keep tons "home" for Chinese farmers. Given how the country runs, we have to once again assume that exports will be limited going forward which will tighten global supplies.
Or will they....
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