Phosphates prices to remain under pressure to 2019, as the global market adjusts to low-cost capacity expansions - Integer
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Phosphates prices to remain under pressure to 2019, as the global market adjusts to low-cost capacity expansions

Posted On: 09-10-2017 By: Grahame Turnbull

This article draws on the latest release of Integer’s Phosphate Cost and Profit Margin Service.
For more information please 
contact Ibi Idoniboye – Head of Phosphate and NPK Analysis – ibi.idoniboye@integer-research.com

China’s role in the international phosphate market has grown from 7% of global DAP exports in 2004 to 40% in 2016.  China’s phosphate capacity is diverse and numerous, accounting for 42% of global ammoniated phosphates capacity in 2017. The country has substantial spare capacity that can be utilised or curtailed, dependent on the international pricing environment. By default, therefore, Chinese capacity utilisation rates should serve as a market balancing mechanism to keep global prices in check.

While Chinese phosphates production is primarily concerned with satisfying internal demand, capacity growth has significantly outweighed that of domestic consumption in recent years. This domestic oversupply has been a key factor in the rise of Chinese DAP/MAP exports and increasing levels of competition in the downstream phosphates market. This is illustrated in the chart below, which draws upon data used in the Q3 2017 Quarterly Brief, and the Price Forecast and Forecast Cost Curve spotlight report – both of which are part of Integer’s Phosphate Cost and Profit Margin Service.

[Click image to enlarge]

In addition to Chinese exports, the rise of Ma’aden in Saudi Arabia has increased global market pressure.  Ma’aden operates a fully integrated supply chain, and is arguably the world’s lowest cost processed phosphates producer. Since 2012, Ma’aden has added approximately 3.5 million tonnes DAP export capacity and is currently in the process of ramping up an additional 3 million tonnes finished capacity. At the same time, Moroccan giant OCP – the lowest-cost rock producer with large economies of scale – is in the final stages of a phased expansion, comprising around 4 million tonnes finished capacity.

Supply pressure from China, the Middle East and North Africa (in conjunction with weaker sulphur and ammonia prices) has weighed heavily on phosphates prices in recent years, as shown in the chart below, taken from our recent Q3 2017 Quarterly Brief overview of Integer’s Phosphate Cost and Profit Margin Service:

[Click image to enlarge]

With DAP/MAP prices currently at marginal cost levels, phosphate producer profits are under pressure highlighting the importance of scale and/or integration. Phosagro, EuroChem, Ma’aden and OCP typically achieve the industry’s highest gross margin. On the other hand, those producers without 100% rock self-reliance and/or stable sulphur/ammonia positions are increasingly under pressure. The chart below shows the evolution of P segment gross margins for various producers over since 2015:

[Click image to enlarge]

Over the medium-term, DAP and MAP capacity additions will take place chiefly in Morocco and Saudi Arabia, regions with one or more of the comparative advantages mentioned previously. We expect China will add capacity, albeit at a slower rate to the rest of the world and without some of the export market advantages. Furthermore, the pace of new Chinese capacity is likely to offset the closures of old and/or inefficient plants, leading to a rationalisation of China’s phosphate industry.

Below, we show an example of how we expect the global DAP cost curve to look in 2020. This was taken from our recent spotlight report and while producer names have been removed for discretionary purposes (as this information is available to subscribers only), it does give a flavour of our expectations.

[Click image to enlarge]

Our mid-term phosphate price forecasts consider our projections on supply and demand dynamics (in China and the rest of the world), in addition to changing raw material costs and industry rationalisation. We expect prices to remain under pressure to 2019, as the market adjusts to low-cost capacity additions, while raw materials prices remain relatively weak. We are more optimistic beyond 2019, as we anticipate most of the adjustment to have taken place and demand growth to have accommodated the extra capacity. Our price forecast to 2022 is shown in the chart below, albeit with prices removed.

[Click image to enlarge]

The views and data contained in this article are expanded upon in Integer’s quarterly service Phosphate cost and Profit Margin Service. In addition to current and future industry cost curves for phosphate rock, phosphoric acid, DAP and MAP, our latest quarterly release of the service provides our view on how the global supply/demand balance will develop over the medium term, in addition to our medium-term price forecasts for the above-named products.

For more information please contact:
Ibi Idoniboye – Head of Phosphate and NPK Analysis – ibi.idoniboye@integer-research.com

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