SAO PAULO, Brazil (DTN) -- Global economic woes and the subsequent slip in commodity prices have caused the world fertilizer market to slow since September, ending a two-year price rally.

"Fertilizer markets have run out of steam," said Paul Burnside, analyst at CRU, a London-based mining and fertilizers consultancy.

However, tight stocks will prevent the bottom from falling out of the market as it did following the global credit crunch in 2008.

"Stocks for potassium and phosphorus, in particular, are short. Meanwhile, demand from China, India and Brazil remains robust and there are limitations to raising capacity in the near term," explained Mario Alves Barbosa Neto, chief executive officer of the fertilizer wing of Vale, Brazil's largest mining company.

All this probably means U.S. fertilizers will continue to trade in a fairly tight price range in the near term.

Urea stoodat about $490 per metric ton, FOB Black Sea, in the first week of November, which is about the same level as June, up from $370 in March but well short of the record level of $770 registered in August 2008. (DTN customers can see the latest wholesale and retail fertilizer prices and analysis at http://bit.ly/…)

Potash producers are currently trying to raise prices: their stocks are low, their expanded production capacity projects still haven't come on line and the higher prices help stimulate projects to increase capacity three or four years down the road. However, they are experiencing pushback from clients in Latin America.

In the longer term, there is a plethora of mineral extraction and fertilizer production projects in the pipeline, although healthy demand growth will probably preclude major price adjustments.

EXPANSION PLANNED

According to the International Fertilizer Industry Association (IFA), there are currently 250 fertilizer production capacity expansion projects under way globally and planned investments of approximately $88 billion through until 2015, including huge projects in China, the Middle East and Latin America.

Handsome margins are the main driver. For example, potash miners typically have production costs of a couple of hundred dollars per metric ton, while the spot market price is hovering at around $580 per mt in the first week of November, according to CRU's Burnside. Moves among major consuming countries to reduce their reliance on imports is also a factor.

Brazil, for example, aims to cut fertilizer import requirements to a third of consumption from the current level of 60% over the next five years following major investments by Vale and oil giant Petrobras. China is producing more and more and becoming a significant nutrients exporter, while India is seeking to bolster its already huge industry in an effort to ensure it can largely supply its own market. India, however, will remain reliant on imported raw materials such as natural gas from the Middle East and potash from Eastern Europe.

DEMAND EXPECTED TO GROW

But demand is also expected to grow robustly, driven by growing agriculture in Latin America, Eastern Europe China and India. The IFA forecasts consumption will rise by 2.2% per year through 2015 and therefore price levels will not likely fall dramatically.

"Nobody is forecasting a crash in fertilizer prices," said CRU's Burnside.

Among the minerals, nitrogen production capacity is growing particularly quickly.

Capacity is seen 19% higher at 229.6 mmt by 2015, driven by expansion in China, India and Latin America, where authorities are seeking to increase self sufficiency and in Africa, where there are the most accessible deposits, according to the IFA.

Meanwhile, regarding urea, the Middle East and North Africa are set to become more important because of the energy cost advantages.

"New capacity is being built to take advantage of cheap gas in Qatar Saudi Arabia and Iran, among other spots," said Calum Findlay of UK fertilizer merchant Gleadell Agriculture.

Another area in which heavy investments are being made is potash and, as a result, large potash surpluses are expected from 2015 onward, according to the IFA. Canada will have the biggest surplus, providing a readily available source of potassium for U.S. farmers. By 2015, North America will produce 39% of the world's potash.

In the area of phosphates, rock mining capacity is expected to grow 26% between 2010 and 2015 with the largest growth areas in Africa, which has the most readily accessible reserves.

In the short term, phosphoric acid supply remains tight but that should ease in the next three to four years as 34 new plants are planned for completion between 2010 and 2015.

With food and feedstuff prices still near all-time highs, demand for fertilizers remains buoyant. But affordability will keep a lid on demand. That's because, at current levels, fertilizer prices are around 30% higher than what is considered a natural equilibrium point against agricultural commodity prices, according to CRU analysis.

Alastair Stewart can be reached at Alastair.stewart@telventdtn.com

(ES/CZ/AG)

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