Citi says supply & demand for fertilisers continues to shift east, urea prices are correcting, DAP prices could slow down in the near term, and capacity is expected to exceed demand. For a net importer of fertiliser such as India, this could be good news

Citi attended the Gulf Petrochemicals & Chemicals Association Fertiliser Convention in Dubai where companies such as Saudi Arabia's Sabic & Ma'aden, Qatar's QAFCO, Kuwait's PIC, Bahrain's GPIC and Oman's OMIFCO, Australia's Incitec Pivot, Norway's Yara, Germany's K+S, Fertiliser Association of India, and China's Sinochem participated. In a report early this week about its conclusions after the conference, Citi said that the fertiliser market appears to be in the midst of a price correction with prices having fallen by $10-$15 per tonne in the last week after a two-month run-up of $100-$120 per tonne.

The broker expects a fall in utilisation rates to below 80% (versus the 86% peak of 2007) in the medium term as new capacity comes on stream. Even assuming consumption at more than 2x the historical average, Citi still arrives at utilisation rates of 80% for 2011 and 81% for 2012.

From 2011-14, around 13 million tonnes (MT) of new capacity will come on stream with almost 65% of this coming from the Middle East and North Africa (MENA). MENA producers have two distinct advantages - low gas costs and phosphate rock deposits (in Morocco, Tunisia, Jordan and Saudi Arabia).

While DAP prices are steady at around $570 per tonne right now, Citi believes these may soften because of the recent slowdown in demand and resistance to the 2-month run-up in prices. Also, a lot of new new capacity is coming on stream, e.g., from Saudi Arabia's Ma'aden, which is due to add around 3MT of annual new DAP capacity - its commercial operations are set to begin in 2Q2011.

Under India's nutrient-based scheme, DAP consumption is expected to increase. India could import over 8MT of DAP in 2010 against 5.5MT in 2009. Indian demand is crucial for DAP imports since these account for almost 45% of global trade. India's bias to urea (81% of the country fertiliser use) still continues but Citi believes demand for other fertilisers will increase.

China, says the report, has increased its fertiliser self-sufficiency and has now become a net exporter of urea and DAP. Its urea market will remain balanced due to capacity cuts which are almost equal to additions. However, if it introduces a year-round 15%-20% export tariff versus its current staggered system, DAP exports may increase.

Early this month, Udai Shanker Awasthi, managing director of the Indian Farmers Fertiliser Co-operative had told the media that fertiliser demand may rise up to 60MT this year. This will mean more import due to India's problem of low domestic production. India imports almost 1/3rd of its fertilisers, most of them potash and phosphate.

In the past few weeks of September, a panel headed by former farm secretary T Nanda Kumar submitted its report, which said that urea should be urgently brought under the free pricing regime under the Nutrient Based Subsidy scheme and the government should slash subsidy for urea significantly to ensure that high price discourages its unproductive use.

Fertiliser stocks in India are showing mixed trends - some are trading near their all-time highs such as Coromandel International at Rs623 (high of Rs678 mid-September), Chambal at Rs74 (high of Rs78), and Deepak at Rs179 (high of Rs188) while others are quite below their all-time highs - such as National Fertiliser at Rs119 (high of Rs149) and RCF at Rs86 (high of Rs118).

(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife).