Tackling the global fertilizer crisis
Salah Uddin Shoaib Choudhury
August 24, 2008
Worldwide fertilizer crisis is getting worse, with no sign of dramatic resolution to this crisis or downwards trend of the price of fertilizer. Even severl months back, price of each ton of Urea was below US$ 400, but now, anywhere in the world, it is above US$ 600 [of course FOB price]. Various large stock holders are offering Urea to potential customers at the rate of US$ 700-720 per ton, while there are some fake suppliers, who wish to cash the letter of credit and disappear. Thos fake suppliers are offering FOB price of Urea at US$ 200-250 per ton. Meanwhile, taking the advantage of global crisis of fertilizer these rackets have cashed a few hundred million dollars already by befooling the customers. Reality is, any company offering Urea at price below US$ 500 for FOB are simply frauds. They are not suppliers indeed.
Here we have some very recent news from the South Asian nations on how fertilizer crisis is creating series of serious problems:
The huge difference of urea prices above $600 per tonne in Pakistan and other regional countries are responsible for massive smuggling, hoarding and shortage of urea in the country.
In local market, the sale price of urea is below $200 per tonne while in regional countries including India, Iran, Afghanistan and Central Asian Republics its value is $800 per tonne. The attractive price for urea in other countries helps in flourishing the smuggling of the commodity. Taking advantage of illegal export of the commodity, the dealers start hoarding of the commodity further aggravating the situation.
Official spokesperson of the Ministry for Food, Agriculture and Livestock (MINFAL) and additional secretary told a Pakistani newspaper that the government had not imported sufficient quantity of urea due to financial constraints. He admitted that some quantity of the commodity was smuggled to neighbouring countries due to higher prices. He said local price of urea is $160 per tonne while in other countries its $800 per tonne. The over $640 per tonne price difference was responsible for some sort of smuggling of urea, besides urea shortage in the country.
He claimed that the government was taking appropriate steps for ensuring smooth availability of urea in the country. The ministry was in proper contact with Saudi Arabia for importing urea and in this regard two officials of the ministry left for S Arabia. They would discuss with officials for releasing earlier import of urea from Saudi Arabia.
According to reports, Pakistanīs Punjab province alone is running short of 600,000 tonnes of urea with 4.8 million tonnes production against the requirement of 5.4 million tonnes. The entire shortage of the nation is much higher. Commenting on this Calum Findlay, Gleadell Agriculture's fertiliser trader, reports: "Activity in the Nitrogen market has fallen to a very low level as the focus has been firmly on completing a difficult harvest.
"Latest indications from China are that the State Council are likely to approve the proposal to raise export taxes on fertiliser sometime in August. The global market will then be short of Urea and the slight correction we are seeing today is unlikely to endure.
The tax could incorporate product already in bonded warehouses so the lacklustre Urea market today will tighten again and leave the market in substantial deficit through to the end of the year.
"Internationally, phosphate prices are now static and as Latin America's absence from the market continues prices are likely to remain so. Ongoing industrial unrest at two Canadian Potash mines is a source of concern in an already tight international Potash market. Blenders remain receptive to Aug/Sept business but as demand increases prices will also move upwards.
"While the market is quiet and we have seen a slight 'dip' in prices an opportunity exists - Gleadell have product in the UK now for spot and forward deliveries," Mr Findlay added.
Why are fertiliser prices rising?
The production of anhydrous ammonia, which is the source of nearly all the nitrogen fertiliser, involves air and natural gas.
Natural gas accounts for between 70 and 90 per cent of the production cost of ammonia so nitrogen fertiliser prices are very much susceptible to changes of natural gas prices.
Double in 12 months
These have more than doubled in the past year and could double again over the next 12 months on the back of high oil prices, according to the Cambridge Energy Research Associates [Cera], a US-based consultancy.
The price of the other main ingredients of fertilisers, P and K, is also rising, as is that of potash.
Phosphate refiners have been hit by escalating costs of ammonia and sulphur, both essential in their processes.
Higher fuel prices have also fed through to increase the transportation component of fertiliser prices at the retail level.
Global demand
Politics has played a part in light of the growing global demand for food and concerns about availability in many parts of the world.
China, for example, has decided that its priority is to feed itself and exports of fertiliser have now been effectively blocked by the imposition of an export tariff of between 100 and 135 per cent.
This means that 2.4m tonnes of urea, equivalent to taking two plants out of production, will be off the market until October 2009 when the tariff is due to expire.
This caused the nitrogen price to rocket by a further $100 overnight with urea now standing at $600-$700 per ton in some markets.
The NFU is also concerned about the import duty in place on non-EU fertiliser imports.
It is intended to protect European manufacturing but is leaving Europeans disadvantaged as Russians can produce nutrients at a fraction of the cost, says the NFU, which is lobbying to get the duty removed to give farmers access to cheaper nutrients.
Market volatility
A fertilizer expert said, the global plant nutrition company, summed up the current level of uncertainty in the global markets: "The difference this year is that in such a volatile market, it is difficult to sell forward before we know our cost prices.
"This means we can only sell what we have available on a month by month basis.
"Unlike the grain markets, there is no effective futures market for the fertiliser industry. Therefore we cannot buy raw materials forward.
Now let us see, what is happening in Bangladesh. There is a question in the minds of many as to how much subsidy Bangladesh government needs to pay during the current season of cultivation, when the global market price of Urea [Prilled or Granular] is between US$ 600-700 and US$ 650-750? If the government has to ensure supplying Urea to the farmers at a tollerable rate, the nation will need to spend almost TK. 40,000 [US$550] per ton as subsidy as the Bangladeshi government continues to fail in collecting Urea fertilizer at a much lesser rate, although a very solid company from North America, named Noca Inc., is offering Urea to the country at much lower price.
According to information, Bangladesh, during the current year collected more than 1.2 million tons of Urea from local and foreign sources. Although production cost of each ton of Urea is below US$ 100, even local companies like KAFCO [which is a joint venture under the control of foreign owners] sells urea to the government at the rate of US$ 800 plus, while the same company supplied urea at the rate of US$ 150-200 last year.
Major stake of urea is procured in Bangladesh by state owned Bangladesh Chemical Industries Corporation [BCIC]. This enterprise has incorporated several ridiculous clauses in the purchase process, being suggested by an organized racket, to stop most of the potential foreign suppliers from making offers at much lower price. According to latest information, Bangladesh presently required around 350,000 tons of urea, which should be imported from foreign countries. A local businessman owning a number of companies namely Bulk Traders, Desh Traders etc., made offers to BCIC for supplying urea and even recently the same company obtained a contract for 200,000 tons. But, according to information, the local businessman has been continuing to fail in furnishing performance guarantee to BCIC thus killing time, while the same company has failed to complete its contractual obligation in delivering urea to BCIC, for which they already submitted performance bond and received letter of credit. It is even rumored that, the racket continues to do monopoly business in BCIC by managing some of the corrupt officials of the enterprise as well as ministry concerned. On investigation it is even revealed that, in many cases, fake bid bonds or even forged performance bonds were submitted by this racket, and the matter is suppressed by some corrupt officials of BCIC. Commenting on this broad day robbery, an official with BCIC on condition of anonymity told Bangladeshi press that the matter and the entire process of bidding as well collection of urea fertilizer needs to be properly investigated by the members of Task Forces urgently for the sake of national interest. Due to such organized crime, the nation will suffer a loss of few hundred million dollars only during the current fiscal year.
Bangladeshi state owned enterprise as well the ministry concerned are having a pre-conceived mind of determining price of urea on the basis of information provided by some publications, mostly owned by traders of fertilizer manufacturers. But, in reality, in most cases, prices in such publications are not within the nearest realities. Bangladeshi government signed contracts with countries like Saudi Arabia, Kuwait etc., for importing urea on state-to-state contract at the price of US$ 870 plus per ton, while, for example, Israel offers the same urea to its friendly nations at the rate of US$ 300 per ton. As Bangladesh continues total ban on Israel, Bangladeshi businessmen or state owned enterprises are not able to buy urea from any of such sources. It may be mentioned here that, although countries like Saudi Arabia and some other Arab nations have committed to supply urea to Bangladesh on state level contract at a price of US$ 900 per tons, the same nations are buying urea from various sources including Israel at the price of US$ 500-700.
Meanwhile, a Canadian company, having firm grip in fertilizer business has come forward in offering urea to Bangladesh at a much cheaper rate with quick shipment guarantee. Local representative of the Canadian said that they can offer urea to local, regional or global buyers at a much cheaper rate.
According to business norms, the same rakcet, which compels Bangladeshi authorities in buying fertilizer at an exorbitant price should already have been black listed by the government for non-compliance of contractual obligation as well legal actions should have been initiated against them for forging bid bonds, performance bonds and other documents. But, due to over enthusiasm of some corrupt officials with BCIC and the ministry, the racket continues to run monopoly cashing of money, thus pressing the nation towards a serious fertilizer crisis in the months to come.
It is even learnt that some vested interest groups are willing to force the present government towards adverse situation by creating shortage of fertilizer. For the sake of national interest, the government can take steps in simplifying the bidding process of BCIC thus giving chance to potential suppliers, who can supply urea to Bangladesh at a much cheaper price with assurance of immediate shipment. Commenting on this, representative of the Canadian company said, they are holding a stock of 500,000 tons of prilled and granular urea fertilizer, which can be shipped anytime. It said, crazy trend is continuing with urea trade in Bangladesh as well in the world. Some suppliers are asking exorbitant price while some organized racket are giving alluring offers of US$ 200-250 per ton to buyers, with the ulterior motive of cashing the letter of credit and disapprearing from the show. It said, any offer for urea below the price of US$ 500 per ton for FOB is really unbelievable. Commenting on Israelīs price for urea, it said, it is a state offer, and there is no reason to have any doubt on it. But, in general, businessmen or traders can never get urea at this price from any of the sources in the world.
Noca Inc representative further said, urea market will remain unstable till 2015, as most of the stocks are already purchased by large conglomerates in the world. Bangladesh government needs to realize this fact and take immediate steps not only in ensuring smooth supply of urea during the current season but till the uncertain period is over. It said, if Bangladeshi government will agree, a smooth supply of urea at a competitive thus much lower price can be ensured till 2018. Such initiatives by the government will help the nation from saving a few thousand crores of Taka.
Meanhwile, Noca Inc has indicated that it has the total arrangement to offer Urea [both prilled and granular] to other countries such as Indonesia, Malaysia, Vietnam, Thailand, Phillippines, Myanmar, Sri Lanka, India, Nepal, Pakistan, Middle east, Turkey, Egypt, China, Taiwan, Korea [South and North] and other African and American countries. It said, CIF or FOB offer for any of the listed countries are much lower than their existing price of purchase.
For any government, National interest should be at the top of any agenda. At this extreme crisis period of fertilizer, most of the large stock holders might not be inclined in going through very complicated tendering process. But, the governments can alwayys invite the propective North American supplier in beginning an immediate negotiations in settling a comfortable price thus ensuring supply of fertilizer till crisis period ends.
Here we have some very recent news from the South Asian nations on how fertilizer crisis is creating series of serious problems:
The huge difference of urea prices above $600 per tonne in Pakistan and other regional countries are responsible for massive smuggling, hoarding and shortage of urea in the country.
In local market, the sale price of urea is below $200 per tonne while in regional countries including India, Iran, Afghanistan and Central Asian Republics its value is $800 per tonne. The attractive price for urea in other countries helps in flourishing the smuggling of the commodity. Taking advantage of illegal export of the commodity, the dealers start hoarding of the commodity further aggravating the situation.
Official spokesperson of the Ministry for Food, Agriculture and Livestock (MINFAL) and additional secretary told a Pakistani newspaper that the government had not imported sufficient quantity of urea due to financial constraints. He admitted that some quantity of the commodity was smuggled to neighbouring countries due to higher prices. He said local price of urea is $160 per tonne while in other countries its $800 per tonne. The over $640 per tonne price difference was responsible for some sort of smuggling of urea, besides urea shortage in the country.
He claimed that the government was taking appropriate steps for ensuring smooth availability of urea in the country. The ministry was in proper contact with Saudi Arabia for importing urea and in this regard two officials of the ministry left for S Arabia. They would discuss with officials for releasing earlier import of urea from Saudi Arabia.
According to reports, Pakistanīs Punjab province alone is running short of 600,000 tonnes of urea with 4.8 million tonnes production against the requirement of 5.4 million tonnes. The entire shortage of the nation is much higher. Commenting on this Calum Findlay, Gleadell Agriculture's fertiliser trader, reports: "Activity in the Nitrogen market has fallen to a very low level as the focus has been firmly on completing a difficult harvest.
"Latest indications from China are that the State Council are likely to approve the proposal to raise export taxes on fertiliser sometime in August. The global market will then be short of Urea and the slight correction we are seeing today is unlikely to endure.
The tax could incorporate product already in bonded warehouses so the lacklustre Urea market today will tighten again and leave the market in substantial deficit through to the end of the year.
"Internationally, phosphate prices are now static and as Latin America's absence from the market continues prices are likely to remain so. Ongoing industrial unrest at two Canadian Potash mines is a source of concern in an already tight international Potash market. Blenders remain receptive to Aug/Sept business but as demand increases prices will also move upwards.
"While the market is quiet and we have seen a slight 'dip' in prices an opportunity exists - Gleadell have product in the UK now for spot and forward deliveries," Mr Findlay added.
Why are fertiliser prices rising?
The production of anhydrous ammonia, which is the source of nearly all the nitrogen fertiliser, involves air and natural gas.
Natural gas accounts for between 70 and 90 per cent of the production cost of ammonia so nitrogen fertiliser prices are very much susceptible to changes of natural gas prices.
Double in 12 months
These have more than doubled in the past year and could double again over the next 12 months on the back of high oil prices, according to the Cambridge Energy Research Associates [Cera], a US-based consultancy.
The price of the other main ingredients of fertilisers, P and K, is also rising, as is that of potash.
Phosphate refiners have been hit by escalating costs of ammonia and sulphur, both essential in their processes.
Higher fuel prices have also fed through to increase the transportation component of fertiliser prices at the retail level.
Global demand
Politics has played a part in light of the growing global demand for food and concerns about availability in many parts of the world.
China, for example, has decided that its priority is to feed itself and exports of fertiliser have now been effectively blocked by the imposition of an export tariff of between 100 and 135 per cent.
This means that 2.4m tonnes of urea, equivalent to taking two plants out of production, will be off the market until October 2009 when the tariff is due to expire.
This caused the nitrogen price to rocket by a further $100 overnight with urea now standing at $600-$700 per ton in some markets.
The NFU is also concerned about the import duty in place on non-EU fertiliser imports.
It is intended to protect European manufacturing but is leaving Europeans disadvantaged as Russians can produce nutrients at a fraction of the cost, says the NFU, which is lobbying to get the duty removed to give farmers access to cheaper nutrients.
Market volatility
A fertilizer expert said, the global plant nutrition company, summed up the current level of uncertainty in the global markets: "The difference this year is that in such a volatile market, it is difficult to sell forward before we know our cost prices.
"This means we can only sell what we have available on a month by month basis.
"Unlike the grain markets, there is no effective futures market for the fertiliser industry. Therefore we cannot buy raw materials forward.
Now let us see, what is happening in Bangladesh. There is a question in the minds of many as to how much subsidy Bangladesh government needs to pay during the current season of cultivation, when the global market price of Urea [Prilled or Granular] is between US$ 600-700 and US$ 650-750? If the government has to ensure supplying Urea to the farmers at a tollerable rate, the nation will need to spend almost TK. 40,000 [US$550] per ton as subsidy as the Bangladeshi government continues to fail in collecting Urea fertilizer at a much lesser rate, although a very solid company from North America, named Noca Inc., is offering Urea to the country at much lower price.
According to information, Bangladesh, during the current year collected more than 1.2 million tons of Urea from local and foreign sources. Although production cost of each ton of Urea is below US$ 100, even local companies like KAFCO [which is a joint venture under the control of foreign owners] sells urea to the government at the rate of US$ 800 plus, while the same company supplied urea at the rate of US$ 150-200 last year.
Major stake of urea is procured in Bangladesh by state owned Bangladesh Chemical Industries Corporation [BCIC]. This enterprise has incorporated several ridiculous clauses in the purchase process, being suggested by an organized racket, to stop most of the potential foreign suppliers from making offers at much lower price. According to latest information, Bangladesh presently required around 350,000 tons of urea, which should be imported from foreign countries. A local businessman owning a number of companies namely Bulk Traders, Desh Traders etc., made offers to BCIC for supplying urea and even recently the same company obtained a contract for 200,000 tons. But, according to information, the local businessman has been continuing to fail in furnishing performance guarantee to BCIC thus killing time, while the same company has failed to complete its contractual obligation in delivering urea to BCIC, for which they already submitted performance bond and received letter of credit. It is even rumored that, the racket continues to do monopoly business in BCIC by managing some of the corrupt officials of the enterprise as well as ministry concerned. On investigation it is even revealed that, in many cases, fake bid bonds or even forged performance bonds were submitted by this racket, and the matter is suppressed by some corrupt officials of BCIC. Commenting on this broad day robbery, an official with BCIC on condition of anonymity told Bangladeshi press that the matter and the entire process of bidding as well collection of urea fertilizer needs to be properly investigated by the members of Task Forces urgently for the sake of national interest. Due to such organized crime, the nation will suffer a loss of few hundred million dollars only during the current fiscal year.
Bangladeshi state owned enterprise as well the ministry concerned are having a pre-conceived mind of determining price of urea on the basis of information provided by some publications, mostly owned by traders of fertilizer manufacturers. But, in reality, in most cases, prices in such publications are not within the nearest realities. Bangladeshi government signed contracts with countries like Saudi Arabia, Kuwait etc., for importing urea on state-to-state contract at the price of US$ 870 plus per ton, while, for example, Israel offers the same urea to its friendly nations at the rate of US$ 300 per ton. As Bangladesh continues total ban on Israel, Bangladeshi businessmen or state owned enterprises are not able to buy urea from any of such sources. It may be mentioned here that, although countries like Saudi Arabia and some other Arab nations have committed to supply urea to Bangladesh on state level contract at a price of US$ 900 per tons, the same nations are buying urea from various sources including Israel at the price of US$ 500-700.
Meanwhile, a Canadian company, having firm grip in fertilizer business has come forward in offering urea to Bangladesh at a much cheaper rate with quick shipment guarantee. Local representative of the Canadian said that they can offer urea to local, regional or global buyers at a much cheaper rate.
According to business norms, the same rakcet, which compels Bangladeshi authorities in buying fertilizer at an exorbitant price should already have been black listed by the government for non-compliance of contractual obligation as well legal actions should have been initiated against them for forging bid bonds, performance bonds and other documents. But, due to over enthusiasm of some corrupt officials with BCIC and the ministry, the racket continues to run monopoly cashing of money, thus pressing the nation towards a serious fertilizer crisis in the months to come.
It is even learnt that some vested interest groups are willing to force the present government towards adverse situation by creating shortage of fertilizer. For the sake of national interest, the government can take steps in simplifying the bidding process of BCIC thus giving chance to potential suppliers, who can supply urea to Bangladesh at a much cheaper price with assurance of immediate shipment. Commenting on this, representative of the Canadian company said, they are holding a stock of 500,000 tons of prilled and granular urea fertilizer, which can be shipped anytime. It said, crazy trend is continuing with urea trade in Bangladesh as well in the world. Some suppliers are asking exorbitant price while some organized racket are giving alluring offers of US$ 200-250 per ton to buyers, with the ulterior motive of cashing the letter of credit and disapprearing from the show. It said, any offer for urea below the price of US$ 500 per ton for FOB is really unbelievable. Commenting on Israelīs price for urea, it said, it is a state offer, and there is no reason to have any doubt on it. But, in general, businessmen or traders can never get urea at this price from any of the sources in the world.
Noca Inc representative further said, urea market will remain unstable till 2015, as most of the stocks are already purchased by large conglomerates in the world. Bangladesh government needs to realize this fact and take immediate steps not only in ensuring smooth supply of urea during the current season but till the uncertain period is over. It said, if Bangladeshi government will agree, a smooth supply of urea at a competitive thus much lower price can be ensured till 2018. Such initiatives by the government will help the nation from saving a few thousand crores of Taka.
Meanhwile, Noca Inc has indicated that it has the total arrangement to offer Urea [both prilled and granular] to other countries such as Indonesia, Malaysia, Vietnam, Thailand, Phillippines, Myanmar, Sri Lanka, India, Nepal, Pakistan, Middle east, Turkey, Egypt, China, Taiwan, Korea [South and North] and other African and American countries. It said, CIF or FOB offer for any of the listed countries are much lower than their existing price of purchase.
For any government, National interest should be at the top of any agenda. At this extreme crisis period of fertilizer, most of the large stock holders might not be inclined in going through very complicated tendering process. But, the governments can alwayys invite the propective North American supplier in beginning an immediate negotiations in settling a comfortable price thus ensuring supply of fertilizer till crisis period ends.