Our view: We think Nutrien did well highlighting a positive fertilizer market outlook, touching many of the same points driving our constructive view of the sector — tight ag markets resulting in high crop prices, strong farmer economics, and an extended ag cycle; constrained fertilizer supply, especially in potash, and robust demand, supporting strong fertilizer prices that may remain elevated for several years; and long-term structural market changes that likely mean higher mid-cycle prices vs. prior periods. We also agree that recent fertilizer price weakness is likely seasonal and temporary, and could see renewed strength into H2/22.
Global ag fundamentals expected to remain strong through 2022/23:
In the near-term, Nutrien sees global grain markets staying tight due to a combination of low grain stocks, production disruptions from weather events and the Ukraine/Russia war, and increased demand from Chinese imports and biofuels use. As a result, high crop prices and strong yields are expected to support favourable crop economics across major growing regions, offsetting increases in crop input costs.
Russia/Ukraine war has disrupted global fertilizer supply: Nutrien highlighted fertilizer supply impacts from the Russia/Ukraine war and sees relatively low probability that these constraints will ease given sanctions appear to be tightening and Russia/Belarus relations with the West remain strained. The company continues to see Russia/Belarus exports constrained, especially in H2/22 (Russian shipments down ~30-35%, Belarus down ~50% in 2022). While Russian exports may see improvements over time as logistics ease, Belarus is expected to remain land-locked unless sanctions are lifted. Nutrien also highlighted Russia's role as the world's largest nitrogen exporter, adding further tightness to a market that has seen lower Chinese exports.
Long-term structural market changes support higher mid-cycle prices:
Nutrien sees significant changes in ag, energy, and fertilizer markets supporting higher mid-cycle prices, equating to 10-year average prices plus ~$50/tonne according to the historical trend. This would be roughly in-line with our view as our long-term potash, nitrogen, and phosphate prices are ~$25-50/tonne above the 10-year average (we forecast long-term Brazil potash, US NOLA urea, and Tampa DAP at $400/tonne, $325/ton, and $465/ tonne vs. 10-year averages at $350/tonne, $300/ton, and $435/tonne).
• Ag markets may see ongoing tightness: Nutrien noted that historically there have been two periods that saw structurally higher crop prices — the 1970's oil crisis and the 2005/06 ethanol introduction — and we may be in the midst of another structural change due to a combination of crop production risks (Ukraine taking time to recover, environmental pressures, new land constraints, more volatile weather), stronger Chinese import demand, and higher biofuels use.
Potash supply constrained through at least 2025: Nutrien expects Eastern European supply over the next several years to come in lower than pre-war expectations due to delayed new capacity expansions — the company sees 2025 Eastern European production at 20-25Mt, down 5-10Mt from prior expectations.
• Nitrogen impacted by changes in energy, low-carbon ammonia: Nutrien highlighted the significant shift in European natural gas price expectations (forward curve $10-25/mmbtu higher than in late-2020) and increased differential in EU/US nat gas which favours North American producers. Additionally, the emerging long-term potential demand from low-carbon ammonia could be a new growth driver for a mature market while the lack of recent new investment means a tighter supply outlook.