Leading Russian fertilizer producers are increasing output as prices recover and China cuts capacity due to uplifted cash costs and environmental concerns.
PJSC Acron posted a 16.1% year-over-year increase in output for 2017 to 6.1 million tonnes from 5.2 million tonnes, while PJSC PhosAgro registered a 12% increase to 8.3 million tonnes. PJSC Uralkali CEO Andrey Guryev told Interfax at the Davos Economic Forum that the company boosted its fertilizer output 12.5% to approximately 8.4 million tonnes in 2017 and plans to grow that figure to about 9 million tonnes in 2018.
While the Chinese capacity cuts do not affect the Russian sector directly, they are a generally positive sentiment for the industry, Konstantin Yuminov, a senior analyst at Raiffeisen Bank, told S&P Global Market Intelligence in a Feb. 6 interview.
"The year should be healthy," he said, elaborating that idling capacity in China coupled with operations running at reduced capacity should balance the market.
Yuminov said the cuts were linked to uplifted cash costs that meant China cannot keep its older, poorer-quality facilities in production. He also said there has been a tightening in environmental regulation in China that has had a knock-on effect on nitrogen, coal and phosphate output.
"This, to some extent, is positive for the Russian producers, and the major effect is really the market effect, because they are not selling a lot directly to China," said Yuminov.
What is positive for Russian producers is the strong growth in diammonium phosphate, up to about US$400/tonne from US$330/tonne in September 2017, he said. Russian fertilizer companies are some of the most effective in the world in terms of their place on the cash cost curve, which allows them to run their operations at 100% utilization capacity.
"They are expanding," Yuminov said. "The weaker ruble, compared to 2013 levels, is still depreciating, and it strengthens their cash cost position and this positively affects profitability levels."
He said that recently, some of the Russian majors have added new nitrogen production, mainly in the form of ammonia and urea plants, and more is expected this year with the launch of a new EuroChem facility.
In regard to the domestic market, the growth of the agricultural industry in Russia following the retaliatory sanctions implemented by the Russian government in 2014 banning imports of certain foods from the European Union has spurred fertilizer demand. Russia's minister of agriculture, Alexander Tkachev, told journalists Jan. 18 that agricultural production is expected to grow 3% year on year in 2018 after an increase of 3% in 2017 and 4.8% in 2016.
Likewise, in terms of sales volumes, the Russian market grew 24% year over year for fertilizer sales in 2016 and preliminary data points to an increase of 10% for 2017, he said.
Maxim Khudalov, director of Analytical Credit Rating Agency's corporate ratings group, said 2018 would likely be a strong year for fertilizers given that prices have not yet returned to pre-2014 and 2015 crisis levels.
"After the decline of production volumes in China due to high costs, we believe the 10% increase in Russian exports would not be enough to bring markets to oversupply," he said, adding that Russia's overall share of the international mineral fertilizers market is less than 10%, so any increase in exports would not be enough to threaten the market.
As of Feb. 7, US$1 was equivalent to 57.23 Russian rubles.
