By MATEUSZ PERKOWSKI
Increased global production of urea is reducing prices for nitrogen fertilizers, with the downward trend likely to continue through the summer, experts say.
"Everybody wants to know where the floor is. The floor is not there yet, it's got some way to go," said Clive Yearsley, chairman of the Profercy fertilizer market analysis firm.
The downward direction is a major reversal from last spring, when constrained supplies caused a surge in nitrogen prices in the U.S.
Wholesale urea prices at the Gulf of Mexico -- a major trading area -- recently dropped below $350 per short ton, down from a peak of more than $700 per short ton in April 2012.
The price for urea is expected to drop to about $310 per short ton on wholesale markets by July or August, said Glen Buckley, chief economist at the NPK Fertilizer Advisory Service.
The floor for urea prices is determined by the cost of production of the world's highest-cost producer, which is currently Ukraine, Buckley said. That country's cost of production is currently $280 per short ton, so prices could conceivably get that low before factories close and supplies diminish.
It's more likely that urea producers will simply reduce operating rates beforehand, easing the price drop before it reaches that level, he said. "We don't think they'll shut down plants. It's not to the point we've got to close capacity."
Even so, the global supply of urea will be weighing on prices, especially as the fertilizer continues to pile up at Chinese ports, ready for export, said Yearsley.
"The key dark cloud hanging over the market is Chinese urea," he said.
Chinese supplies of urea are a major wild card in the market because exports are largely determined by domestic usage of the fertilizer, Buckley said. This year, an extended winter reduced demand, creating a surplus.
"The whole world balance gets screwed up by China. Nobody knows how much they will export," he said. "They're building more capacity than demand because they want to make sure they have enough supply."
At some point, though, Chinese manufacturers will pull back on production rather than continue to flood the ports with product, Yearsley said. "I don't think it's a bottomless pit for urea prices."
Even so, low prices can be expected to stick around if the delayed plantings of corn in the Midwest shrink total acreage of the crop, reducing fertilizer demand even as new shipments of urea arrive by autumn, he said.
"It's been a period where the weather has just not cooperated," Yearsley said, noting that weather disruptions have also harmed demand in Europe and Thailand. "It's a worldwide bear market right now."
While the heavy global supply of urea will weigh down prices for other types of nitrogen, like urea ammonium nitrate or UAN, he said. However, UAN isn't directly affected by Chinese exports, so producers have more control over the supply.
It's unlikely the U.S. will see major price spikes for nitrogen or other fertilizers for the foreseeable future, but the domestic production outlook remains stable, said Buckley.
Even at lower prices, U.S. manufacturers of nitrogen still have healthy profit margins -- with low natural gas prices, a short ton of urea costs $150 to produce and sells for roughly $350, he said.
"They're doing very, very well," Buckley said.