Fertilizer Producers Sector Update - Continuing high gas and coal prices buoy urea prices

Urea prices to remain high in 2022-2023F due to high gas and coal prices. The average Middle East urea price in 7M 2022 beat our expectation due to surging energy costs and a lower supply from Russia, China and Europe. We expect prices of natural gas (input for ~70% of urea produced globally) to remain high in 2022-2023. In its July 2022 gas report, the International Energy Agency (IEA) raised its average 2022 gas price forecast by ~5% to ~USD25/MMBTU vs its April 2022 report. In addition, Chicago Mercantile Exchange (CME) futures as of mid-July 2022 imply average LNG prices of USD37/36 per MMBTU in 2022/2023, respectively, suggesting that gas prices will decline nominally in 2023, in turn supporting urea prices. The price outlook for coal (input for the 30% of urea produced globally) is also inflated due to a supply shortage as a result of the Russia – Ukraine conflict. Therefore, we increase our average 2022/2023F Middle East urea prices by ~11% to USD700/500 per tonne in this Sector Report.

Urea prices to normalize in long term as we expect energy costs to cool down. We maintained our 2024-2026 oil price forecasts in our July 20, 2022 Energy Sector Update and continue to expect oil prices to normalize over the long term as increased global exploration & production spending improves the supply availability. Accordingly, we continue to expect Middle East urea prices will normalize to USD350-400/tonne in 2024-2026 as we assume energy costs will cool down. 

We expect a minor gap between DPM and DCM’s ASPs vs international urea prices in 2023-2026. In H1 2022, DPM and DCM’s ASPs were ~12%-16% lower vs the average Middle East urea price — slightly better than our forecast. We now assume a 14% discount for DPM and DCM’s ASPs vs average Middle East urea price in 2022, followed by a ~2% discount in 2023-2026F as urea prices decline.

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