Fertilizer Producers Sector Update - Expecting relatively flat urea prices in coming months

We cut our 2023 average Middle East urea price forecast by 13% to USD350/tonne (76% of the pre-Russia-Ukraine conflict level and 132% of the pre-COVID level) while maintaining our assumption of USD350/tonne in 2024-2027F. As of May 18, 2023, the spot Middle East urea price was USD331/tonne and the YTD average was USD352/tonne — 46% lower than the 2022 average. Furthermore, in its May 2023 gas report, the International Energy Agency (IEA) nearly maintained its average 2023 gas price forecast in Japan, EU and US at USD11/MMBTU (-57% YoY) vs its February 2023 report (Figure 9). This gas price is favorable for gas-based urea plants in Europe that stopped production in 2022 to resume operation in 2023, which will in turn increase the urea supply. Meanwhile, a greater supply from China (after its reopening) and Russia is contributing to the global supply of urea this year. We maintain our assumption for an average price of USD350/tonne in 2024-2027F as the Russia-Ukraine conflict continues, which suggests a potential rebound in EU gas prices and a lower urea supply in the EU over the longer term.

According to industry players, global urea prices may have bottomed in H1 2023, which should trigger higher urea demand in H2. We expect the recovery of urea demand should restrain further decrease of urea prices and keep them relatively flat over the remainder of 2023 (Figure 6).

We maintain our assumption for no gap between DPM & DCM’s average selling prices (ASPs) vs international urea prices in 2023-2027F as urea prices have fallen since October 2022 to affordable levels in May 2023. In 2022, DPM & DCM’s ASPs were ~4%-8% lower vs the average Middle East urea price partly due to both companies supporting farmers. Before COVID and the Russia-Ukraine conflict, DPM & DCM’s urea ASPs were at a premium vs Middle East urea price.

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