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Phosphate producers will be forced to cut output, Phosagro says

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Phosphate producers will be forced to start cutting production soon, helping prices to find a floor, the head of Phosagro said.

The Russian fertilizer group reported a sharp rise in profits over the first half of 2016, thanks to currency effects, but margins are under pressure due to low nutrient prices.

This industry-wide margin pressure appears to already be supressing Chinese production, the company said.

Bottoming prices

"I believe the market is in the process of bottoming out," Phosagro chief executive Andrey Guryev said.

"We might see production curtailments, especially in phosphates, relatively soon and in turn that should drive prices higher."

Mr Guryev noted that the recent pressure on agricultural commodity prices, which might appear bearish, was the result of good harvest prospects worldwide.

"This bodes well for next season's nutrient demand as soil is depleted and very low nutrient prices provide more incentive for farmers to replenish the soil."

Pressure on Chinese margins

"Fertilizer markets are going through challenging times across all nutrient groups," said Mr Gurev "Prices for concentrated fertilizers have reached the lowest point in several years, similar to 2009 levels, and we see declining margins across the industry."

"Overall on the demand side most factors remain supportive," said Mr Guryev. But on the supply side, he noted a heavy oversupply, at least in terms of production capacity.

Mr Guryev said that determining actual production levels was "complicated" as there was no clear picture of output in China, the largest producer.

A fall in Chinese exports "supports the view that most local production is high-cost," Mr Guryev said, suggesting that capacity utilisation rates may be down due to weaker margins.

But while Chinese production may be falling, Mr Guryev said that other players, particularly Morocco, were increasing output, "notwithstanding a significant deterioration of margins".

"I would say that this was the major reason why we saw a further decline of DAP prices in the second quarter, which are now at just $340 per tonne [in Tampa, Florida].

Revenues, profits rise

Phosagro reported a sharp rise in profits over the first six months of 2016, thanks to the weaker rouble, which buoyed foreign currency receipts for the Russian company. Profits were up 30% year on year to 36.1bn roubles.

Phosagro reported adjusted earnings before interest, taxation, depreciation and amortisation of 41.6bn roubles, in line with last year.

The company's revenues rose 9% year on year, to 102.0bn roubles.

Phosagro shares were down 0.7% in afternoon deals, at 2,818 roubles.

By Agrimoney.com

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