Markets
Nitrogen outlook supported by tight market fundamentals
OCI’s earnings momentum is underpinned by several factors which suggest a structural shift to a multi-year demand driven environment for nitrogen products.
The global grain stock-to-use ratio is at one of the lowest points in the past 20 years, exacerbated by numerous weather-related crop production issues in Latin America and the conflict in Ukraine.
As a result, it will take at least until 2024 to replenish stocks to ease food security concerns, providing support for higher crop pricing. Corn futures are above $6/bushel to the end of 2024, incentivizing farmers to increase acres and maximize yields by using more nitrogen.
The US nitrogen outlook is underpinned by low inventories and higher grain prices driving farm incomes to record levels in 2022.
In Europe, demand for nitrates is supported by attractive farm margins which combined with low producer inventories is resulting in further tightness in the spring season.
Farmers in grain exporting regions in the US, Europe and Latin America have been hedging their operating margins by selling forward their new crop at current high forward corn and wheat pricing. At the same time, they are incentivised to purchase nitrogen, secure input costs and lock in margins. This is expected to be supportive of nitrogen demand and pricing over the summer period.
In India, demand is strong as the government continues to prioritize food security and subsidise nitrogen fertilizer costs for farmers.
In October last year, the Chinese government implemented measures to curb exports and prioritize domestic supply until July 2022. Recent articles suggest that government discussions are ongoing for export restrictions to stay in place until June 2023, which, combined with tight environmental restrictions, are capping medium term exports below 3 million Mt.
Nitrogen pricing has support to remain above higher marginal cost floors in Europe and Asia:
Global input costs to produce nitrogen products are elevated for the medium term. Gas price futures in Europe currently indicate c.$30 / mmBtu for 2022 and $23/MMBtu over 2023/2024, compared to $5 / mmBtu in the 2016 to 2019 period.
Outlook favourable for our industrial products
The ammonia market is structurally tightening over the medium term as demand growth is expected to more than offset limited net new capacity additions , resulting in an estimated supply deficit of 4 million Mt over the medium-term compared to a net surplus of 7 million Mt in the last five years, providing a strong market backdrop for forward ammonia pricing.
Further, over the medium term there is upside for ammonia from expected incremental demand for clean ammonia in new applications across a range of sectors including marine fuel and power, and as a hydrogen carrier.
Melamine markets have been driven by demand from home renovation and construction markets, tight supply and low global inventories across the supply chain.
The recovery in truck sales and freight activity has continued, supporting an improving trend for OCI’s Diesel Exhaust Fluid (DEF) sales in the US for 2022. The higher netbacks for this product enable us to continue to enhance returns for our US nitrogen operations going forward.
Methanol market fundamentals remain healthy. US spot and contract prices in Q1 2022 have been supported by a continued recovery in demand, low global inventories, and the higher oil prices whereas there is no new major supply expected to come onstream in 2022.
Operating rates for several major derivatives segments are reported to be at healthy rates in the US and Europe. Methanol-to-Olefins (MTO) operating rates in China have recovered to more than 80% in Q1 2022 and are expected to remain healthy in the quarters ahead with affordability of methanol currently at attractive levels. A new 1.8 mtpa MTO facility is starting up in China later this year which should provide a further boost to demand.
Over the period 2022 through 2026, we continue to expect tighter methanol market fundamentals with incremental demand expected to exceed new supply by ~8 million Mt. This does not consider the meaningful additional upside from hydrogen fuel demand, notably for road and marine fuel applications.
Gas markets
OCI’s nitrogen and methanol assets are favourably positioned on the global cost curve, and we are a net beneficiary of a higher global gas price environment, despite our production platform in Europe which remains partially shut as a result of the high gas prices. A portion of our supplies in the U.S. is covered by long-term collars and gas hedges. Fertiglobe has a significant competitive advantage with favourable gas price supply agreements which represent more than half of our total natural gas requirement.