Inside Fertilizer Analytics: Sulphur, Feb. 2021

Author Argus

The sulphur market has seen dramatic price gains across almost all regions in recent weeks.

The sulphur market has seen dramatic price gains across almost all regions in recent weeks. Tight supply on the back of Covid-19 related disruption has led to supply side issues. China imports dropped dramatically in 2020 but prices have remained firm through January. What is next for the global price outlook and how will global trade be impacted by changing demand and new capacity? Meena Chauhan, Head of Sulphur and Sulphuric Acid Research, and Tim Cheyne, VP of Fertilizers, discuss.

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Tim: Welcome to this podcast episode. My name is Tim Cheyne. I am VP of Fertilizers at Argus Media. And today, we're going to be looking at the sulphur market. And to join us to discuss what's happening there, we have Meena joining us, who is head of sulphur and sulphuric acid research. She's part of our consulting team, and she's responsible for our forecasts and forward-looking research in these markets. She spends her time thinking about what's going to affect future prices for sulphur and sulphuric acid. Given that there's lots of different thing going on in the sulphur market, we thought now would be an opportune moment to discuss how these different developments are affecting sulphur prices and where we think things could be going in the future.

So, welcome, Meena. It's good to have you on this podcast today. And I guess, let's start with prices because a lot has been going on and sulphur prices are just...just looking at the prices, we've seen most sulphur more than doubled in the last 12 months. So, a lot is changing, some rapid upward prices recently. So, tell us, what's been driving this? What are the key factors that have been pushing the price for sulphur up so quickly?

Meena: That's a great place to start, Tim. Absolutely. It's been a combination of factors, really. Partly, starting with Covid-19 related disruption to the oil market that obviously has had a knock-on effect to the sulphur supply side of things. And that's really reduced liquidity significantly. At the same time in Q4 as well, we have seasonal tightness out of Russia. And that happens over the winter months where we see the closure of the river system there. Alongside that, there's been healthy demand as well as a rundown of Chinese port inventories. So, all of these factors combined kind of led to the first inklings of price run-up back in the fourth quarter. And now, here we are at the end of January, and still, there's no sign of a price ceiling being reached.

Tim: So, it sounds like we've got supply restrictions, supply factors combining together with demand factors, and all happening at the same time. Do you think we're going to see a continued rally in prices, or do you think we've reached the top? Any idea of how far this current development could continue?

Meena: There does seem to be room for further increases in the first quarter of 2021. I think that's given the sort of very tight supply balance that we're seeing still. The expectations are that we may well see a downward correction from the second quarter of the year. And that would be, again, partly seasonal factors influencing the price outlook. So, the river system in Russia would reopen. We've also got the upcoming Chinese Lunar New Year in mid-February, and that may help stall the current price run that we're seeing. But certainly, for the very short-term, there is no ceiling in sight at least for now.

I would say, for the remainder of the year, perhaps the second half of the year, the outlook is for slightly softer prices also from the downstream processed phosphate sector as well. And that, I think, provides some direction for the short-term view for sulphur also. But, of course, Covid-19 is still that wild card factor for the market overall. There's obviously some positive signs that we're starting to see in the macroeconomic picture on the back of the vaccine rollouts in some regions. But there still appears to be a pretty long way to go with numerous lockdowns in place and there's limits to travel and so on.

Tim: That's a great point. Of course, the global pandemic and its impacts have had all kinds of implications for all commodities. But can you talk through the implications particularly for sulphur supply? Because you...what you're saying there is it certainly has reduced supply. But what are the mechanisms that's made that happen? What particular things have happened which resulted in sulphur supply being affected by Covid-19?

Meena: Well, there's been significant impact, firstly, with the demand shock to the oil market last year that we saw. And that's been where we're seeing those losses in the market. So, for instance, when we look somewhere like the U.S., which is a heavy oil-based sulphur recovery market, we saw refinery run rates dropping in our latest quarterly sulphur analytics. We're estimating 2020 losses at about 0.6mn t of sulphur just from the oil sector in the US. When we look at other markets, Western Europe is another good example where we've seen the refining sector margin struggling as well and leading to lower run rates and tightening of supply and availability.

Tim: That's fascinating. So, lower refinery output means less byproduct sulphur of course, I guess that's completely unexpected development. So, have you seen suppliers having to fill in some gaps, buyers having to scramble to find the sulphur they need in this situation? Has it caused disconnects in terms of getting sulphur to the right customers in town?

Meena: Yes, absolutely. So, I think that's really where we've seen this price run-up during this period of low liquidity. We've seen in places like China now as well where there's been a few months of liquidated stocks at the major ports, those sorts of trends that we're seeing in the market as a result of this situation. Absolutely.

Tim: Great. I guess, also linked to supply with the other supply development and connected to the Covid-19 pandemic, can you tell us, are you expecting other supply changes in the next year, new sources of supply or changes to supply sources that will have an impact on the supply and demand balance?

Meena: Yes. So, despite that Covid-19-related disruption that we've been talking about in the energy markets, we are actually still seeing growth on the capacity editions in the very short-term. For 2021, we're currently forecasting an increase of just over 3mn t of new capacity versus last year. And that's really primarily being driven by the Middle East regions. So, countries like Saudi Arabia, Qatar, and Kuwait. Even last year, we saw a new gas facility starting up in Saudi Arabia. And at capacity, that one will be ramping up to over a million tons a year of sulphur.

Elsewhere, it will be good to note Northeast Asia because we've got additional capacity coming online in China. But I would say that, certainly, there have been delays as well, as a result of Covid-19. So, even with the new capacity that we're seeing, there are some projects — the Barzan Project, for instance, in Qatar is a good example here — with commissioning being pushed into 2021 currently.

Tim: Got it. Okay. It sounds like growing supply is expected to influence the market. But particularly in the Middle East, it sounds like that's where we need to keep a close eye on supply in the medium term. Do you think that producers in the Middle East will start using long-term sulphur storage as an alternative to supplying the markets...the way of controlling supply and balancing the markets?

Meena: That's an actually really interesting question because when you look back historically, the producers' main marketing strategy for the Middle East region at least is to pretty much export production with minimal stocking overall. Perhaps only building stocks during periods of technical issues or any problems at the ports, for example. And going forward, we would expect that trend to continue. Some of the analysis we've been doing in the analytics is to look at a sulphur cost curve to try to address this question of which, if any, producers would be looking to potentially stock sulphur in long-term storage during periods of low pricing perhaps and the cost curve is based around freight and logistics costs obviously because sulphur is a byproduct. And that exercise has really shown the vast difference in cost between most Middle East producers in terms of getting product to port ready for export versus some of the other regional counterparts. So, in places like Western Canada or Central Asia or Turkmenistan.

Tim: Oh, I see. So, Middle Eastern producers can get product support more cost-effectively, which means the barrier to export seems lower, presumably. But if they did start storing sulphur in a long-term way, that could be a major structural change at the markets. Certainly, as you said, something we haven't seen. But it does sound like you think that's unlikely, though. Did I interpret you correctly?

Meena: Exactly, yes. We would expect that to be a highly unlikely scenario. And it would really be the other producers perhaps with much higher costs in terms of logistics that would go down that route. So, I think Turkmenistan is a good example here where the logistics can be prohibitive in terms of the cost side of things and getting product out for export. And those would be the types of producers that would look at those long-term storage options perhaps if we reach periods of lower pricing.

Tim: Makes sense. Thanks. Just turning to the Northwest European markets, of course, the Northwest European market is different in the sense that it's a molten market, not solid on the sort of sulphur market. What sort of trends do you see in Northwest Europe as compared to the rest of the world?

Meena: That's right, yes. So, the Northwest European Sulphur market, we tend to see a premium to pricing in the region. And that's because of the molten nature of sulphur. And it's a bit of more of a closed market. What some of the trends that have led to this has been that structural decline that we've been seeing in gas based production particularly in Germany as well as the tightening across the refining sector in recent years. And that's been something we've been seeing over the past decade, really. The Covid-19 oil demand collapse, I think, has highlighted some of the issues that the Northwest European refiners have been facing.

And we have seen increasing tightness in some countries. In the last couple of years, there are two projects that have emerged to address this market balance issue. And those are remelter projects. And so, it will be interesting to see how these progress. Both projects are based in Germany, and that's where we see gas based supply depleting. In the medium term, that will be dropping down to pretty much zero. And so, the remelters would look to import solid sulphur for remelt to supply molten to those buyers that require it.

Tim: I guess that would mean that the premium would remain because there would be some costs required to remelt the imported solid sulphur.

Meena: Yes, exactly. That's the thinking, that with the cost of remelt we would expect the premium on Northwest European prices to remain in the long-term outlook.

Tim: Turning across from supply to the demand side, we've seen disruption in fertilizer markets from Covid-19, of course, through the course of last year and into this year. But I've noticed in phosphates, of course, that the processed phosphate prices have been also increasing. Can you comment on the impacts of the developments in the phosphate sector through the pandemic, and how that's affected sulphur demand?

Meena: Yes. It's been quite an interesting few months in the downstream processed phosphates market because at the very start of the pandemic in early 2020, we did see the disruption with lockdowns leading to a reduction at that time in phosphoric acid production in places like India. And, obviously, that had a knock-on impact on sulphur demand in that region. But then pretty quickly after that, we did see a lot of government support for the agricultural sector which then supported continued operations and restart of some of the operations in the phosphoric acid side of things.

And actually, when we look at the estimates - demand for sulphur in the phosphoric acid sector actually grew marginally last year. And I think, really, this was supported by Moroccan uptick in production of phosphoric acid. Overall, when we look at the whole demand picture, fertilizers and all other end uses, we did see a decline. At the moment, our estimate is about 0.8mn t of demand losses versus the 2019 overall. But this was not uniform across all regions. So, I've mentioned Morocco, of course, Africa saw growth, so did Latin America and also Southeast Asia. Whereas we saw Northeast Asia and North America seeing a reduction in demand.

Tim: That's interesting to know. Definitely, the tightness in the rising prices in processed phosphates will continue to support sulphur prices in the next few months, do you think?

Meena: Absolutely, yes. There is a strong correlation between the downstream phosphates market prices and sulphur. When we look globally, we estimate over 90pc of seaborne sulphur trade is for phosphate producers. So, you can see there's a strong link with trade and pricing with the phosphates market sector overall. So, certainly, the tightness that we're seeing in the downstream phosphate market would support sulphur in that very short term at least.

Tim: What about the non-fertilizer markets that consume sulphur? How are they developing and how is that affecting overall sulphur demand volumes?

Meena: So, outside of fertilizers, the metals and industrial sectors are really key for the sulphur market outlook. We've spent quite a lot of time assessing the nickel market recently in our latest analytics. We delved into some of the new projects that are emerging in this sector, some of which are firm and some speculative. But these are really concentrated in Indonesia for the new firm emerging projects and also in Australia. But Indonesia, that's quite key to note, I think particularly because of the import requirement that would be there from the sulphur side because we would expect to see sulphur burners being installed alongside these new nickel projects. Obviously, it's sulphuric acid which is required at the project level. But majority of nickel projects tend to install sulphur burners as well.

There's been, obviously, disruption with Covid-19 to the nickel markets. So, one of the major projects in Madagascar is currently on care and maintenance and has been for some time now. But we're expecting to see that restarting this quarter. And the demand side for nickel growth, it's partly attributed to the electric vehicle market. That's obviously been a significant growth area in light of environmental policies.

Tim: Lots of consuming segments to keep track of when you're looking at sulphur. It's really interesting to evaluate where it is that sulphur's used. I'd like to turn to look at a particular country. Of course, you can't talk about sulphur for too long without discussing China and what's happening there. We saw Chinese sulphur imports plummet in 2020. Also, we've seen that the Chinese sulphur stocks were much lower by the end of the year than they were at the beginning of the year. So, what is view of how this is going to develop during 2021?

Meena: We do expect to see this trend continuing actually in the very short-term. And we are not forecasting any recovery in Chinese imports. In fact, we're actually looking at China potentially losing its leading importer ranking in that medium-term forecast as well. So, this trend is set to continue.

Tim: What is behind the drop in structured China? Is that something structural? Was it just a cyclical issue?

Meena: With the tighter availability in the market as well as the prices, we've seen a move to liquidate stocks from traders. So, not necessarily structural. I mean, over the years, we've seen historical fluctuations in Chinese port stock levels. It's not unusual to see this type of draw down that we're currently seeing.

Tim: Absolutely. I guess, when prices are up, it's a good time to be selling sulphur inventories. That makes great sense. Finally, I'd like to ask you about sulphur trade. How do you see sulphur trade evolving during the outlook period in the medium term? How are these supply and demand factors going to impact trade?

Meena: Great question. Yes. So, ultimately, obviously, any changes in supply and demand will influence the trade flows that we're seeing in sulphur. So, China, we've mentioned, for the last year with the plummeting volumes, we actually saw a drop of 3mn t, which is really interesting. And I think, going forward, that trend is expected to continue, as I've mentioned. So, one of the things that is driving that is the rise in Chinese domestic production of sulphur. So, we're expecting to see almost a 40pc increase on current levels of sulphur production in China by 2025. So, that will continue to dampen the view for Chinese imports.

Elsewhere, Africa is a region with strong potential for significant changes. We mentioned Morocco earlier. I think, in particular, in the forward view, it's the ramp-up of increased processed phosphates production capacity. And, obviously, in the absence of any domestic sulphur output, then we'll see increased imports there. On the export side, I would say, the story is really around the Middle East region with growing capacity on the gas side, in particular, and some new oil projects due to come online. We'll be expecting this production to be for the global export market.

Other projects that we're keeping an eye on are in Western Canada with several new forming projects emerging. And that would potentially mean increased trade of sulphur out of Alberta as well.

Tim: Well, there's lots to keep an eye on there. And we look forward to hearing from you again. Meena, thanks for your time today. It's been very interesting to discuss how things are developing in the sulphur market. And if you're listening to this podcast and would like to delve into more detail, if you're a subscriber, then please log into Argus Direct and download two different reports, which I think will be interesting. One is our latest quarterly sulphur analytics report, which was published in December. So, a few weeks ago. It's available covering developments in the sulphur markets. And then we've also just published our annual long-term sulphur outlook report, which is part of the same sulphur analytics service. That's also available in Argus Direct. That's a longer report, which means more detail on how things are going to develop further out on sulphur demand, sulphur supply, trade and prices.

If you aren't an [Argus] Sulphur Analytics subscriber, please go to where you can find more information about our sulphur services, including sulphur analytics, which is published by our team in the consulting group. And certainly contains Meena's expertise in terms of how these developments will affect future prices. Thanks for your time today. We hope you join us for the next sulphur podcast.