MOSCOW, RUSSIA – The global fertilizer market witnessed unprecedented turmoil in 2022, largely due to Western sanctions against the Russian and Belarussian economies related to Russia’s invasion of Ukraine. High prices have driven farmers to cut down the use of fertilizers, which threatens to hinder grain production in some countries. Prices recently have drifted downward, but there are signs that the storm has yet to pass, and new problems could be around the corner. 

Laura Cross, director of market intelligence at the International Fertilizer Association (IFA), said the impact of sanctions, high raw material costs and export restrictions led to the prospect of a dramatically reduced fertilizer supply, and higher prices led to demand destruction in affordability-driven markets. 

“Since then, some markets have stabilized, namely nitrogen and phosphate, while others remain disrupted, in the case of potash,” Cross said.

The IFA’s latest Medium-Term Outlook estimates that globally, fertilizer use decreased by close to 3% in 2021, falling to 194.7 million tonnes, and by close to 5% in 2022, falling to 185.1 million tonnes. Global fertilizer use in 2022 was 15 million tonnes lower than the record-high level of 200.2 million tonnes reached in 2020, according to the IFA. The picture dramatically varies across the key market. 

“In absolute terms, East Asia and South Asia led the global decrease in the two-year period, accounting for almost 60% of the reduction,” Cross said. “In relative terms, three regions reduced their fertilizer use by at least 10% over the two years: West Asia (down 17%), West and Central Europe (down 15%) and Africa (down 14%).”

Turkey led the consumption fall in West Asia as a severe weakening of the Lira aggravated fertilizer inflation. In West and Central Europe, fertilizer use suffered from both higher prices and the 2022 drought. In Africa, where farmers are sensitive to higher fertilizer prices, potassium consumption dropped by almost half (44%), significantly more than in other regions, said Cross. 

Collateral damage

Since the beginning of the military conflict in Ukraine in February 2022, Russian fertilizer exports have felt the sting of Western sanctions. In 2022, Russia exported 38 million tonnes of fertilizers, down 17% compared with the previous year, the Russian Association of Fertilizer Producers (RAPU) estimated. Remarkably, fertilizers appeared to be collateral damage of Western sanctions since the restrictions have never directly aimed at this segment of the economy. 

“Several jurisdictions have clarified that sanctions on Russian individuals should not hamper the flow of fertilizers,” Cross said. 

But in reality, sanctions have hurt Russian exports. Maxim Kuznetsov, executive director of RAPU, explained that the critical difficulties were associated with clearing financial transactions as the key Russian banks were disconnected from the SWIFT international system, and there were also problems with insuring export shipments.

Infrastructural challenges also played their role. Before 2022, almost one-third of Russian fertilizer shipments and a large portion of Belarussian exports went through Baltic Sea ports. However, Western sanctions have put these supplies on hold, with most of the cargo now flowing through the already overloaded Russian ports near St. Petersburg. 

“It is impossible to load liquid ammonia in our (Russian) ports, just as in general there are no capacities for transshipment of dangerous goods such as some types of other mineral fertilizers,” Kuznetsov said. 

The future of ammonia exports largely is linked to the situation around the Togliatti-Odesa 2,500-kilometer pipeline, which runs from the Russian city of Togliatti to three Black Sea ports in southern and western Ukraine. It exported 2.5 million tonnes of ammonia annually in the previous years, but supplies were stopped at the beginning of 2022.

During talks to ensure grain exports from Ukraine last year, Ukrainian and Russian leaders struck a deal to allow the safe passage of ammonia through the pipeline, but at the beginning of June, a part of the pipeline in the Kharkiv region of Ukraine was damaged. The consequences could be enormous, as Russia said it could not renew the United Nations-brokered Black Sea Grain Initiative beyond July 2023 unless the pipeline was operational.

While Russian fertilizer exports were not subject to Western sanctions, the owners of the Russian fertilizer behemoths were. As a result, ships carrying Russian fertilizers occasionally have been detained in European ports, including in Lithuania, Estonia, Belgium and the Netherlands. 

Thus, some fertilizer exports did not manage to bounce back to a similar extent, according to the IFA. 

“Exports of urea and phosphates have returned to pre-war levels or higher, while exports of ammonia and potash have been lower due to pipeline closures and global demand destruction, respectively,” Cross said. “Belarusian potash exports have remained significantly lower than previous levels because supply typically flows through Lithuania to the Baltic Sea port of Klaipeda, which has not been allowed to resume. Some Belarusian supply has been exported by rail to China and Russia. The global supply of potash remains a concern because the lost volume from Belarus in 2022 cannot be immediately replaced. This is because potash is a mineral resource, and mines take several years to develop.”

Plugging the loopholes

It would be inaccurate to say, however, that the Russian and Belarussian fertilizer giants suffered much pain due to the Western sanctions. Despite a drop in sales to foreign customers during the first 10 months of 2022, the Russian fertilizer industry generated a net revenue close to $16.7 billion, nearly 70% higher compared with the previous year. While exports to the United States and Europe plummeted, Russian suppliers enjoyed strong demand in alternative markets. 

The Russian think tank Business Profile estimated that last year Russian fertilizer exports to India more than tripled. A tangible increase also was recorded in Vietnam, Turkey and Brazil. RAPU also underlines a strong growth in sales to the markets of the Middle East and Africa, putting high hopes on Southeast Asia in 2023. 

Andrey Guryev, president of RAPU, told the Russian newspaper Agroinvestor that, facing unprecedented sanctions pressure, the industry managed to cope well with the challenges last year. 

“A significant proportion of (Russian) manufacturers managed to quickly navigate in the new market conditions and change the vectors of shipments,” Guryev said.

However, there are no guarantees that the situation will remain as favorable for Russian fertilizer giants as it was in the previous months. The 11th package of European sanctions is expected to focus on combating the circumvention of pre-existing trade sanctions rather than introducing new bans on still-unsanctioned Russian products and sectors.

The new measures, among other things, are expected to include secondary sanctions entities from Russia and third countries that intentionally circumvent EU sanctions.

A source in the Russian industry warned that although not directly aiming at fertilizer exports, the European efforts to crack down on sanctions circumvention could weigh heavily on export operations. He said that some countries in Central Asia already have started to bring their policy in line with the European requirements — steps Russian businesses are following with great concern. 

Food security threatened

Russian businesses repeatedly have been warning about dire consequences the global market could face if restrictions against its fertilizer exports are not lifted, let alone toughened. 

“The decline in the use of fertilizers in some regions of the world due to Western sanctions against Russia in 2023 threatens to cause a global food disaster,” RAPU claimed, adding that the problems are associated not only with a lack of Russian products on the foreign markets but also to a lack of Western technologies in the Russian industry. 

“We hope for the early removal of sanctions barriers: restrictions on both the exports of Russian products and the import of new production technologies,” the association said. “All this causes significant damage to global food security.” 

The key Russian and Belarussian producers harbor large expansion plans. For example, PhosAgro intends to pump 250 billion roubles ($3 billion) in new production capacities, including 63 billion roubles ($800 million) in 2023. In previous years, Russian fertilizer giants largely relied on Western technologies, which are no longer available. It is not yet known how they plan to overcome this challenge. 

The concerns about the global food industry supply, at least partly, are likely to be true. David Malpass, former president of the World Bank Group, wrote in a December 2022 blog that it was essential to leave room for developing countries in the global natural gas and fertilizer markets. In particular, the supply disruptions looked challenging for the farmers in sub-Saharan Africa. 

“Over time, greater production is vital to replace Europe’s dependency on Russia, but in the short run it is important for the advanced economies to avoid locking up the current supply to overly guard against the risk of shortages,” Malpass said. 

The World Bank estimated that during 2023 and 2024, global fertilizer prices would be gradually falling. In particular, prices per tonne for urea, diammonium phosphate and potassium chloride will average $650 and $600, $750 and $650, and $500 and $479, respectively. New sources of nitrogen-based fertilizers in Turkey and potassium fertilizers in Brazil will partially offset price pressures and reduce the risk of supply shortages.