SunSirs: Divergent Paths Ahead: Nitrogen vs Phosphate Fertilizer Markets After Strait of Hormuz Reopening

During the blockade of the Strait of Hormuz, the market generally believed that the resumption of navigation through the strait would mark the end of the global fertilizer crisis, and at that time, various explicit supply disruptions would gradually ease. However, when there were signs of the crisis in the strait being lifted, market participants found that the adjustment logic of the phosphate fertilizer market was completely different. If one only interprets phosphate fertilizer by referring to the nitrogen fertilizer market trend, it will ignore the core fundamentals of the industry, making it difficult to timely detect the hidden shortage risk of phosphate fertilizer.

Market insiders said that phosphate fertilizer is currently in a special cycle dominated by supply sources rather than costs. The market regulates supply and demand through methods such as allocating supply volumes and controlling circulation, instead of forming an equilibrium price through public bidding. This pattern will continue until sulfur supply returns to a loose state. The restart of the Taiwan Strait only resolves the superficial and obvious transportation disruption, but cannot resolve the deep-seated contradictions hidden behind the transaction volume. A large number of phosphate fertilizer plants have passively reduced production and been idled due to insufficient raw materials, which poses a potential impact on agriculture.

Market participants said that for the nitrogen fertilizer market, the market has sufficient liquidity, and the way to absorb the impact is very straightforward, namely a rapid and significant drop in prices. This is a typical trend of risk premium dissipation, and the price fluctuation is easy to understand. Nowadays, the market habitually uses the trend template of nitrogen fertilizer to anticipate the entire fertilizer sector, but this logic cannot be fully applied to phosphate fertilizer.

Phosphate fertilizers are hard to replicate the price recovery path of nitrogen fertilizers, the root cause lies in the fact that sulfur, their essential raw material for production, cannot have its tight supply situation quickly improved by the resumption of strait shipping. Most of the globally circulating sulfur is transported out of the Gulf region as a by-product of oil and gas, rather than being specially mined on demand. Even after the waterway resumes passage, problems such as production capacity bottlenecks at the mine end, risk premiums caused by conflicts, and queuing backlogs caused by ships giving priority to transporting energy products continue to restrict sulfur supply.

Global phosphate fertilizer producers have proactively addressed the shortage of sulfur raw materials. Some enterprises have carried out equipment maintenance in advance, and the production lines of NPK (nitrogen, phosphorus, potassium) compound fertilizers have undergone centralized shutdown and maintenance. No products were shipped in July, and existing fulfilled orders can only be delivered after mid-July. Market insiders predict that the subsequent trends of phosphate fertilizers and nitrogen fertilizers will diverge completely. That is to say, once the navigation through the Strait of Hormuz resumes, the output and prices of nitrogen fertilizers will quickly return to normal, while the output of phosphate fertilizers will still be difficult to boost due to the persistent sulfur shortage.

As for the price impact, it also depends on the application characteristics of phosphate fertilizer. If a crop lacks nitrogen, its yield will drop significantly in the same year, so nitrogen fertilizer must be applied periodically. However, there is inherent phosphorus reserve in the soil itself; when a crop is deficient in phosphorus, it can rely on the soil reserve to sustain growth for one season or even longer. This characteristic will completely change the way to resolve the supply-demand gap of phosphate fertilizer. When the supply of phosphate fertilizer is tight, growers and compound manufacturers do not need to keep raising prices until demand collapses. Instead, they can choose to reduce the application rate in the current season, draw down the soil phosphorus pool, and defer the fertility costs and yield reduction risks to subsequent planting cycles. Compared with the nitrogen fertilizer market driven by costs, phosphate fertilizer has a natural buffer space to absorb the supply-demand gap by reducing application rates.

Therefore, the shortage of phosphate fertilizers in this round was first reflected in trading volume rather than intuitive price fluctuations. In the recent Strait blockade incident, the price volatility of phosphate fertilizers seemed less significant than that of nitrogen fertilizers, but the actual impact was severe. Core observation indicators include: a decline in phosphate fertilizer import procurement volumes in countries such as Brazil and India; a reduction in the proportion of phosphorus added in compound fertilizer formulations; and actual fertilization amounts by farmers being far lower than originally planned. In a market that relies on sales volume to absorb the supply gap, price signals are lagging. However, most market participants still only focus on price trends and are prone to misjudging the market situation.

The practice of farmers delaying phosphate fertilizer application has a long history and has occurred numerous times ever since the Russia-Ukraine conflict disrupted fertilizer supply chains. Some demand was long pulled forward in advance. Deferred demand does not equate to permanently lost demand. If low-rate fertilization persists across consecutive growing seasons, soil phosphorus reserves will become depleted, and phosphate fertilizer demand will surge sharply. Once sulfur supplies recover, phosphate fertilizer supply will also rebound, and the suppressed purchasing demand will be unleashed all at once. Prior to that, the phosphate fertilizer market may face tight supply, slow trading activity and mild price volatility — a market dynamic that makes it far too easy to underestimate the risk of supply shortages.

Market participants believe that the core focus of the phosphate fertilizer market in the next 6 to 9 months is not the price high, but the actual circulation volume. There are two trends for the currently deferred demand: concentrated restocking after the improvement of raw material supply; or long-term reduced fertilization leading to a permanent shrinkage of demand. Both scenarios are based on the background of limited sulfur supply, and the final trend depends on the recovery speed of sulfur supply and the choice of farmers between "overdrawing soil fertility" and "purchasing phosphate fertilizer at high prices". It is impossible to fully judge the future trend of phosphate fertilizer only by relying on the price trend chart.

The market for monoammonium phosphate (MAP) in Brazil has confirmed this adjustment logic. Insiders commented on the local market situation: "It is not simply bearish about the price decline, but market trading has come to a standstill. Only a significant price drop can reactivate procurement demand." This is a typical feature of absorbing the supply-demand gap through trading volume: declining trading activity, buyers adopting a wait-and-see attitude and leaving the market, shrinking market liquidity, and price adjustments lagging behind changes in trading volume.

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