Fertilizer: We Do Not Expect Supply Shock From Israel Conflict

Fertilizer stocks rallied following the Hamas attack on Israel and the Israeli military response. Of the three primary fertilizers, Israel is a major exporter of potash, accounting for around 6% of global exports based on Nutrien’s NTR 2022 fact book. The country is not a major exporter of nitrogen or phosphate. We think the market may be reacting to the increased potential for a supply disruption if the conflict leads to the destabilization of export volumes from Israel.

Even if potash exports were to be disrupted, the market should be able to remain in balance with lower Israeli exports. Demand fell sharply in 2022 in response to record-high prices and has not yet recovered to 2021 levels as many farmers are still using less potash on their fields. Returning exports from Russia and Belarus and a small production increase from Nutrien and Mosaic could keep the market balanced.

In nitrogen and phosphate, we think the rise in producer stock prices is due to the potential leak in the Baltic Sea underwater pipeline between Finland and Estonia that could lead to higher European natural gas prices, which is the feedstock for marginal cost producers. While this could impact natural gas supply, a lot of European nitrogen production is still offline after temporarily shutting down last year in response to record-high European natural gas prices, leading to likely less of an impact on the nitrogen market.

Accordingly, across the three primary fertilizer producers, we do not see a repeat of the supply shock that led fertilizer prices to spike in 2022 following the start of the Russia-Ukraine conflict. Further, even if fertilizer prices were to rise temporarily, we would expect a quick fall back to the marginal cost level, similar to what occurred in the year after the Russia-Ukraine conflict began. Accordingly, we maintain our current fertilizer price outlook and our fair value estimates for Nutrien, Mosaic, and CF Industries.