Russia's invasion of Ukraine has resulted in sanctions from Western countries. As a result, raw material exports will be heavily impacted. We often hear about oil and gas but much less about fertilizers.
Russia, Belarus (very close to the Russian government) and Ukraine together account for 38% of the world's potash supply, 11% of ammonia and 7% of phosphate. While Russian producers face multiple constraints (logistical challenges, Western sanctions and an export ban by the Russian government itself), US companies in the industry are getting a boost. And that's just what the market is anticipating. Players such as The Mosaic Company (+50%) or CF Industries (+35%) have benefited from this new environment since the beginning of the year and the trend is likely to continue in this direction as long as the current scenario does not change.
The production of nitrogen fertilizers (ammonia) could be impacted beyond Russia and Ukraine due to the surge in natural gas prices in Europe. This has significantly increased the cost of producing nitrogen fertilizer in Europe, which means that producers are making large negative margins at spot prices. Bank of America analysts believe that nitrogen fertilizer prices will have to rise further to offset the margin erosion and restore positive margins for European players.
Inevitable consequences on crops
There is a clear short-term relationship between the application of fertilizers on agricultural land and crop yields (particularly cereals, including wheat). Thus a short term decrease of 10% in fertilizer use could lead to an 8% decrease in cereal yields. It is difficult to measure the influence of each primary nutrient in fertilizers (nitrogen, potassium and phosphate) on crop yields (although several studies estimate that nitrogen is the most influential).
Source: Bank of America
Unfortunately, not all countries have the same organization in terms of fertilizer supply policy and it is often the emerging countries that suffer the most. The poorest countries tend to use less fertilizer and are therefore further down the fertilizer/yield curve (see Figure 16).
Source: Bank of America
This relatively worrying situation could lead to famine in countries that are highly dependent on Russian fertilizers and grains (Especially some African countries such as Egypt).
What will happen when these people are desperately short of food? How will they choose to reverse the balance of power in order to access these essential raw materials? It is important to remember that many developed countries obtain their raw materials from Africa: copper (the Democratic Republic of Congo at the top with $18.1 billion in exports in 2020, up from $15.5 billion in 2019); cocoa (Côte d'Ivoire and Ghana at the top, followed by Cameroon); and(Côte d'Ivoire and Ghana in the lead, followed by Cameroon); coffee (dominated by Kenya); aluminum (with South Africa, Mozambique, Egypt, Morocco, and Cameroon in the top five); and wood (Cameroon, Gabon, South Africa, Congo, Ghana). The cost of these raw materials could continue to rise in order to allow these countries to buy wheat and fertilizers that have become more expensive. This is all hypothetical, but we should keep this in the back of our mind.