S&P Global Ratings expects that pricing declines for the global fertilizer industry will begin moderating, given our expectation for relative supply-demand balance. Despite the negative bias in the overall chemicals space, we believe fertilizer entities are relatively better positioned, and ratings have cushion to absorb the current softness.

We believe issuers, especially investment-grade, will be prudent with their discretionary spending, maintaining leverage within current rating thresholds. While we expect carbon transition-related costs to increase in the medium term, we also view favorable trends for the fertilizer sector due to population growth and the need to improve yields.

Companies Strengthened Credit During Temporary Price Dislocation

Fertilizer prices more than doubled in 2021, led by rising global demand, low inventory levels, and limited new supply growth. The Russia-Ukraine conflict further exacerbated prices in 2022 because of export restrictions from Russia, a major producer of potash, nitrogen, and phosphate. This allowed companies to pay down gross debt, building robust buffers for their credit measures relative to the levels we expect for their ratings. In our view, balance-sheet strength and our expectation for more balanced industry conditions is allowing issuers to sustain ratings despite the steep decline in fertilizer prices since the second half of 2022.

Price Declines Will Moderate

We believe fertilizer prices, on average, will decline 5%-15% in 2024, relative to 2023 levels, and will continue declining into 2025-2026 at a moderating pace. Notably, the price decline will vary by nutrient, influenced by supply-demand dynamics. While inventory levels have improved in North America, global demand remains uncertain as fertilizer affordability is moving into less favorable territory due to declining crop prices.

Since early 2023, fertilizer affordability strengthened, exhibiting significant improvement due to lower fertilizer prices (see charts 1 and 2). However, in recent weeks, declining crop prices have challenged affordability. S&P Global Commodity Insights (CI) currently expects the global stocks to use ratio for corn to increase to 26% in 2024-2025, reaching 27% by 2025-2026, pressuring prices. Per CI, soybean prices are also under pressure from a sustained increase in global supply as crop production continues out of South America while demand from China remains weak. This means that the next spring allocation trading could be tougher for fertilizer producers and for farmers who will be wearier how much they spend on inputs.

Chart 1

Chart 2

Still, we believe the credit quality of our rated entities remains commensurate with the ratings, supported by healthy buffers built during strong pricing in 2021 through the first half of 2022. Overall, we view the fertilizer industry outlook over the next 12 months as largely stable.

Price Trends By Fertilizer

Nitrogen

We estimate nitrogen prices, on average, will decline about 10% this year, with the decline moderating to low-single-digit percent in 2025, and remaining relatively stable thereafter.

Chart 3

After peaking during the second quarter of 2022 due to the Russia-Ukraine conflict, nitrogen fertilizer prices fell through mid-2023, where they have remained relatively stable since then. Nitrogen fertilizer producers experienced temporary windfalls of earnings for a short time, but profits have since reverted to more normal levels.

U.S. producers have been particularly profitable because they have a significant cost advantage on natural gas feedstock relative to that of their European counterparts, particularly during 2022. While the magnitude of the advantage has eased as European natural gas prices have abated, there is--and will continue to be--a price differential between the two regions, with European producers structurally disadvantaged.

Chart 4

While global demand has remained weak, supply has remained relatively steady, with some new additions on the gulf coast. At the same time, previously curtailed capacity in Europe came back online, contributing to last year's ammonia price decline, but some plants in Europe may close as global demand has softened. India has increased its capacity, and while it remains a major importer of urea, its import level may continue to decline as the country balances its goal of self-reliance. Capacity in Egypt is also coming back online.

Given current market fundamentals, we forecast pricing on Tampa ammonia and NOLA urea will both decrease about 9%-10% in 2024, with rated issuers' ammonia prices averaging around $490 per tonne in 2024 and urea averaging around $360 per tonne. In 2025 and beyond, we believe the declining trend will stabilize as industrial demand recovers driving pricing improvements for Ammonia, while limited capacity additions bode well for urea.

Potash

This year, we project average potash prices will decline 10%-15%, compared to last year's levels. We expect this trend will continue in 2025 and 2026, albeit at a slower pace, with prices declining low- to mid-single-digit percent.

Chart 5

Although demand strengthened in the first half of the year, pricing has remained under pressure, as demonstrated by the recent Chinese contract signed with Uralkali at US$273 per tonne and India at $283 per tonne. This contract was below the 10-year historical average price of US$355 per tonne and 2023's average price of around US$310 per tonne.

Beyond 2024, we anticipate prices to continue declining, but at a moderate pace as demand rebounds in regions outside North America. We believe the underapplication of potash in previous years while channel inventory normalizes will support demand. However, the decline factors in the high likelihood of incremental volumes coming out of Eastern Europe (estimated at 1 million tonnes) as well as new capacity additions. For example, Phase 1 of the Jansen project is scheduled to come online in late 2026 (about 4.5 million tonnes once fully ramped). Anglo American PLC's polyhalite project in the U.K., however, will likely be delayed at least until the end of the decade, while Nutrien has also suspended its 3-million-tonne brownfield expansion.

Phosphate

We project monoammonium phosphate (MAP) and diammonium phosphate (DAP) prices to decline mid-single-digit percent on average in 2024 and 2025 before flattening out.

Chart 6

We anticipate higher global production volumes in 2024, on top of an already considerable increase in 2023. This is mainly due to a major capacity boost in Morocco following OCP S.A.'s expansion; ramp up of Eurochem's Serra do Saltire plant in Brazil, and higher output from Maaden. We believe that the discipline at which new volumes will be released to the market will be key to price stability, particularly in context of pressure on farm economics and reducing fertilizer affordability.

We believe that Chinese phosphate exports will add modestly to the supply in the market, but they could decline compared to 2023 because the Chinese government is preserving phosphate reserves. Although exports from China are not banned, its government has imposed restrictions since late 2021 to ensure domestic oversupply and has control over how much is exported out of the country. We anticipate no major changes to the Chinese policies in 2024; but this is not predictable. As such, we will continue monitoring, especially for phosphate and nitrogen--which is where China has considerable export capacities.  

Credit Check: Implications For Rated Companies 

We examined the credit quality of fertilizer companies and if ratings on these companies could change if prices continue to decline.

Chart 7 

Chart 8

We believe our rated investment-grade issuers are well-positioned to manage the current off-peak industry conditions. Most of them lowered leverage during the strong industry conditions in 2021 and 2022, which built cushions to help navigate softer industry conditions. While the cushion has been eroding, management teams are adapting their financial policies, including limiting discretionary spending.

Chart 9

Credit Implications By Company

Nutrien Ltd. (BBB/Stable/A-2)

Nutrien repaid about $2.1 billion in 2021, which built in considerable rating cushion. We believe management will continue to take a measured approach to discretionary spending to maintain leverage within its publicly stated target of below 3x across a commodity cycle. The company has lowered its capital spending program by $500 million relative to 2023 levels, focusing mainly on sustaining spending, with modest growth spending related to mine automation and brownfield expansions. Based on our current projections, we project FFO to debt to average around 45% over the next three years, well above our downside cushion near 25%.

CF Industries Holdings Inc. (BBB/Stable/--)

CF Industries has maintained a prudent balance sheet. The company repaid some debt during the past few years, reducing the balance by $741 million in 2019 and $500 million in 2022. Despite the wind down in nitrogen fertilizer prices since 2022, credit measures remain robust, with FFO to adjusted debt at 140% and adjusted debt to EBITDA at 0.6x, well ahead of the ranges we expect at the current rating. The company should have sufficient funds to satisfy the remaining $1.9 billion under its $3 billion share repurchase program expiring in December 2025.

Mosaic Co. (BBB/Stable/A-2)

We expect Mosaic's financial policies, including significant debt reduction in recent years, will continue to support an investment-grade rating. The company paid down $450 million in 2021 and another $550 million in 2022. The company's funds from operations (FFO) to total debt declined to around 41% in 2023. Although we expect this key ratio to decline further to low-30% in 2024, we believe it will remain appropriate for the rating.

Yara International ASA (BBB/Stable/A-2)

Yara's financial policy commitment to the current rating supports its credit quality. While the company's leverage weakened to below 30% in 2023, we anticipate Yara will continue to deliver shareholder returns in line with its policy of distributing 50% of the prior year's net income as dividends. While this has led to elevated distributions of about $3.6 billion in 2021-2023, we expect that Yara will not pay any sizeable dividends in 2024.As we also expect profitability to improve, this will bolster credit metrics. Specifically, we anticipate FFO to debt to recover to 30%-45% in 2024, which is appropriate for the rating.

In 2023, Yara's funds from operations (FFO) declined. Yara faced a high cash tax outflow, which reflected high profitability in 2022 and high tax prepayments in 2023. As we define FFO as S&P Global Ratings-adjusted EBITDA minus cash interest and cash taxes, the tax outflow dragged FFO to debt below 30%.

ICL Group Ltd. (BBB-/Stable/--)

ICL will maintain ample rating headroom in 2024 and 2025, despite a forecast decline in EBITDA. While we expect phosphate and potash prices will likely subside further from their 2023 levels, we project that credit metrics will remain strong for the rating, with S&P Global Ratings-adjusted debt to EBITDA increasing to about 1.9x-2.2x in 2024 and 2025, from 1.5x in 2023. This implies healthy headroom under the rating--adjusted debt to EBITDA of 3.0x-4.0x is typically commensurate with the current rating.

In recent years, ICL used part of its strong cash generation to pay down debt. This offers ICL considerable flexibility to allocate capital for growth initiatives, such as the recent bolt-on acquisition of Custom Ag Formulators, and maintain its capital expenditure spending close to its current level of $750 million-$800 million.

K+S AG(BBB-/Stable/A-3)

During 2022 and January 2023, the company redeemed about €640 million in outstanding bonds; it also fully repaid about €120 million of its factoring utilization in 2022. This followed the 2021 repayment of more than €2 billion of debt, funded by the sale of its Americas operating unit. The debt repayment and high potash prices in 2022 supported strong leverage metrics, with debt to EBITDA at around 0.2x.

We believe lower potash prices will drive down K+S AG's EBITDA in 2024 and exhaust headroom under our leverage threshold, with S&P Global Ratings-adjusted debt to EBITDA increasing to above 1.5x. However, we anticipate a gradual improvement in EBITDA and leverage in 2025, notwithstanding our expectation of further, slight moderation of potash prices in that year. This stems from our forecast of 1.5%-2.0% higher sales volumes in the agriculture segment, modest growth in industry, and a gradual improvement in margin due to measures and investments that support cost position and site efficiency--in particular, the continuous ramp-up of secondary mining in Bethune, Canada, and the Werra 2060 project.

OCP S.A. (BB+/Positive/--)

The rating on OCP considers management's clear commitment to maintain a financial policy that supports an investment-grade stand-alone credit profile (SACP). We project higher EBITDA in 2024 compared to 2023, reflecting increased capacities at the Jorf Lasfar facility and broadly supportive phosphate prices. Nonetheless, we forecast that in 2024 and 2025, OCP's FFO to debt, as adjusted by S&P Global Ratings, will be at the lower end of the 20%-30% range commensurate with the rating because of the company's expanding capital program. We believe, as in the past, OCP will adjust its capital expenditure to the prevailing market outlook, cash flow generation, and maintain credit metrics and liquidity to support the rating. The positive outlook on 95% state-owned OCP mirrors the rating on Morocco.

LSB Industries Inc. (B/Stable/--)

Given current credit metrics and the company's liquidity position, we view a downgrade within the next year as unlikely. At midcycle pricing, we expect EBITDA of $100 million-$150 million over the next two years, with debt to EBITDA of 4x-5x and funds from operations (FFO) to debt in the mid-teens percent. We expect potential midcycle EBITDA will increase in coming years as a result of ongoing operational improvements, higher operating rates, small-scale brownfield expansions, and potentially from larger growth projects.

LSB also has substantial balance sheet cash, which we do not net against debt in our leverage calculations. We expect the company will use this to partly fund its prospective blue ammonia project on the Houston Ship Channel.

Growth Strategies Limit M&A, Focus On Sustainability

Mergers and acquisitions (M&A)

M&A deals have been limited recently. Over the past 12 months, they've included:

• OCI N.V.'s sale of its global methanol business to Methanex Corp. for $2.05 billion and the sale of its nitrogen fertilizer plant in Iowa to Koch Ag & Energy Solutions for $3.6 billion;
• Abu Dhabi National Oil Co.'s (ADNOC) acquisition of 50% plus 1 share in Fertiglobe PLC from OCI driven by Fertiglobe's initiatives in low-carbon ammonia production; and
• CF's acquisition of the Waggaman ammonia plant for $1.675 billion.

Instead, we have seen companies engage in brownfield expansions. More importantly, they've invested in sustainability-related projects to lower emissions. We have seen increased investment in clean ammonia projects, especially in Europe, and are gaining momentum in the U.S. following the Inflation Reduction Act, as it provides tax credits.

Ammonia currently consumes about 50% of globally available hydrogen, and 70% of ammonia produced is used for nitrogen-based fertilizers. As a result, nitrogen-based producers have been pursuing clean ammonia projects to lower emissions. The idea is to develop a market for a cleaner, decarbonized source of fuel to help lower emissions and more effectively navigate potential emissions-related legislation and taxes in various countries. Blue ammonia is further along in maturity than green ammonia, as the latter is still grappling with technological and regulatory considerations.

Sustainability-related projects

CF Industries is evaluating a number of projects including: 

• A joint venture with JERA, Japan's largest energy company, to explore the development of a 1.4 million-tonne-capacity ammonia plant in CF's Blue Point complex in Ascensio, La., announced April 2024;
• A joint venture with POSCO to construct a clean ammonia plant at the Blue Point complex, announced September 2023; and
• A joint venture with Mitsui & Co. Ltd. for a blue ammonia project at its Louisiana complex, announced May 2022.

LSB Industries is evaluating low-carbon ammonia production. If development proceeds, the first phase is targeted to produce 1.1. million tonnes per annum by end of 2027.

Yara has signed an offtake agreement for green ammonia and has a couple of pilots in Norway and Australia. However, its main blue ammonia projects in the U.S. and the Netherlands are awaiting final investment decisions (FID). For the Netherlands plant (which is currently producing grey ammonia), it signed a binding carbon dioxide transport and storage agreement, aiming to reduce annual carbon dioxide emissions by 800 kilotons from the ammonia production at Sluiskil in the Netherlands.

OCI was building a clean ammonia project of 1.1 million metric tonnes in Beaumont, Texas, which it recently sold to Woodside Energy Group Ltd.

Nutrien considered a clean ammonia project in Geismar, La., but is no longer pursuing it in favor of reducing its controllable costs by $200 million by 2026.

In addition, nonfertilizer companies such as Air Products and Chemicals Inc. are investing in building their blue and green hydrogen capacities. These could be used to make ammonia, mostly used as a carrier for hydrogen to be used in the transportation market.

While the projects will require heavy capital outlays, we anticipate capital spending will be conducted in a phased and disciplined manner, thereby not impairing financial measures.