Azerbaijani carbamide to satisfy global need for fertilizers Review by Caliber.Az

Since the start of the war in Ukraine and adoption of sanctions against Russia and Belarus, global prices for nitrogen fertilizers have soared by an additional 30%, despite more than a two-fold increase in this segment last year. The rise in fertilizer prices is being fueled by booming demand in developing countries facing food and gas shortages in Europe. At the same time, the crisis in the fertilizer market contributes to the entry of Azerbaijani producer SOCAR Carbamide Plant into new markets: thus, domestic urea fertilizers were exported to India for the first time.

Moreover, against the background of a favorable external environment, the prospects for the construction of a second urea plant in Azerbaijan have become relevant again.

Rising fertilizer prices, which may emerge from further reductions in nitrogen fertilizer exports from Russia and Belarus, could reduce future agricultural yields and cause a sharp rise in food prices, the UN Food and Agriculture Organization (FAO) noted in a recent report. Such prospects are quite realistic, all the more so because the problem of fertilizer shortage has been observed since last year. As a result of the lingering energy crisis, many nitrogen fertilizer plants that use natural gas as raw material stopped operation in Europe. Fertilizer prices rose rapidly, partly because of higher ship freight rates and railroad tariffs. As a result, the prices for urea fertilizers went up 2.6 times from $250 to $600 per tonne at commodity exchanges last year.

The situation was particularly difficult in China, India, and Brazil, where rising gas prices also inflated prices for urea fertilizers. At the same time, prices for potash and phosphate fertilizers rose 2-3 times, also exceeding multi-year price growth peaks.

From February 2, 2022, even before the active phase of the conflict in Ukraine, the Russian government-imposed restrictions on the export of ammonium nitrate, and until July there were quotas on the export of nitrogen and complex nitrogen-containing mineral fertilizers from Russia. In turn, the economic sanctions imposed on Belarus, which sharply reduced the export of potash fertilizers from this republic, has been remaining in force for over a year. The impact of these processes on the global market is enormous, as Russian and Belarusian producers account for about 30% of global exports of nitrogen fertilizers.

And with the start of the war in Ukraine and the imposition of harsh anti-Russian sanctions (which partially affected Belarus as well), the situation got even worse: according to the first days of the current month, the already high world prices reacted with a new wave of growth. The cost of potassium chloride in Brazil rose from $750 per tonne in mid-February to $1,000 per tonne in April, carbamide - from $600 to $750 per tonne on the FOB basis (when the seller delivers the goods on board a chartered ship at a specified port of shipment) in Baltic ports, phosphate fertilizers rose from $800 to $950 per tonne. At a number of markets, on the eve of spring sowing, exchange prices for nitrogen fertilizers skyrocketed by an additional 30%.

Under the circumstances fueled by the food crisis, India, Brazil, China and a number of other Asian and South American countries started massive purchases of nitrogen-containing fertilizers to make up the required reserves before the beginning of the spring-summer fieldwork. It's not hard to guess how this is already affecting fertilizer exchange prices today.

However, most importantly, the high demand for fertilizers, especially nitrogen fertilizers, helped the SOCAR Carbamide Plant, located in the Sumgayit Chemical Industrial Park (SCP), to sharply increase exports of this valuable product to foreign markets, including to foreign countries. The plant produced 355,000 tonnes of urea in 2021, compared to about 120,000 tonnes in 2020. Most of the products were exported. Thus, according to the State Customs Committee of Azerbaijan, in 2021 the export of nitrogen fertilizers from Azerbaijan exceeded 322,567 tonnes (4.5 times growth), and in monetary terms, these supplies are estimated at more than $118.5 million. In this way, the country reached an elevenfold increase in supplies for the first time in recent years.

It is worth recalling that the SOCAR Carbamide Plant, which was commissioned in January 2019, consists of three production sites, where the production of ammonia, urea, and urea pellets is set up. The capacity of the plant is 1,200 tonnes of ammonia and 2,000 tonnes of urea a day. The advantages of fertilizer production in Azerbaijan include relatively low domestic tariffs for gas, electricity, water, utilities, transportation and other costs, which makes this business highly profitable, especially against the background of foreign producers facing a shortage and high cost of gas.

In fact, these circumstances make products of Azerbaijani chemical enterprise comparable in quality more competitive on the world market. Moreover, the domestic nitrogen fertilizers are exported not only to the CIS and neighboring countries - Ukraine (until recently), Georgia, Turkey, Moldova, Romania, Italy, and Bulgaria - but also to distant Brazil and India.  

Brazil is the world's largest importer of nitrogen fertilizers: in 2021 this South American country imported about 89% of the 43 million tonnes of fertilizers used in agricultural production. With proper logistics and price parameters, the Brazilian market due to its capacity could become a stable outlet for the Azerbaijani chemical industry. The situation is similar in India, where due to high gas prices the local chemical facilities are unable to produce affordable nitrogen fertilizers in sufficient quantities. The Indian authorities are trying to make mineral fertilizers more accessible to farmers and in February 2022 allocated about $14 billion for their purchase, including through imports.

SOCAR Carbamide Plant, in particular, used this opportunity and for the first time started exporting carbamide fertilizers to India: at the first stage the volume of delivered products exceeded 5,000 tonnes. However, amid the global need for fertilizers, it is possible that the volume of supplies to India will increase and the list of buyers in the far corners of the world is likely to expand even more.

According to experts from FAO and other international specialized agencies, taking into account the geopolitical conflict in Eastern Europe, the global energy and food crisis will not be overcome in the next year or two, respectively, the rush in demand for nitrogen fertilizers will remain for a relatively long time, opening a window of opportunity for Azerbaijani fertilizer producers and exporters.      

In particular, taking into account the reduction of nitrogen fertilizer supplies from Russia, Azerbaijan plans to achieve full import substitution in this segment. At a recent meeting of representatives of the Ministry of Agriculture of Azerbaijan and SOCAR Carbamide Plant, the issue of increasing the output of urea sold in 40-kilogram bags from 500-600 tonnes to 700-800 tonnes per day was discussed. This task has already been initiated at the enterprise, located in SCPP. Azerbaijan's internal demand for carbamide is 100-150 thousand tonnes a year, but in the future, as the agricultural potential of the Karabakh region is developed, the demand for nitrogen fertilizers can significantly increase. In the meantime, taking into account the capacity of the plant, which can produce 650-660 thousand tonnes of carbamide annually, up to 500 thousand tonnes of finished product a year can be exported without any damage to the food safety of our country.

Moreover, taking into consideration the steady demand for fertilizers in foreign markets, the issue of building a second carbamide plant in Azerbaijan has become relevant again: a number of local media outlets have recently covered such prospects.

Here it is appropriate to recall that back in May 2019, the State Oil Company of Azerbaijan and the Turkish TEKFEN signed a memorandum of understanding to build a new plant in Sumgayit, the approximate daily capacity of which was estimated at 1200 tonnes of ammonia and 2000 tonnes of urea. It was expected that the construction of the second urea plant will cost 20-25% cheaper than the first one and was estimated at 640-650 million euro (calculated in 2019 prices). Such savings were expected due to the exemption of the project from taxes and the fact that both chemical plants could use common infrastructure, storage, laboratory facilities, etc. Moreover, three years ago, even the possibility of SOCAR and TEKFEN participating as shareholders in co-financing this project was discussed. However, the pandemic crisis of 2020 and the subsequent drastic drop in energy prices and a decrease in demand for nitrogen fertilizers postponed the implementation of this project for an indefinite period.

Today, it is difficult to speculate on long-term commercial prospects that would give grounds for a second capital-intensive chemical project in Azerbaijan. However, such a possibility exists, especially in the future, as new generating capacities of "green" energy are introduced, Azerbaijan will free up additional reserves of natural gas, which processing into urea fertilizers, ammonia, and methanol promises good profits from exports.