Stormy MENA waters

What began as protests against escalating food prices in various countries in the Middle East and North African (MENA) region quickly escalated into riots against long-established governments. Regime change was quickly achieved in Tunisia, while Egypt followed suit after three weeks of vigorous civil protests in Cairo and other cities. The desire for political change spread to Libya, but there the Gaddafi regime dug in more firmly and extremely violently, and at the time of writing, it seems set to prevail. Meanwhile, protestors have taken to the streets in the Arab Gulf states, notably in Bahrain and Saudi Arabia. To date, bloodshed are been largely avoided in these states, but the undercurrent of civil discontent remains.

The term MENA covers the region that extends from Morocco to Iran, and includes the majority of both the Middle Eastern and Mahgreb countries. The region’s population of around 381 million is about 6% of the world total. MENA is well-known as a region of global economic and strategic significance because of its vast reserves of oil and natural gas. The MENA oil reserves are estimated to total 811 billion barrels, representing 60% of the world’s oil reserves, while the gas reserves of 2,868.9 trillion ft3 are 45% of the world’s total. Of the 12 members of OPEC, eight are within the MENA region.

The eruption of civil unrest and the threat, potential or actual, posed to the authoritarian governments the length and breadth of the MENA region inevitably reverberated in global commodity markets, above all in oil. Oil prices promptly jumped some 20-30%, reaching in excess of $118/barrel for Brent crude. Any element of instability in the MENA region prompts nightmare scenarios involving fears of a major cut-off in oil supplies, and memories remain vivid of the 1973-74 Arab oil embargo.

Tunisia and Egypt are not oil producers, but Libya is – and the country’s supply to world markets has been disrupted. However, while Libya has been an active member of OPEC, its output of 1.8 million bbd represents less than 5% of world output. A truly nightmarish oil scenario would hinge on oil production being withdrawn from global markets if Saudi Arabia erupts into civil strife.

Meanwhile, what has been the impact of the MENA rumblings in global fertilizer markets? The story has been a mixed one so far. Of the MENA countries which have so far been affected by the political upheavals, Egypt, the Arab Gulf countries and Libya are significant exporters of ammonia and urea, while Tunisia is a key player in phosphate markets. Overseas partners also have fertilizer investments in the MENA region, notably Yara in Qatar and Libya. In the latter country, Yara was obliged to suspend production at its joint-venture Lifeco complex at Marsa el-Brega. The facilities there comprise the Brega 1 and Brega 2 units, which have a rated capacity of around 900,000 t/a of prilled urea, while about 150,000 t/a of ammonia are normally available for export. (Fertilizer Week, 25 February 2011)

By contrast, production of ammonia and urea in Egypt was scarcely affected by the three weeks of civil unrest during late January and into February. Indeed, the period was one of softening urea prices as Egyptian stocks of unsold product were high, while US offtake slipped back. Egyptian prices of urea rose to $425/t fob in the first half of February but offers were later made at around $380/t, even then only attracting limited interest from buyers.

Supplies of phosphate rock and downstream fertilizers from GCT, Tunisia were disrupted for some time after the change in government, as labour disputes at the Sfax, Gabes and La Skhira production sites continued. It was reported that production at the GCT 330,000 t/a DAP plant was continuing at just one-third of normal capacity. These factors helped ensure continuing firm prices in phosphate markets, but there has been no spiking, as potential buyers have proven willing to hold back on their purchases rather than be stampeded into panic buying.

Fertilizer markets may thus be praised for keeping their nerve. However, the scenario for fertilizers remains uncertain, and not simply because of the unclear MENA political outlook.

Fertilizer prices have been buoyant because of the perceived low cereal stocks and escalating global food prices. Crop commodity markets appear to be particularly vulnerable to shocks arising from bad weather and the like, such as disappointing harvest in India, drought in China and floods in Australia. During the past 12 months, coffee prices have risen by 94%, corn has risen by 88% and wheat has gone up by 74%. (Financial Times, 18 February 2011)

Analysts meanwhile debate the short- and medium-term direction of crop markets. While some believe that prices have peaked, others say that they have further to go: they see food inflation as a growing problem in the medium to long term because supply will struggle to keep up with the growing demand from a rapidly rising population. These factors have ensured that fertilizer shares are performing well in international stock exchanges, as are those for agricultural technology companies, machinery and equipment and other inputs.

Combating food inflation poses a challenge for all concerned with mankind’s long-term security. The ultimate answer will come from further enhancements in agricultural productivity, food distribution systems and nutrient use efficiency. Riots over escalating food prices that spill over into efforts to seek new governments emphasise the urgency of the task.