The wider repercussions of the latest war in Iran, already being felt heavily across the Middle East, are reverberating internationally as soaring energy and fertiliser prices increase crop input costs and pose critical risks for global food security.
The normally bustling Persian Gulf is not only a regular channel for crude oil but also for crucial agricultural fertilisers. But with the critical Strait of Hormuz effectively shuttered amid the expanding conflict, the potential inflationary effect on food prices worldwide is rising rapidly.
Around 27 per cent of the world’s oil exports, 20 per cent of global liquified natural gas (LNG) shipments, a critical feedstock for the production of nitrogenous-based fertilisers, and 25-30 per cent of international fertiliser exports, including urea, ammonia, phosphates and sulphur, pass through the Strait annually.
The Persian Gulf sits at the centre of the fertiliser system for two structural reasons. Firstly, it offers access to some of the world’s cheapest natural gas, which is essential for ammonia production. Secondly, vast capital investment has been channelled into ammonia and urea production capacity over the past couple of decades, especially in Qatar, Saudi Arabia and the United Arab Emirates, primarily aimed at the global export market.
Countries across the world were already increasingly reliant on the Gulf states of Bahrain, Oman, Qatar and Saudi Arabia, as well as Iran, to offset fertiliser supply losses resulting from the ongoing war in Ukraine and mounting Chinese export restrictions.
The region produces almost half of the sulphur, a third of the urea, and a quarter of the ammonia, another essential fertiliser feedstock, traded worldwide each year. After Russia, Egypt and Saudi Arabia, Iran is the fourth-largest global exporter of urea, the world’s most widely used nitrogen fertiliser.
The spillover effects of Russia’s invasion of Ukraine four years ago are still being felt. It reorganised the global fertiliser trade and has kept prices well above prewar levels. It exposed the extreme concentration of risk in a market where a small number of geopolitically volatile states hold enormous control over a critical input to global food production.
The escalation in hostilities against Iran and its drone warfare retaliation across the region has exacerbated an already explosive situation, immediately pushing fertiliser prices higher. Fertiliser plants across the region have shut down as storage facilities fill, while others have been targets of Iranian drone attacks. The Persian Gulf price of urea rose by 19 per cent within a week of the first strikes, and the benchmark Egyptian urea price rose by more than 25 per cent, adding to the fiscal challenges for agricultural production across the world.
This comes at a time when fertiliser demand generally spikes. The northern hemisphere winter crop is emerging from dormancy, and the spring seeding program is about to commence. In the southern hemisphere, farmers are less than a month away from the start of their winter crop planting campaign.
Already in the midst of a global grain glut, margins are tight for farmers worldwide. Now, the near-term outlook is even gloomier, especially for those growers that still need to purchase this season’s fertiliser requirements. Adding the rising cost of fuel renders farmer optimism a scarce commodity.
Increasing fertiliser output beyond the Middle East is being hampered by the limited availability of raw materials and the rising cost of the energy used in production. Fossil gas accounts for between 60 and 80 per cent of the cost of manufacturing nitrogen fertiliser. Some urea producers in India and Bangladesh have reportedly shut down plants or brought forward annual maintenance after Qatari LNG supplies were suspended due to the conflict.
Russia accounts for about 20 per cent of global fertiliser trade each year, but limited underutilised production capacity, domestic export caps, and recent Ukrainian attacks on major manufacturing facilities will all constrain its ability to ramp up output and partially fill the supply void.
India has asked China, the world’s largest producer of urea, to allow the sale of some urea cargoes, after Beijing announced it was strictly controlling fertiliser exports via quotas and issuing no new export permits to safeguard its own domestic supply for spring planting. China’s state-owned Sinofert reportedly told its customers not to speculate, hoard or drive up fertiliser prices during the spring planting season.
Some countries have fertiliser stocks, but self-sufficiency is rarer than it appears. India, for instance, relies heavily on LNG imports from the Persian Gulf to run its domestic urea plants. Brazil depends substantially on imported nitrogen and phosphate fertilisers to sustain its burgeoning soybean and corn production.
Even the United States, one of the world’s largest fertiliser producers, imports meaningful volumes of ammonia and urea to help meet domestic demand and reduce prices. In sub-Saharan Africa, fertiliser use is already low due to cost. A further rise in prices is likely to reduce use even more, cutting yields and increasing food insecurity.
In Australia, farmers are almost entirely reliant on urea imports, with 3.8 million metric tonne, or 95 per cent of annual demand purchased from overseas manufacturers. Projections before the Iran conflict escalated had the Gulf states supplying around 65 per cent of the 2025/26 season requirements, with a further 15 per cent expected to come from China. Other major imports include ammonium phosphates (MAP/DAP) and potassium, largely sourced from China, Morocco and Saudi Arabia, as well as potash-based fertilisers, where Canada is the main supplier.
Current urea supplies in Australia are reportedly set to last until mid to late April, with additional imports required to meet the majority of the upcoming winter crop demand. Alternate sources include Southeast Asian producers, who collectively supplied around 400,000 metric tonne last year, and Oman.
Fertiliser manufacturers in the Middle East are continuing to load product onto waiting ships to prevent storage capacity from overflowing. As of March 4, at least 11 bulk carriers had reportedly loaded since the Iran conflict began on February 28, and at least eight more were in the process of loading. However, tracking data suggests only one vessel has managed to transit the Strait since the war began more than two weeks ago.
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Written by Peter McMeekin.
