31 January, 2008 - The animal feed sector was plunged into crisis last December when the steady tightening of the global feed phosphate supply became critical almost overnight, triggering a price surge and extreme scarcity in parts of Europe that caught many unaware.
Since then, the availability of feed grade phosphate has become a major talking point in the industry as some European countries continue to experience a serious supply problem.The shockwaves felt by the feed industry have reverberated into Q1 2008. Some premixers and feed mills have reported a physical shortage of product, leading to warnings in the UK that integrators would soon be forced to start culling herds amid animal welfare and health fears. Massive demand for fertilizer to satisfy rocketing grain production for both biofuel and to supply food for increasingly affluent populations in developing countries explains the global growth in demand for phosphates. But many have been mystified by the sudden feed phosphate shortage in some European countries and prices that have more than doubled in recent months. A number of factors, including sudden price hikes and a shortage of raw materials like phosphoric acid, combined with a lack of investment in the phosphate industry and a willingness by the fertilizer industry to pay more for phosphates, have all combined to create a ‘perfect storm’ for the animal feed sector. Current Feed Phosphate Crisis
It is understood the sudden and extreme tightness of supply to regions within the European market since the end of 2007 was fundamentally caused by a price dispute over sulphur, which is used in the manufacture phosphoric acid. Sources have revealed the manufacture of phosphoric acid was interrupted in North Africa for a period while the producer was embroiled in protracted price negotiations with Russian sulphur suppliers.After seeing sulphur prices rise by more than 300 pct during 2007, it is understood the delay in settling the North African contract was sparked by the Russians’ move to leverage a higher price for their now more valuable commodity. While negotiations dragged on, the North African company exhausted the last of its sulphur reserves and this resulted in them halting phosphoric acid production.
However, rumours of a sulphur shortage have been met with scepticism by some analysts who suspect a delay in settling contracts was used to keep phosacid prices moving upwards by implying a short-fall would develop.
Phosacid, as it is referred to by the industry, makes up 90 pct of feed phosphate and therefore the disruption has had a profound effect on short-term supplies to parts of Europe.
Companies, known as transformers, who convert phosacid into feed phosphate, have been affected to different degrees. Fully integrated feed phosphate producers, who make their own phosacid, have been largely insulated from the fallout of the crisis. However, non-integrated producers, who buy in phosacid from third parties, have struggled to meet demand and have seen the cost of their main raw material rise steeply. Transformers would argue they have largely been reacting to events beyond their control as they battle to adapt to market conditions that are changing swiftly and significantly.
Despite the resumption of phosacid production in North Africa, the consequences of this delay are expected to be felt on the market for some months. This current crisis is not expected to ease until Q2 2008 at the earliest, with feed phosphate prices remaining high and supply tight throughout the year, according to one well-placed industry source.
However, it is still unclear how much the situation will improve in Q2 as that period marks the beginning of extra seasonal demand for phosphates from the fertilizer industry.
The diagram below shows how phosphate ore is combined with various raw materials by different manufacturers to produce fertilizer and animal feedgrade phosphates.

MAJOR ISSUES IN 2008 AND BEYOND*
Demand for Phosphate Fertilizers
A huge increase in demand for fertilizers is at the root of the phosphate shortage problem for the animal feed industry. Demand for phosphate fertilizers has soared to meet the worldwide rush to produce grain for the booming biofuel industry. The increased demand for meat - and therefore livestock feed - from more affluent populations in developing countries is also a contributory factor. The pressure on grain supplies that has seen wheat and corn prices balloon has fuelled the demand for fertilizers as farmers seek maximum yields from their land.Figures from British Sulphur Consultants show the growth rate for phosphate fertilizers doubled in 2007 from its usual rate of an extra one million tonnes a year to two million tonnes.
British Sulphur phosphate Research Manager Andy Jung called the increase “huge”, explaining the demand surge above trend growth was equivalent to the annual capacity of three reasonably-sized phosphoric acid facilities.

He added: “The phosphate market is currently undergoing significant changes, with prices continuing to head higher. This is being driven both on the supply side due to tight availability with limited new capacity built in 2007 and 2008, as well as from the demand side.”
Some analysts have suggested that those who provide the raw materials for fertilizers have seized on their new-found power in the market by hiking prices. The result has been a steep rise in the market price of phosacid and sulphur over the past several months.
* Phosphoric Acid Supply
As the main component of phosphate feed, the supply of phosacid during 2008 will be a key factor. An examination of phosacid shows current output is expanding in response to tight supply. An important factor in any analysis of this is the understanding that phosphoric acid is not stockpiled because it is difficult and expensive to store. For practical purposes, this means annual production equals consumption in any given year.The best way to gauge the tightness of the market is via the operating rate, industry expert Andy Jung explains. Therefore, high operating rates are the consequence of a very tight market. Because of the nature of the substance and the way it is processed, the industry has historically run at about 71% of name plate capacity. As the graph below shows, this has been increasing steadily, reaching 83% by the end of 2007.
As the graph also illustrates, the current market is now so tight that some phosacid plants in major production zones such as the US and Morocco are said to be working at more than 90%, which is seen as maximum capacity, said Mr Jung.He said: “Going forward, we expect that operating rates could get some slight relief in 2008, falling as low as 81%, but from 2009 out for the medium term, we expect them to hold in the 81-83% range.”Phosacid is the feedstock for about 90% of feed phosphate production. Some 3.03 million tonnes of phosphoric acid was used in the feed business in 2007, to make 3.36 million tonnes of phosphate feed (or 8.2 million, product tonnes). In 2006, 2.85 million tonnes of phosphoric acid was used to produce 3.17 million tonnes of feed phosphate (or 7.7 million product tonnes).
Global phosacid consumption in 2007 was about 36 million tonnes, which means feed phosphates accounted for just 8 pct of the total. The fertilizer industry is by far the largest user, taking 66 pct of supply.
Given the current shortness of supply, rocketing prices and the possibility of EU legislation restricting their use in certain industrial applications, there is speculation that the detergent industry might decide to use readily available alternatives to phosphates going forward.
* Sulphur
The enormous leap in the price of sulphur over the past 12 months is also vital to understanding the present situation – both in the short and medium term. Sulphur prices surged in 2007 and this trend has continued into 2008, most likely due to strong demand and tight supply. However, even British Sulphur can find no concrete reason for the scale of the increase, with Mr Jung labelling it “something of a mystery”.Global demand for sulphur increased steadily between 1999 and 2006 by between 500,000 tonnes and 1.5 million tonnes, year on year, according to figures from the International Fertilizer Industry Association. However, preliminary estimates from British Sulphur indicate a strong growth in demand during 2007 of 2.6 million tonnes over 2006 to 51 million tonnes.
A recent price analysis by Canada’s Scotiabank said sulphur was the top performing commodity last year, with 2007 prices to November rising by 313 pct. In other regions, price increases were equally dramatic.
The fob Arab Gulf benchmark price, which is one of a number for sulphur, rose from an average price of US$65/tonne in 1H 2007 to US$185/t in the 2H 2007, before leaping to a January 2008 high of US$450/tonne.

British Sulphur said it expects prices to remain high in 2008, with some softening by the end of the year. Prices should ease in 2009 as sizeable new sulphur supplies planned as a by-product of natural gas hit the market.
* Phosphate Rock
Phosphate rock is combined with sulphuric acid to make phosphoric acid. This commodity has been the subject of a bidding war between the fertilizer and animal feed industries. This battle has so far been won by the more lucrative fertilizer sector, hence the scarcity of phosphates for animal feed businesses. Prices of phosphate rock have risen dramatically in the past year. On the Moroccan market, the prices have soared. Between 2005 and 2007 the price rose from US$47 per tonne to US$80 but by Q1 2008 had leapt to US$190 per tonne.
One analyst said this price increase has occurred on the back of the strength of demand and tightness in the market. However, the small number of traders who dominate the phosphoric rock market quickly realised they could exploit the soaring price of downstream products such as fertilizer, he said.
The analyst added: “[The price rise] is due to both higher realized prices for downstream products prompting rock sellers to try to capture some of those margins, as well as higher energy and labour costs.
“In addition, a factor which has not been present in the past is that the main exporters of phosphate rock and phosphoric acid have pushed through substantial price increases as they leverage the market power they’ve acquired by holding such a large share of the export market.
“Higher rock costs have meant that non-integrated producers of phosphoric acid have had their costs pushed significantly higher, thus pushing up the price floor for the industry. We do not expect this situation to change, so even if there is a slow-down in demand in 2008, prices are expected to remain high.”
This analysis appears accurate in the light of recently announced price hikes by major rock players. Russian outfit Phosagro, an important supplier to the European animal feed industry, has doubled 2008 prices to US$200/t. Jordan’s JPMC, the world’s second largest exporter, recently quoted prices of US$155 fob Aqaba for prompt shipments - an increase of 138%.
Conclusion
The scarcity of feed phosphate seemed to appear from nowhere at the end of last year, leaving many feed producers perplexed and concerned. A disruption in the supply of sulphur has been blamed for this extreme situation which analysts say should ease in Q2 2008. However, supply looks set to remain tight and prices high for at least the rest of the year. Other key raw materials such as ammonia have also contributed to the higher costs associated with phosphate production. The upward price trend in sulphur and phosphoric acid, prompted by the explosion in demand for fertilizer, looks set to continue for the foreseeable future. While some believe the price of sulphur is too high for the market to bear over the very long term, prices are not expected to ease until 2009 and 2010 when significant new supplies come on-stream.One industry insider has forecast feed phosphate prices have little chance of ever returning to previous levels, given the current costs of key raw materials such as sulphur, phosphate rock and ammonia.
Given the dramatic rise in phosphate prices, feed producers are looking more closely at alternative options. A partial solution for pig and poultry producers to the current crisis can be found through the use of new generation bacterial phytases. Recent research has shown that these phytases are more effective at releasing plant-bound phytate phosphorus than traditional fungal phytases.
As the recent dramatic plunge in world markets has shown, predicting economic events and trends is becoming more and more difficult. But whatever happens in the next 18 months, those in the animal feed industry could be in for a bumpy ride as they find themselves at the mercy of economic forces, including commodity price fluctuations, beyond their control.