The 2023 food crisis could pose a major threat to polymer demand in developing countries – Asian Chemical Connections
By John Richardson
FERTILIZER PRICES recently fell from record lows but remained at levels far higher than before the Ukraine-Russia crisis, ICIS Fertilizer Market editors said in this important ICIS podcast (please listen very carefully and take note).
A sign, perhaps, of a return to normal for the fertilizer market? Far from it, said associate editor Deepika Thapliyal, who covers urea for ICIS. She warned of the risk of major logistical disruptions due to many farmers re-entering the market when prices were thought to have bottomed out.
This could put additional pressure on already disrupted ports and other supply chains, delaying fertilizer deliveries for upcoming planting seasons.
Deepika and Sylvia Traganida, CIHI’s phosphates editor, said the food crisis could worsen in 2023 due to fertilizer shortages, food supply disruptions, extreme weather events, limited funding and farmers’ lack of knowledge on how to switch to different fertilizers.
Before the war, Russia and Belarus supplied 40% of the world’s potash exports, according to a The Morgan Stanley study quoted by CNBC.
Russia also accounted for 11% of global urea exports and 48% of ammonium nitrate exports. Russia and Ukraine together exported 28% of fertilizers based on nitrogen and phosphorus, as well as potassium, according to the same Morgan Stanley analysis, again cited by CNBC.
Russian fertilizer exports have been hit by the sanctions, Ukrainian production and shipments have obviously been affected by the conflict. Prices were also pushed higher by soaring prices for natural gas, the raw material used to make fertilizer.
Boston Consulting Group (BCG), in a May 2022 post, said:
- More than 40% of the world’s calorie intake came from just three crops: wheat, corn and rice. The production of these cereals was concentrated in only a few regions, with only a few players dominating each stage of the value chain. Russia and Ukraine together accounted for 30% of world wheat exports and provided 12% of world calories.
- Some 1.7 billion people – most of them in developing economies – could suffer significantly from increased food insecurity, high prices, according to the UN Global Crisis Response Group task force. energy and debt burden.
- Most residents of countries where food represents less than 10% of consumer spending, such as the United States, Australia and the United Kingdom, would be slightly affected by rising food prices.
- The impact would be far more severe in the many countries around the world where food accounted for more than 40% of consumer spending. This included Pakistan, Guatemala, Kenya and Nigeria – and the most vulnerable populations in each country.
- The looming global food crisis is not about the world’s ability to produce enough food, but rather about storage and distribution.
The war had “aggravated or accelerated pre-existing food deficits and inflationary tendencies resulting from a host of related factors: the negative economic impact of the pandemic; resulting supply chain, employment and transportation issues; drops in production linked to extreme weather conditions and the climate crisis; skyrocketing energy costs and many other ongoing conflicts around the world,” wrote the Guardian in another May article.
Middle-income countries, such as Egypt and Brazil, were badly positioned to deal with rising food insecurity, the newspaper said, citing international risk consultants Verisk Maplecroft.
Many governments had exhausted their financial resources and reserves in the face of the coronavirus and incurred heavy debts, said the Guardian.
There was a “record high of 49 million people in 46 countries at risk of succumbing to famine or famine-like conditions,” the United Nations World Food Program (WFP) said. in a report released earlier this month.
“A total of 276 million people face acute food insecurity in 81 countries where WFP operates, and this number could reach 323 million people in 2022 due to the effects of conflict in Ukraine,” the report continues.
Underlining BCG’s argument that food distribution and storage were the problems rather than food production, Brian Lander, WFP’s deputy emergency director, said: “There is absolutely no reason for people to die hungry today. There is enough food in the world to feed everyone, which is why it is essential to act now to avoid famine.
Calculation of the impact on HDPE demand
The chemical and polymer industries are being transformed by the geopolitical conflict between the United States and China, the Ukraine-Russia conflict that escalated this latter conflict – and all the other implications of Ukraine-Russia.
But this is of course a long-term story, which requires many separate blog posts and is an aside from today’s main topic of food safety. Suffice it to say here, however, that I hope one of the long-term outcomes of Ukraine-Russia will be stronger global food supply chains.
The highest priority right now is to avert a humanitarian catastrophe resulting from lack of access to food. This blog, however, aims to help chemical companies plan for a very uncertain future using ICIS data, trivial as it may seem.
Back in March, when I looked at the demand for Linear Low Density PE (LLDPE), I expected the food crisis to drive down demand in developing countries in 2022.
At the time, it looked like the region’s demand would contract this year by around 1% from 2021 compared to the ICIS base case for 5% growth.
But food price inflation appears to have yet to significantly affect vulnerable economies. Rather, the exit from the worst phase of the pandemic is supporting demand.
India, thanks to its vibrant middle class as usual, is expected to experience the fastest growth among major economies.
India’s growth is boosted by stronger exports and record profits among listed companies, although job creation remains sluggish, according to this article of June 13 of the New York Times.
“We are also seeing a lot of ‘revenge spending’ as people offset consumption during shutdowns,” an Indian polymer industry source said.
Southeast Asia appears to be in the midst of a reasonably strong recovery. The commodity exporting economies of Malaysia, Indonesia and the Philippines are benefiting from high commodity prices. Thailand’s economy is recovering thanks to the rebound in tourism.
But labor shortages and depreciating currencies are major negative factors in the region.
What about next year, although given our fertilizer team’s warning about potential fertilizer shortages for the next planting season, likely disruptions to food exports and mounting pressure on the finances of developing countries?
It is prudent to consider the downsides to the demand for polymers in 2023. In developing countries, demand for even the most basic modern products, including food packaging, may be damaged by rising extreme poverty.
On this occasion, I examine the demand for high density polyethylene (HDPE). The chart below shows the expected demand from developing countries in 2022 with two outcomes for 2023. One is our base and the other is my downside.
Note that China is not included because China is no longer a typical developing economy.
CIHI’s base case scenario for 2023 assumes that this year’s strong growth momentum continues without a negative impact from the food crisis.
My downside is really for demonstration purposes only. I assumed that the percentage drop in demand for South and Central America, the Middle East, Africa and developing Asia that we saw in 2020 – at the height of the pandemic – is repeat in 2023.
The effects would be great. Instead of seeing global developing demand increase by around 800,000 tonnes in 2023, it would contract by 300,000 tonnes. Assuming all other regions grew as in our base case, global growth would be 2% in 2023 rather than our base case of 4%.
According to our base scenario of 2023, demand from developing countries is expected to represent 30% of global demand. Consumption growth in the region is expected to account for 42% of the global total, second only to China at 44%.
Conclusion: why more complex demand management is needed
Previously, it was possible to estimate demand from developing countries by multiples of GDP growth. One could argue about the size of multiples, but, in general, growth has almost always been rapid and the region as a whole has tended to move together.
Not now, as the analysis above shows. Some countries with insufficient financing, a lack of commodity exports and a large part of their population close to the extreme poverty line could be hit hard by the food crisis.
And as we discussed, even middle-income countries like Brazil and Egypt face significant risks. But maybe countries like Malaysia and Indonesia will get away with it next year because they are major commodity exporters.
We should, however, be concerned for some countries in Africa where food security is already low due to climate change and conflict.
What is needed, therefore, are country-by-country assessments of the results of demand for chemicals and polymers in 2023, using our ICIS supply and demand database and with the support of our analysts and consultants.
This granular analysis will help you better allocate sales and production. The right sales and production decisions will, I believe, define success or failure during the multiple crises facing our industry.