Impacts of the Middle East conflict

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Openfield experts reflect on the imports of the conflict in the Middle East on supply chains and fertiliser markets.

The recent Middle East conflict has reminded us all, about the importance of Oil. Many of us now drive electric vehicles and have improved various elements of our energy efficiency, but the world still relies on oil and when supplies are restricted the market prices in ‘uncertainty’. The question on everyone’s lips and the computers algorithms, is what does the real price of uncertainty look like? How quickly can the status quo be returned after a restriction in the supply chain, how long can users of oil stay out of the market and how quickly do increased costs get passed along the supply chain either directly or indirectly? We saw a similar effect at the start of the Ukraine conflict with energy markets, but also with the grain markets mainly because of the importance of Ukraine and Russia being key exporters of wheat and corn to the world. In the current situation Iran is an importer of around 9.5 million tonnes of corn, 3 million tonnes of wheat and 2.6 million tonnes of barley, much of which comes from Russia!, with a domestic crop of around 16 million tonnes of wheat and 3.1 million tonnes of barley harvested from early May.

The ability to choke supply chains of any description reminds us all of how vulnerable we are, but also how much of a risk we as consumers take for not being prepared. I feel that the world is so used to always having what it wants when it wants it, that most humans and businesses have forgotten the art of being prepared. As a daughter of a pilot my father always used to say that he carried extra fuel, which the airline really didn’t like from an efficiency point of view, just in case and that just in case when you’re a pilot is sometimes the difference between getting there or not or having the ability to divert. It’s a life lesson I learnt at a young age, but I have also learnt that markets ultimately find their own level and usually revert when supplies are again readily available and market economics are allowed to work.

The uncertainty that conflicts create is trying to judge when players start to invest in ‘security’ to become more resilient to any future shocks. In the grain industry this could be governments buying their own stocks or consumers buying their own storage or paying others to store on their behalf. The problem is that anticipating issues creates a cost in the supply chain and in such a competitive marketplace who can afford to bear that cost. Global stocks of cereals are largely in the hands of China while other countries seem to rely on market prices to feed their nations, but what seems to always be forgotten is that agricultural inputs rely of energy – be that chemicals or fertiliser and bulk commodities needing to move either in lorries, on trains or via ships all of which are energy consumers and each sectors costs will change depending upon their forward planning and purchasing / sales. This means in a time of volatile prices some will profit whereas others will be on the back foot, but there also remains an element of luck. Either way if markets present opportunities, it’s important to take them rather than try and second guess situations completely out of your hands but it also pays to be prepared whenever possible.

Fertiliser matters

Fertiliser markets have been facing further challenges as a result of the Middle East conflict, whilst still navigating through the effects of the Russian/Ukraine war.

In a reaction to a spike in the European gas price early March, two major exporters from Poland and France released statements advising they would be reducing ammonia output and withdrawing all offers from the market. Urea is currently a watch point, with the Strait of Hormuz still closed in mid-March, and three out of the world’s top ten largest exporters of urea rely on this route for shipping.

Qatar Energy was forced to declare force majeure on Liquefied Natural Gas (LNG) obligations because of Iranian attacks on its facilities, and downstream production of fertilisers such as ammonia and urea has been halted. In addition to this, Israel have cut the supply of gas to Egypt as they temporarily suspend production.

Due to holidays my comments were written in mid-March, but I’m hoping that by publication we will see a more positive outlook during what is a very uncertain time.