When tension rises in the Gulf, you check the price of petrol. Almost nobody checks the price of urea.
Urea is a nitrogen fertiliser, and India buys more of it from the world than any other country. In recent tenders the price moved from about $500 a tonne to between $935 and $1,136. That is close to a doubling in a few months.
Why gas decides the price of fertiliser
To make urea, you need ammonia. To make ammonia, you need natural gas. Gas accounts for 70% to 80% of the total cost of producing urea.
So when gas moves, urea follows.
Where the Gulf comes in
The Strait of Hormuz carries about 20% of the world's LNG, which is natural gas cooled into a liquid so it can travel by ship. The Middle East also supplies about a third of the urea traded across borders.
One narrow stretch of water sits on both the raw material and the finished product. This is how an oil shock becomes a food shock.
What actually happened
On February 28, the U.S. and Israel struck Iran. In March, LNG supply tightened. Spot prices rose from $10 to $12 per MMBtu to $19 to $21. MMBtu stands for million British thermal units, the standard unit in which gas is priced.
Gas and urea both moved to roughly double
Price range before and after the supply shock. Hollow bar is before, solid bar is after.
LNG spot price ($ per MMBtu)
Urea tender price ($ per tonne)
In India, gas allocation was cut. Fertiliser plants received around 70% of their normal supply in March, and urea output for the month fell 27%.
Lower output at home means more buying abroad, at the higher price. The import bill climbed.
But the warehouses are full
Fertiliser stocks in March were at record highs, roughly 36% above last year. That sounds like a cushion.
Run the math.
The first signs in prices
March CPI data shows early signs of transmission. CPI is the consumer price index, the main measure of retail inflation. Food inflation moved from 3.47% to 3.87%. Headline CPI moved from 3.21% to 3.40%.
The move is small. The direction is not.
Who pays first
Rural households spend about 47% of their income on food. Urban households spend about 40%.
A 10% food inflation print hits rural households hardest. A price set in a shipping lane ends up deciding how much of a rural family's budget is left after food.
Sources
- Urea tender prices: Reuters, StoneX
- Gas share of urea production cost: The Fertilizer Institute, CF Industries
- Hormuz LNG flows and Middle East urea trade: US EIA, CF Industries
- LNG spot prices: S&P Global, Reuters, Business Standard
- Gas allocation and March urea output: Reuters, Wright Research, Business Standard
- Fertiliser stocks and urea cover: CRISIL
- March CPI and food inflation: MoSPI
- Household spending on food: HCES 2023-24, MoSPI
This piece is for education. Nothing here is investment advice or a recommendation to buy or sell any security.
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