SULFUR'S PRICE COLLAPSE TO FORCE MARKET CHANGES

Price drops for sulfur over the past 2 years of P 50-66% at most major consuming locations are prompting a major industry restructuring, according to Fertecon, a U.K.-based research organization that follows worldwide sulfur production for the fertilizer industry.

A recently completed Fertecon study of the cost of producing and marketing sulfur indicates that the attrition in worldwide sulfur mining capacity has now mostly run its course.

Moreover, the burden of balancing the market will fall firmly on major producers of sulfur in the sour-gas industry, especially Canada.

DEMAND SUPPLY REALITIES

Since 1988, demand for elemental sulfur worldwide has fallen by 18%, Fertecon's survey of the industry shows.

The decline reflects an unprecedented 5 successive years of reductions in the use of phosphate fertilizers, the main end-use for sulfur. Phosphate consumption has declined particularly in the formerly Communist world but also in Western Europe.

Two of the growth markets for phosphates over the past 5 years have been India and China. Both are now facing problems that are expected to halt or reverse that growth.

Fertecon has found that production peaked in 1990 and has since fallen, responding to market conditions. With production of by-product sulfur continuing to rise, the overall production decline has fallen heavily on the mined-sulfur sector (Table 1).

The decline would have been sharper but for the shortage in the market in 1988 that was balanced by withdrawals from stocks.

REGIONAL FOCUS

Despite its light weight, high purity, and ease of handling, says Fertecon, all major producers of sulfur now face limits on how far their product can move before markets fall outside an economic radius.

Although sulfur has recently been an international commodity similar to crude oil, the industry is now becoming regionalized. Surpluses exist in North America, the former Soviet Union, and the Middle East.

Fertecon noted that some sulfur mines, including all of those in Mexico, have already been forced to close, while major by-product producers from oil and gas must stockpile or subsidize freight to move their product.

As markets adjust to producers' increasing reductions in discretionary production or to their finding ways to remove by-product output from the market, says Fertecon, options for sulfur buyers will become less easy.

Poland and the U.S. will remain significant mined sulfur producers. But elsewhere, mining has become a small component of supply aimed at specific local markets, although Iraq has a cost profile that would allow a partial re-entry to the market when sanctions are lifted.

SOUR-GAS ROLE

Major producers of sulfur from sour gas will have to balance the market.

Canada, the world's leading recovered-sulfur producer and for more than two decades the world's largest sulfur exporter, must bear much of the impact, reducing the significance of Canada in the world market.

Canadian stocks, which peaked in 1979 at more than 20 million tons, had nearly been exhausted by the middle of 1992 but are now again rising rapidly.

The Middle East is set to become the price leader in the major deep sea markets. How the various Middle East producers will react to the responsibility remains to be seen.

Significant stock accumulation has also taken place at involuntary production centers in France and Saudi Arabia.

Fertecon believes that long-term ramifications for an industry that produces waste sulfur with no realistic prospect that the market will ever require the product at a later date are beginning to be considered.

Low-price sulfur is also influencing the oil industry.

Although sulfur is not costed as such by oil refiners who view sulfur recovery as a pollution abatement charge, the cost of transportation to market must be compared to alternative means of disposal.

There is dearly ample sulfur in the marketplace, but the willingness to sell at any price could soon be tested.

OUTLOOK

The most optimistic forecasts, says Fertecon, do not see demand increasing by more than 7 million tons/year by 2000 (Table 2).

Capacity to use sulfur has declined during the recession, and first priority for consumers when markets improve will be to increase netbacks on their products rather than invest in additional capacity.

Some potential exists to increase supply by up to 12 million tons/year over the same period. More than 7 million tons/year of the potential comes from increases in by-product recovered sulfur.

The mining sector could increase as well but is unlikely to find encouragement from the market. Reductions in mined sulfur output are still more likely.

In total, more than 6 million tons/year of potential mined sulfur production or forecast recovered-sulfur production will be surplus to market requirements by 2000.

Supply that is at risk of not being produced or not being marketable is expected in all of the major producing areas in the U.S., Canada, the former Soviet Union, and the Middle East.