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The closure of the Strait of Hormuz affects three strategic commodities: oil, natural gas and urea fertilizer. Even after the Strait of Hormuz reopens, it will take several weeks for export flows to return to levels seen before the military operation began on February 28.
Oil prices are on technical high alert, but does this also apply to urea prices in financial markets? The answer is no. It is true that the fundamental risks are high, and 35% of global urea exports pass through the Strait of Hormuz. However, judging from the price trend of the commodity market, urea prices have not yet shown a strong bullish technical signal, and are still down by more than 50% compared with the level after the outbreak of the war in Ukraine.
The technical resistance level of 1950 must not be exceeded, otherwise urea prices will enter the inflation risk technical zone and have a negative impact on global food inflation.
The chart below shows the daily Japanese candlesticks for Urea in the commodity futures market.
However, the potential risk is real, as 35% of urea exports pass through the Strait of Hormuz, and it is expected to take at least a month after the strait reopens to return to pre-crisis flow levels. Urea is the main nitrogen fertilizer used globally and is an important component of modern agricultural production, playing a vital role in increasing the productivity of crops such as wheat, corn and rice.
If the current conflict continues for a long time, global supplies could shrink quickly, which is already happening in light of the U.S.- and Israeli-led military campaign against Iran. The chart below illustrates the risks associated with oil, gas and urea arising from current conflicts in the Middle East.
This deflation naturally leads to rising prices. Fertilizer is a major cost for farmers, with an average variable cost of 20% depending on crop type. When urea prices rise, producers face a dilemma: either absorb the increase and use less (risking lower productivity), or pass the cost on to sales prices. In most cases, part of this increase is transferred through the entire food chain.
However, the impact of inflation varies by region. Europe, for example, is relatively less dependent on direct imports from the Gulf but remains vulnerable to global prices and the cost of natural gas needed for fertilizer production. On the contrary, some emerging countries that are highly dependent on imports are more vulnerable to risks.
Ultimately, the inflation risk associated with urea is very real, so technical signals on urea prices in financial markets should be watched closely in the coming weeks.
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