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A NEW 40,000-ton dry fertilizer plant standing alongside a unit-train spur in Alton, IA, has allowed its owners to largely avoid this winter's expensive — and highly volatile — fertilizer market.
The fertilizer hub, owned by Northwest Iowa Agronomy, was placed in service in spring 2005 to enable the owner co-ops to participate in the emerging global marketplace for fertilizer, primarily urea. The facility allows the company to purchase trainloads of fertilizer and to stock up on plant nutrients when the market is right.
To say that the timing was right is an understatement.
Late last summer, Northwest Iowa Agronomy, which is owned by four area co-ops, along with Agriliance, purchased the lion's share of the co-ops' fertilizer needs for the fall, as well as for spring 2006.
“We've got most of our fertilizer locked in,” says Ken Ehrp, president of Northwest Iowa Agronomy and manager of one of the owner co-ops. “We purchased most of the three major nutrients right before the hurricanes. We were very fortunate.
“With changes in the marketplace because of imports, the time to purchase fertilizer has changed, and the timing is hard to predict,” he adds. “Now we can buy and store fertilizer at the right time because we have the storage capacity. You have to be able to take advantage of buying opportunities when they are available.”
Granular future
Although there were many reasons to build the plant, being able to buy and store imported urea was an important factor, Ehrp says. Urea is expected to become the dominant nitrogen form in the U.S. as globalization and high domestic natural gas costs squeeze production of domestic anhydrous ammonia.
The importance of the global marketplace for nitrogen fertilizer — and the reason granular urea has a strong future in the U.S. — is underlined by the fact that, in 2004, 55% of U.S. nitrogen was imported, up from 40% just a few years ago, says Bruce Vernon, Agriliance director of crop nutrients marketing. That percentage is expected to continue to grow as global competition continues to put the squeeze on domestically produced nitrogen.
This winter's high-priced and highly volatile energy and anhydrous ammonia market is expected to escalate the trend.
“I think this will push the market toward urea,” Vernon says. “Urea is up, but not as much as ammonia.” Spot anhydrous ammonia shortages expected by some this spring will further drive the trend, he adds.
Most nitrogen imports are in the form of granular urea, which is the imported nitrogen form of choice because it is relatively inexpensive to store and ship compared to ammonia, a pressurized gas and a hazardous material. Liquid urea ammonium nitrate (UAN) isn't competitive because of the higher cost of shipping the lower-load liquid.
“I think this trend [toward more imports] will continue,” Vernon says. “We will not lose all the domestic manufacturing, but there are an awful lot of plants under construction across the world that will put product into the global market — and put continued pressure on domestic manufacturing.”
As imports have become more important, Agriliance has seen anhydrous ammonia volume decline 3 to 8% per year over the past seven years. However, anhydrous ammonia won't disappear, given customer preferences and the existing manufacturing and support infrastructure.
U.S. anhydrous ammonia production statistics sketch a bleak picture of what has happened the past half-dozen years. In the late 1990s, U.S. anhydrous ammonia production peaked at 18 million short tons, points out Mike Rahm, vice president for economic and market analysis for The Mosaic Company, which was formed in 2004 by the merger between Cargill Crop Nutrition and IMC Global.
“We now project that U.S. gross ammonia production will drop to less than nine million tons for the fertilizer year ending June 30, 2006, so we have seen production shrink by about one half,” he says.
Energy-intensive blues
The shift to an import-dominated nitrogen market is borne out of natural gas price shocks earlier this decade. Because energy makes up about 85% of the cost of manufacturing nitrogen fertilizer, the impact of these price shocks was huge for both manufacturers and their customers.
Before 2000, the price of natural gas in the U.S. was relatively stable at about $2/mmBtu (million British thermal units). Since then, the price has trended sharply upward and become extremely volatile, with winter gas trading in the $11 to $15/mmBtu range in December 2005.
“Record-high U.S. natural gas prices are accelerating the transition of the global nitrogen market,” Rahm says. “Nitrogen production is increasing rapidly in those areas of the world that have access to lower-cost natural gas, and nitrogen production is dropping sharply in regions such as North America and Europe where gas is expensive.”
When natural gas prices shot up, investment was made in new nitrogen fertilizer plants in the Middle East and the Caribbean, where natural gas costs $1 to $2/mmBtu. Those plants are coming online to supply the U.S. as well as the growing world market for fertilizer.
A look at the core economics of producing urea fertilizer highlights the challenge for domestic nitrogen producers. Manufacturing a ton of urea fertilizer requires about 23 mmBtu of natural gas. With a price spread of $5/mmBtu between U.S. and Middle Eastern gas, nitrogen manufactured there has a $115/ton price advantage, minus roughly $35/ton to ship to the Gulf of Mexico, Rahm says.
The impact of these economic realities will gradually eat away at the domestic nitrogen industry, Rahm and others say.
“If U.S. gas prices continue to trade at $5 to $10/mmBtu more than gas in other parts of the world, imports could climb to 75% or more of use in just a few years,” Rahm says.
Price scenarios
Fertilizer industry experts expect the shift toward more nitrogen imports to develop in waves. These waves will occur as new manufacturing plants in inexpensive natural gas markets come online. As this occurs, supply could outstrip demand at times, resulting in price declines, says Richard Downey of Agrium, the large Canada-based fertilizer manufacturing and agricultural retailing company.
He expects that, over the next three years, world nitrogen prices will remain volatile and near the historically high levels experienced over the past year. Although new plants will be coming online, growing world nitrogen demand, which increases 2 to 3% annually, will offset higher manufacturing capacity in the short term.
However, around the end of the decade, when plants currently in the planning stages have been built, supply could exceed demand, resulting in lower nitrogen prices.
“Eventually, we will get into an oversupply situation,” Downey says. “Right now, good money is being made on nitrogen, so plants will be built. We are likely to see a rash of plants being built in the 2009 to 2010 period.”
That will be good news for nitrogen fertilizer buyers and bad news for nitrogen manufacturers with a high cost of production. “The high-cost producers in Western Europe and the U.S. will lose,” Downey says.
“We could easily see prices 20 to 30% lower than last summer's prices toward the end of the decade,” he says. “We may never see nitrogen prices in the 1998 to 2002 range again, but we are likely to see prices decline to a lower longer-term average.”
The U.S. still is the fourth largest nitrogen producer in the world, even after the sharp decline in output this decade. One of the consequences is that U.S. natural gas sets a floor for world nitrogen prices, adds Rahm of the Mosaic Company.
“As new capacity comes on, there will be a period when world values will drop below that floor,” he says. “That will set in motion another round of closures. Then you are right back in the soup and U.S. gas values will again set the floor.”
Some U.S. nitrogen producers are planning for this challenging future by going offshore or by switching production to formulations such as UAN, whose high transportation costs can make domestic production more viable compared to imports. Terra and CF Industries reportedly are exploring building production facilities in Trinidad.
Not the only game
Although urea is likely to continue to be the biggest player in the global nitrogen marketplace, other nitrogen forms also will be imported.
“It is not just a urea game,” Rahm says. “We also may see more ammonia imports. There is an efficient, well-developed infrastructure, including pipelines, that is likely to continue to be utilized.”
UAN imports may also rise. Rahm notes that the government of Trinidad, which controls large offshore gas reserves, is interested in producing UAN because it further processes ammonia and requires a larger local workforce than granular urea. “The players down there see the U.S. as a 10-million-ton UAN market,” he says.
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