Urea boosted by high upgrading margins, Argus Media report

Upgrading margins have averaged about US$100/t since the latter half of 2017 – just under 50% above the long-term average – according to analysis by Argus Media consultants.

A short payback period

The increased margin has made new urea capacity more appealing. Argus has estimated that the return on investment period for a new 2000 tpd urea plant in Russia is 4–5 years based on current margins and an estimated capital cost of around US$200 million.

Three Russian producers, Acron, Togliatti Azot and Kuibyshev Azot, have decided to increase urea capacity to convert ammonia that is sold on the open market. A fourth producer, Schekino Azot, is building new urea and nitrates capacity, as well as a new ammonia plant for a low net reduction in ammonia supply.

Argus’ urea-ammonia upgrading margin is created by subtracting the product of the ammonia price and a urea plant's ammonia consumption rate, assumed at 575 kg/t, from the urea price. This measures the added value that can be achieved in the urea market above the input ammonia cost.

Historically, the average for this value is around US$80/t, which needs to cover the conversion costs of a urea plant – including power, chemicals and consumables, labour and maintenance — as well as provide a level of return that incentivises the operator to produce and sell urea, rather than selling the ammonia. Currently, a marginal plant at US$80/t can cover costs of US$50–60/t.

Merchant ammonia weakness

The comparative weakness of merchant ammonia prices, which recently fell to two-year lows, and the comparative firmness of urea have driven the rise in urea margins.

The average of upgrading margins was about US$40/t between September 2012 and August 2017, making urea a less profitable product than ammonia. But the situation has turned around since then, especially in the past 9 months, which have seen an almost continuous fall in ammonia prices. Black Sea ammonia prices are about US$220/t fob at present, compared with urea at US$250/t fob.

Merchant ammonia trade is small at only 18–19 million tpy, so minor changes in supply and demand have a significant influence on pricing. Urea trade is approximately 48 million tpy, with corresponding prices more stable.

New ammonia plants are ramping up to full production in Russia, the US and Indonesia that will add more merchant ammonia supply. At the same time, it appears that ammonia import demand in China has fallen this year as domestic producers have increased their share of the local market. As a result, ammonia prices are forecast to average below US$230/t fob Black Sea in the coming year.

Contrastingly, urea prices have averaged US$241/t fob Black Sea — US$12–13/t higher than last year — and are forecast to average nearly US$260/t fob in the upcoming year.

Market implications

The rise in urea capacity will reduce the supply of merchant ammonia from Russia when the new plants are scheduled to start production after 2020.

The three new units in Russia will need around 1.1 million tpy of ammonia to operate at full capacity, which suggests a drop in that amount of merchant ammonia supply from the country.

This amount represents over a quarter of the 4.2 million t of ammonia that Russia exported in 2018. The stronger margins also raise the question of whether other producers will decide to install urea units.

Trinidad and Tobago exports nearly 3 million tpy, making it the largest exporter of merchant ammonia in the western hemisphere. Although analysts doubt that there is much potential for further upgrading in the country given the age of the plants and continuing concerns over gas supply.

In the US, there are a number of plants supplying the near 3 million tpy market for direct application ammonia and delivering ammonia to the main consuming states in the Corn Belt will become more difficult after spring 2019 due to the permanent closure of one of the two dedicated pipelines. The Magellan pipeline will close this year, which runs between plants in Oklahoma and terminals in the western Corn Belt.

A fourth producer, Schekino Azot, is building new urea and nitrates capacity, as well as a new ammonia plant for a low net reduction in ammonia supply.

Read the article online at: https://www.worldfertilizer.com/nitrogen/06062019/urea-boosted-by-high-upgrading-margins-argus-media-report/