When Stars Align: Part 1

Fertilizers are a vital component of modern agriculture. According to Nutrien, a Canada-based fertilizer producer, the world consumed approximately 191 million t of NPK fertilizer during the 2017 – 2018 growing season. Over half the world’s fertilizer was consumed in East Asia and South Asia (approximately 103 million t), while North America consumes 13%, or 25 million t.

The fertilizer sector is also buffeted by an impressive spectrum of challenges. Producers strive to accommodate short-term vagaries (weather, regional policies, and crop price fluctuations), as well as longer-term trends (the growth in world population and changes in diet). Throughout the world, projects totalling billions of dollars in new capacity investment hang in the balance, hobbled by an extended commodity down-cycle.

Fortunately, there are signs that fertilizer’s fortunes may soon improve. “In general, the wave of new capacity has come and gone, and the sector is no longer being swamped,” said a senior industry analyst. “For nitrogen, new capacity is incremental, and not a tidal wave. Phosphate is not seeing a lot of new capacity, and potassium is seeing steady increments. Overall, supply growth and demand growth are close to matching.”

Nitrogen

Nitrogen is the cornerstone of the fertilizer sector. According to the International Fertilizer Association (IFA), nitrogen demand has grown from 102 million tpy in 2014 to an estimated 107.3 million t for the 2018 – 2019 growing season. China produced 46 million t of ammonia in 2016. Most of this was converted to urea and ammonium nitrate (AN). Although urea exports reached 13.8 million t in 2015, exports have been falling as a combination of higher coal feedstock prices, stricter environmental regulation policies, and a government focus on domestic consumption. It is estimated that China exported less than 5 million t in 2017. Industry analysts expect urea exports in the 2 – 3 million t range in 2018, and even less in 2019.

The Chinese Nitrogen Fertilizer Association (CNFA) predicts that members could shut down up to 13 million tpy of older urea capacity by 2020. Whether China eventually replaces all its former export capacity with new, efficient plants may hinge on several factors, including domestic demand for natural gas. The country uses slightly less than 24 billion ft3/d of gas, and relies upon imports for 40% of its natural gas needs. During the cold winter of 2017 – 18, a shortage of gas in northern China led to a huge increase in LNG purchasing.

The government also ordered natural gas diversions from industrial use (including fertilizer plants) so that there would be sufficient reserves to heat homes.

And the situation is not expected to improve in the near term. The International Energy Agency (IEA) recently calculated that China’s natural gas demand is expected to almost double, from 210 billion m3 in 2016 to 400 billion m3 in 2040. The domestic gas industry is not expected to keep up with growing demand, however. If China becomes increasingly dependent on gas imports, government policy is unlikely to support the development of gas-based urea export capacity.

North America has 21.7 million tpy of ammonia capacity. In Canada, most of the 5.4 million tpy capacity is located in the western provinces. In the US, 16.3 million tpy of capacity is spread between Texas and Louisiana.

Most of the recent new capacity build in North America, including CF’s Port Neal, Iowa plant, Agrium’s Borger TX plant, and Iowa Fertilizer’s complex in Lee County is now online. This largely completes the current cycle of capacity expansion in North America that was initiated by higher commodity prices earlier in the decade. North America nitrogen manufacturers benefit from low natural gas prices (used for both feedstock and energy), proximity to immense farming regions, and a mature agricultural industry that consumes large volumes per acre. In mid-2018, Nutrien reported that its nitrogen EBITDA had improved 17% compared to the same time in 2017, citing lower natural gas costs, higher plant utilisation rates, and tight urea supply in China firming up nitrogen prices.

After a normal 2017 monsoon season, India’s food grain production (the total of wheat, rice, and pulses for both summer and winter seasons), hit a new record of over 277 million t. The Indian Meteorological Department reports that the 2018 – 2019 monsoon season is at 97% long period average (LPA). India’s Agriculture Ministry aims to increase 2018 – 2019 production from 6.2 million t to 283.2 million t.

Over the last decade, India’s fertilizer consumption has been growing at 3%/yr, and reached a total of 58.2 million t in 2016. Urea accounted for 42 million t, or 72% of consumption. Approximately 17 million t of urea were imported; Chambal Fertilizers & Chemicals is constructing a US$600 million fertilizer project in Kota, Rajasthan, that will include an 800 000 tpy ammonia plant and a 1.46 million tpy urea plant. India would like to increase domestic nitrogen production further, but growth is highly influenced by a series of subsidies, price controls, tax breaks, and regulations.

These non-market factors tend to distort fertilizer supply and demand. Subsidies intended to increase fertilizer consumption, for instance, can be diverted to other sectors. After a pilot test programme in 2016, India’s federal government expanded its ‘Direct Benefit Transfer’ policy, a new subsidy-dues settlement system that pays companies for selling at the state-set price within a week. The new policy (which is aimed at increasing fertilizer use, while at the same time preventing it from being diverted to industrial uses or smuggled abroad), has been seen as effective, and nutrient-based subsidy rates for the financial year 2018 – 19 have been increased for phosphate and sulfur, reduced for potash, and left unchanged for nitrogen.

Russia produced approximately 12 million t of ammonia in 2016. The majority was converted to AN and sold domestically, although Russia is a significant exporter of nitrogen fertilizer. When it comes to natural gas feedstock prices, Russia is among the lowest percentile and remains a competitive producer; the next wave of new capacity is expected to occur within its borders.

In late 2017, PJSC Metafrax announced it is expanding its chemical complex in Gubakha, Russia, by adding nitrogen chemical production. When completed in early 2020s, the facility will recover hydrogen and carbon dioxide from an existing methanol plant and convert it into 325 000 tpy of ammonia and 630 000 tpy of urea.

Russia’s National Chemical Group (NChG) has commissioned a US$5 billion fertilizer complex for the Pacific port city of Nakhodka. It will include two ammonia plants with a combined capacity of 2.4 million short tpy, and two urea plants with a total capacity of 2.2 million short tpy. The facility, which will use gas from Russia’s Sakhalin and Yakutia fields, is expected to come onstream in 2021, and will target export markets.

Western Europe produced 10.2 million t of ammonia in 2016. Due to climate and soil conditions, AN is the most popular fertilizer with European farmers (5 million t), followed by urea (2.4 million t).

Growth of fertilizer use in Western Europe is largely static. The Common Agricultural Policy (CAP), the European Union’s system of agricultural subsidies, is being gradually reduced, and the focus of both regulations and consumer preferences for organic products has meant a switch from chemical to organic fertilizers. Overall, prospects for the global nitrogen fertilizer sector look promising. Assuming average demand growth to be 2.5 – 4 million tpy, participants expect the market to begin to tighten starting in 2019. “We're actually very constructive on the nitrogen business,” said Chuck Magro, CEO of Agrium Inc., at a recent investor conference. “We believe that the global supply-demand balance will tighten towards the end of 2018 moving into 2019.”

Read the article online at: https://www.worldfertilizer.com/special-reports/27122018/when-stars-align-part-1/