Most participants in the fertilizer sector do not consider its outlook to be particularly rosy. Prices are down, supply sits well ahead of demand, input costs in some markets are soaring through the roof and the hand of government lays heavily in many jurisdictions.
However, as in any down cycle, canny stakeholders can take action to consolidate their comparative advantages and prepare for improved long-term prospects.
Nitrogen is the cornerstone of the fertilizer sector. World production of NH3 grew from under 110 million tpy in 2000 to over 140 million tpy in 2015. World urea production grew from under 40 million tpy in 2000 to over 80 million tpy in 2015.
In recent years, China has been the market maker, producing, for instance, almost 50% of the world’s urea, and exporting approximately 15 million tpy in 2015.
However, at US$200/t, 60% of high cost Chinese urea capacity was loss-making in 2016. Several million tpy of capacity has been shuttered, and more is expected. Exports have dropped dramatically, with further downside expected.
Other jurisdictions are also suffering. In Trinidad, NH3 production peaked at 5.5 million tpy in 2010. It has since dipped to under 4.3 million tpy. Fertilizer technology in the island nation is outdated; average gas consumption is high (approximately 38 million Btu/tNH3); gas reserves are falling; and LNG production is more profitable. Fertilizer may be squeezed out as reserves deplete. The potential for closures, already being seen in methanol plants, is high.
In North America, most of the new nitrogen capacity has been built and will be fully onstream by mid-2018. Producers in the US and Canada have the advantage of abundant, low cost natural gas for use as both a feedstock and energy source. They are also close to market; regional supplies are expected to significantly displace imports.
There are, however, ‘probable’ plants that could increase supply. These include Chambal’s Gadepan III in India, Dangote Lekki II plant in Nigeria, and Lavan PetroChemical and Pariss III in Iran. However, the down cycle has severely limited profits in fertilizer companies, which, in turn, limits financing of large scale projects.
Assuming average demand growth to be 2.5 million tpy – 4 million tpy, market participants expect the market to begin to tighten, starting in 2019. “As we move into 2018, 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.”
This is an article written for World Fertilizer's November/December 2017 issue and abridged for the website. Subscribers can read the full issue by signing in. Non-subscribers can access a preview of the issue here.