A NEW 40,000-TON dry fertilizer plant standing alongside a unit-train spur in Alton, IA, is a symbol of the increasingly global market for fertilizer.
The fertilizer hub, owned by Northwest Iowa Agronomy, also symbolizes a future in which imported granular urea fertilizer becomes the nitrogen fertilizer of choice in the U.S., supplanting anhydrous ammonia, which now dominates.
The Alton plant, owned by four area co-ops, along with Agriliance, the large farm-supply concern, was placed in service in spring 2005 to enable the co-ops to participate in the emerging global marketplace for fertilizer.
Although the co-ops had many reasons to build the plant, the ability to buy and store imported fertilizer was an important factor, says Ken Ehrp, president of Northwest Iowa Agronomy, Alton, IA, and manager of one of the owner co-ops. “Being able to purchase and store all of our nitrogen has been the biggest benefit,” Ehrp says.
The fertilizer hub allows purchase of full unit trains of fertilizer. This enables the co-op to take advantage of volume discounts and lower shipping costs, which also are critical in the new globalized market for fertilizer.
“With changes in the marketplace because of imports, the time to purchase fertilizer has changed, and the timing is hard to predict,” Ehrp says. “Now we can buy fertilizer at the right time because we have the storage capacity.”
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 last year 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.
Most nitrogen imports are in the form of granular urea, which is driving the trend away from anhydrous. Urea is the imported nitrogen form of choice because it is less expensive to store and ship than ammonia, which is a pressured 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 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. “The amount of urea we have sold in just the first 10 months this year is above what we sold in 12 months last year,” Vernon says. “At the same time, we have experienced a small decline in anhydrous ammonia year over year.”
Anhydrous ammonia won't disappear, given customer preferences and the existing manufacturing and support infrastructure.
Short-term price disparities still can make anhydrous a good buy. “This year we have actually seen our anhydrous sales increase,” notes Ehrp, who also is general manager of Farmers Co-op Society in Sioux Center, IA. “Farmers in this area like the cost savings.”
Nevertheless, 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. “For the fertilizer year ending June 30, U.S. production was 12 million short tons, so we have seen production shrink by about one third,” he says.
The shift to an import-dominated nitrogen market is borne out of natural gas price shocks earlier this decade. Energy makes up about 85% of the cost of manufacturing nitrogen fertilizer, so the impact of these price shocks was huge for both manufacturers and their customers.
Prior to 2000, the natural gas price in the U.S. was about $2/million British Thermal Units (mmBtu). Since then, the price has at least tripled, with near-term contracts this summer at $6.75/mmBtu and winter contracts more than $9/mmBtu, Rahm points out.
“High U.S. natural gas prices are really driving greater globalization in the world nitrogen market,” he says. “It is those areas of the world that have access to lower-cost natural gas that are becoming the larger players globally.”
When natural gas prices shot up, investors were drawn to build nitrogen fertilizer plants in the Middle East, the Caribbean and elsewhere, 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 about $5/mmBtu between U.S. and Middle Eastern gas, nitrogen manufactured there has a $115/ton price advantage, minus roughly $30/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 stay in the $5 to $7/mmBtu range, imports could be in the 75% range a few years from now,” Rahm says.
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 near current historically high levels. 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 current 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. 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 does. “The players down there see the U.S. as a 10-million-ton UAN market,” he notes.
Agrium is capitalizing on the shift to urea with its controlled-release ESN, the Smart Nitrogen brand. The company introduced the fertilizer in the Corn Belt in 2002, though the timing relative to nitrogen price spikes was happenstance, says Murray Hasinoff, Agrium director of diversified products.
ESN's improved nitrogen use efficiency compared to that of standard urea has resulted in solid growth. In the 2004-05 year, Agrium expects sales to be about 35,000 metric tons across the Corn Belt. By next season, it will have increased production capacity to 150,000 metric tons, which Agrium expects will sell out, Hasinoff says.