by Russ Quinn, DTN Staff Reporter
PHILADELPHIA (DTN) — Nitrogen production is flourishing in North America on demand from farmers who want more fertilizer for increased crop acres, but also thanks to some of the lowest natural gas prices in a decade.
The U.S. Gulf price is among the lowest natural gas price in the world. This spurred the nitrogen expansion boom, said Arvin Pirness, manager of market research for Potash Corp. This encouraged fertilizer companies to expand or plan to build production facilities, especially in North America.
“U.S. producers remain a very competitive market compared to others on the world market,” Pirness said. “Even around $4(US$/1 million British Thermal Units) vs. $14.00 (US$/MMBtu) for Western Europe is a large difference,” Pirness said in a presentation at the 2012 Fertilizer Outlook and Technology Conference held last week in Philadelphia.
“After peaking at nearly $16 per thousand cubic feet in December 2005 and at more than $13 in June 2008, New York Mercantile Exchange nearby delivery natural gas futures have trended lower, falling to a 10 1/2-year low in April at $1.902,” said Telvent DTN Refined Fuels Editor Brian Milne.
“Moreover, natural gas futures are expected to remain low compared with historical averages going forward,” Milne said. This is thanks to billions of dollars being spent to build new pipelines and facilities to gather, transport and upgrade natural gas. “This is revolutionary,” Milne said.
This influenced the remarkable expansion in the nitrogen fertilizer industry. During the last four months, several fertilizer manufacturing companies announced plans to revamp existing facilities or build new production plants. There are also many speculative or rumored expansions.
For North American farmers, who need more fertilizer as they increase their crop acreage to take advantage of high commodity prices, if the proposed expansion takes place, this would be good news.
Brad Thykeson, a corn/soybean/wheat farmer from Portland, N.D., and past president of the North Dakota Grain Growers Association, saw positive aspects to increased production in the U.S. “Keeping fertilizer production domestic relieves pressures on imports and also the fact that it's closer to where the crop is actually grown is good as well.”
FLURRY OF FERTILIZER ANNOUNCEMENTS
In September, CHS Inc. announced taking steps to construct a nitrogen plant in North Dakota at a cost between $1.1 billion and $1.4 billion, according to a news release. The plant would produce 2,200 tons of ammonia fertilizer daily to be distributed as anhydrous ammonia, urea and UAN liquid fertilizer.
Also in September, Egypt's Orascom Construction Industries (OCI) announced plans to build a $1.4 billion nitrogen plant in Lee County, Iowa, near the Mississippi River.
Then, in October, the Indian Farmers Fertilizer Cooperative (IFFCO), one of India's largest producers of fertilizer, announced plans to build a $1.22 billion nitrogen plant in eastern Canada somewhere in Quebec.
On Nov. 1, CF Industries announced it will construct new ammonia, urea and UAN facilities at its Donaldson, La., plant and new ammonia and urea facilities at its plant in Port Neal, Iowa. The expansions will cost the company $3.8 billion. Combined, these projects will be able to produce 2.1 million tons of ammonia, 2.0 million to 2.6 million tons of granular urea and up to 1.8 million tons of UAN solutions annually.
In addition to new facilities, there is a long list of remodeling of existing facilities. Potash Corp has plants in Geismar, La., and Augusta, Ga., set to see increased production. Yara has expansion plans at its Belle Plaine, Sask., facility and Agrium and Koch have nitrogen expansion set in various locations.
Pirness said if these proposed North American nitrogen projects are completed, there would be “modest pressure” on the market prices. The new capacity would have a greater effect on imports, he said.
“We could see shrinkage of around 57{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} in offshore imports for North American nitrogen by 2017, if this proposed production happens,” he said.
Glen Buckley, chief economist and partner at NPK Fertilizer Advisory Service, said typical product demand annually for ammonia is 13,338 tons in North America, while urea is around 9,600 tons and UAN solutions is at 13,000 tons. He speculated that the total announced/speculative production estimates could be 12,273 tons (or 69{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} of demand) for ammonia, 10,234 tons (or 107{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} of demand) for urea and 6,908 tons (or 53{8a1275384cb93b18aa3d41af404144e37302a793dec468d70d54c97b65cfac05} of demand) for UAN.
SKEPTICISM ABOUT ALL BEING BUILT
However, Buckley is very skeptical all these plants will get built or remodeled, since they are still subject to financing and permitting concerns.
“As you can see, there is more announced urea production than is actually used,” Buckley told DTN. “Most of the announced projects are likely going nowhere, particularly the ones that are looking for financing.”
Buckley stressed it can take up to 20 years to get financial return on new or expanded fertilizer plants. What will be natural gas price then, he asked. While companies contract out several years for natural gas, 20 years is too long to contract.
“This is a high-risk gamble for a fertilizer company,” he said. “Best guess is that virtually all of these plants were knocked out of the box after CF made their announcement.”
Jim Prokopanko, CEO of The Mosaic Company, said during his presentation at the Philadelphia conference that he, too, does not expect all the proposed plants will get built.
“There would be way too much supply, although some of the supply could be exported, I suppose,” Prokopanko said. “Those already planning expansion are probably in a better position than those just announcing expansion. It may be too late for them.”
Prokopanko said he believes the nitrogen fertilizer expansion, combined with increased demand for natural gas in such things as natural gas vehicles, could cause natural gas prices to rise in the future. This, in turn, would make North America less competitive on the world market for nitrogen fertilizer.
WILLING TO TAKE RISKS
Despite these potential risks, this has not stopped companies from other parts of the world coming to the U.S. and building fertilizer facilities. During the same presentation in which Prokopanko spoke, Renso Zwiers, Chief Operating Officer (Fertilizer Group) of Orascom Construction Industries (OCI) spoke on his company's building plans.
OCI is an Egyptian company that is relatively new to the fertilizer manufacturing business, building its first plant in 2008. The company is ground-breaking its Lee County, Iowa, plant next week.
“We are a company that is not afraid to take some risk, which is good for the shareholders of our company,” Zwiers said.
Zwiers said among the reasons his company decided to build a nitrogen fertilizer plant here is the less strenuous regulations in the U.S. compared to other places in the world. While he was careful to point out the U.S. does have its fair share of regulations, it is nothing like the environmental and safety regulations his company faces when building fertilizer plans in other parts of the world, such as in the European Union.
Expanded North American nitrogen production is looked at as positive by farmers and fertilizer retailers.
Stan Geiser, assistant manager for Crop Production Services located in Upper Sandusky, Ohio, said while he has not heard many farmers/customers talking about the ramp up in North America nitrogen production, fertilizer retailers keep up on the news.
More production closer to home can only be a good thing, he speculated.
“I know sometimes, in the busy spring months when nitrogen is being applied, that some areas will be short product,” Geiser said. “You would think more nitrogen being produced here would help to limit supply problems as shipments,” and make it easier to get, he said.
As for prices, Geiser said he would expect nitrogen produced in North America would be less expensive in the longer term, compared to imported supply that currently is produced overseas.
However, while Thykeson believes there would be lower fertilizer prices for farmers, “The price is still based on the supply and demand but let's face it, it is also the price of corn,” he said.
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Posted with DTN Permission by Haylie Shipp
