From the American Oil and Gas Reporter, Feb. 2013:
According to BMO Capital Markets, close to 6 million tons of gross ammonia production capacity is slated to be added in the United States over the next three years (Table 1). Another 5 million-6 million tons has been proposed, but BMO says it considers those projects speculative and lacking financial commitments.
An industry overview from The Fertilizer Institute (TFI) trade association states that the U.S. nitrogen fertilizer industry is both energy intensive and trade exposed, with 70-90 percent of the cost of production being attributable to natural gas, which is used as the principal feedstock and also as an energy source. “Farmers in the United States rely on domestically produced nitrogen fertilizer for a significant portion of their fertilizer supply, but must compete with farmers around the world for the remainder of this critical input,” TFI states.
That evaluation is corroborated by industry analysts. “The United States is structurally short of ammonia, which is the primary feedstock for producing nitrogen fertilizers such as urea and urea ammonium nitrate (UAN), and also serves as a raw input for phosphate fertilizers,” says Joel Jackson, lead fertilizer analyst with BMO Capital Nesbit Burns in Toronto. “The country imports 7 million-8 million tons of ammonia every year, as well #$%$ million-6 million tons of urea and 2 million-3 million tons of UAN. The United States had not seen a new ammonia plant built in 30 years.”
Because ammonia historically has been a low-margin business, he notes that it has tended to be extremely sensitive to feedstock and energy prices. Fertilizer companies were among the first to seek offshore production when U.S. energy prices rose in the early 2000s, so the new and expanded plants are a seminal indication of the domestic manufacturing renaissance wrought by affordable and plentiful long-term natural gas supplies, Jackson affirms.
Crediting the domestic oil and gas sector for changing the economics of the fertilizer market, TFI states, “A reliable supply of U.S.-produced natural gas is boosting the domestic industry’s employment footprint by stimulating investment in nitrogen production facilities. This is in stark contrast to 1999-2007, when nearly half of U.S. nitrogen fertilizer production capacity and employment was lost to plant closures related to, among other things, high relative natural gas costs. The U.S. fertilizer industry is experiencing a renaissance, evidenced by announcements of restarting existing facilities and constructing new plants that could potentially double capacity and add billions of dollars to the U.S. economy. Each new facility brings jobs to construction workers and permanent, high-paying jobs to individuals who will work in those plants.”
Jackson explains that the United States is unique among major agricultural nations in that many farmers apply anhydrous ammonia directly in crop fields. The United States also applies a significant amount of urea and UAN, the predominant nitrogen fertilizers.
Rentech Nitrogen Partners is a publicly traded integrated ammonia and UAN producer based in East Dubuque, Il. It distributes the majority of its products under a long-term distribution agreement with Agrium Inc. It also sells urea-based diesel exhaust fluid (DEF) under contract to Yara International, the Norwegian company that is the largest global supplier of urea. DEF is a small, but specialized and profitable market, reports Rentech Nitrogen President John Diesch.
Early in January, as Technip was releasing details of its project for Mosaic, Rentech Nitrogen completed an upgrade and debottlenecking of its urea plant, adding 15 percent to its previous annual capacity of 168,000 tons. The next incremental expansion will be adding 70,000 tons a year of ammonia capacity to its existing 300,000 tons a year, Diesch announces. That project, which will include new storage capacity, is on schedule and due to be completed after the fall maintenance turn. The plant will be at its new production capacity by the end of the year, he says.
To secure raw materials, Diesch says Rentech Nitrogen deals directly with large natural gas suppliers. “We purchase at key trade point gateways, and pricing is done at a differential plus or minus to the New York Mercantile Exchange. In terms of the physical commodity, we receive the gas from our local distribution company, Nicor Gas, through the interstate carrier Northern Natural Gas Company,” he says, adding that Rentech Nitrogen pays the price at the interchange, plus transportation, which has been running $0.42 an Mcf.
Rentech has hedged both its raw materials and its finished materials, and is likely to do so again, but Diesch says the company is not running a big book on forward natural gas purchases. “When we get a prepaid contract for our products, we either have product inventory, gas strategically purchased in advance, or go buy the gas to put behind it. Sometimes we go a little long on gas, depending on the NYMEX curve,” Diesch details. “It is very tactical and has worked for us in these current market conditions.”
Strategically, Diesch says he is optimistic about the position his industry finds itself in. “The economics of fertilizer production in this country are very good, and that will continue, even if gas prices rise somewhat. We are expecting prices this year in the range of $3-$4 an Mcf. Over the next few years, we would not be surprised if gas prices rose to the $4-$5 an Mcf range, especially with an ultimate recovery of the U.S. economy.”
Diesch says he also is not overly concerned about overcapacity in the fertilizer building boom. “Historically, only about 30 percent of industrial projects that are planned or announced get built,” he points out. “It can be very difficult. New plants need siting and all kinds of environmental permits, while expansion projects often run into other types of constraints.”
That said, Diesch echoes industry analysts in saying he expects the proposed OCI plant in Iowa to be built. “OCI is a global player and is a construction company. Plus, it already has the permits in hand,” he remarks.
For fertilizer companies, expansion is a natural combination of strong demand, strong margins, and a secure feedstock position. “We are very bullish on demand for corn and all grains,” says Diesch. “The growth in corn is coming from food and feed, rather than ethanol. There is always a drought somewhere, so food and feed demand stays strong. Even when production is good worldwide, the increasing demand for protein in Asia means good demand.”
Diesch concludes by noting that Rentech Nitrogen is expanding its “natural hedges” by expanding its product lines in diesel exhaust fluid, and also in ammonium sulfate, which tends to go into different crops and other end-use markets from ammonia and urea. Rentech Nitrogen’s ammonium sulfate plant on the Houston Ship Channel in Pasadena, Tx., is the largest such facility in the country and consumes about half the amount of ammonia produced in East Dubuque, but purchases the ammonia from a different supplier and at a lower price than the ammonia sold from its East Dubuque plant.