Global Fertilizer Outlook - 3

Nitrogen Market in Supply-Driven Phase

Bryce Anderson
By  Bryce Anderson , Ag Meteorologist Emeritus
Connect with Bryce:
Many North American nitrogen production expansion projects were planned, but only a few greenfield (new) projects were ever built. (Slide courtesy of Laura Cross, Integer Research.)

JACKSONVILLE, Fla. (DTN) -- Oversupply and lower commodity prices caused the global nitrogen market to suffer in 2015. However, industry analysts say the cyclical nature of the market should make it more positive for nitrogen producers in coming years.

This is especially true for North American nitrogen producers who have seen revenues fall in recent years, but continued lower energy costs should aid them greatly.

Laura Cross, senior analyst for London-based Integer Research Limited, said the nitrogen market is in the throes of a supply-driven phase. Cross spoke at the 2015 Fertilizer Outlook and Technology Conference held in Jacksonville, Florida, in mid-November.

CHINESE OVERSUPPLY

Cross pointed to 2012 as a point in time in which the nitrogen market changed. This was when an influx of new Chinese capacity began to move the market into its current supply-driven phase, she said.

When energy prices collapsed in 2015, coal prices dropped in China and this led to over-investment in the country's nitrogen industry.

"The Chinese government was trying to stimulate their nitrogen industry, but in the end this has just led to an oversupply situation," Cross said.

The chart of monthly Chinese urea exports from 2011 to 2015 shows the sudden increase during that time. In 2011 and 2012, there were barely any exports, but January-to-September exports in 2014 totaled 8 million metric tons, and January-to-September exports this year totaled 9.5 mmt.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

The global nitrogen fertilizer demand is estimated for 2014/2015 to be 111.8 mmt, according to the International Fertilizer Industry Association. This is up 1.3% from 2013/2014.

Growth in global nitrogen demand is expected to be slight heading for 2015/2016. The forecast is for 112.9 mmt demand, an increase of 1%.

A medium-term forecast by an international fertilizer organization predicts world nitrogen demand will continue to climb a small amount in coming years. The estimate from 2012/2013 to 2014/2015 is to be a total of 110.1 mmt, and the forecast for 2019/2020 is 119.2 mmt, which would be a 1.3% average annual change.

With China there is no way to know how much longer this oversupply situation will last, Cross said. Several factors are at work. This includes what will be the price level of Chinese coal, the currency depreciation issues which have made this situation even worse, and how long will some Chinese nitrogen producers operate, even at a loss.

Cross said China is caught in this cycle and the Chinese margins are likely to suffer further. The country is home to many high-cost nitrogen producers and it will be interesting to see what happens to these producers.

"China is the world price setter and this situation could be in play for the next one to two years yet," she said. "We then will see a self-correcting period as we start to see a recovery."

OPPORTUNITIES IN NORTH AMERICA

While Chinese nitrogen producers have issues to deal with, North America, on the other hand, has the perfect recipe for success in the nitrogen producing industry.

Cross said two factors for success are necessary in the nitrogen market: costs and prices. North America became the hub of investment in the industry over the last several years because of the steady supply of lower natural gas and a price premium for its nitrogen.

However, the economics of nitrogen production changed considerably over the last two years as the oversupply situation lowered nitrogen prices. This has caused many greenfield (new) projects to be either delayed or shelved completely.

A prime example is CHS Inc. announcing in August that it decided not to build a new $3.3 billion nitrogen facility in Spiritwood, North Dakota. Instead, CHS decided to invest $2.8 billion in current fertilizer producer CF Holdings, Inc. to have guaranteed access to that company's nitrogen supplies.

Cross said North America may see one or two more projects completed in the next five years and these projects will have to be well-planned.

"Unless these planned projects have all of their financing lined up, it is not likely to ever get built," Cross said.

North America has the opportunity for its nitrogen producers to become exporters of nitrogen fertilizer in the coming years, she said. She added that developments in the energy market will likely end up dictating the scale of opportunity in possible nitrogen exports.

Russ Quinn can be reached at russ.quinn@dtn.com

Follow him on Twitter @RussQuinnDTN

(ES/CZ)

P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]
P[R1] D[300x250] M[300x250] OOP[F] ADUNIT[] T[]
P[R2] D[300x250] M[320x50] OOP[F] ADUNIT[] T[]
DIM[1x3] LBL[] SEL[] IDX[] TMPL[standalone] T[]
P[R3] D[300x250] M[0x0] OOP[F] ADUNIT[] T[]

Bryce Anderson

Bryce Anderson
Connect with Bryce: