Relevant • Independent • Objecve Nitrogen, phosphate, and potassium are the three main nutrients in ferlizers used by the agricultural industry. Of the three nutrients, nitrogen is the most important in terms of increasing crop yield, and accounts for approximately 60 percent of total ferlizer consumpon. 2 Although the US produces nitrogen ferlizers domescally, the country is heavily dependent on imports. The US is the world’s largest importer of nitrogen-based ferlizers, imporng a total of 10.79 million tons (54 percent of total US consumpon) in the 2011 calendar year. 3 Figure 2 displays US nitrogen ferlizer producon and imports, between 2002 and 2010. Figure 2: US Nitrogen Supply Source: USDA 4 Anhydrous ammonia, urea, nitrogen soluon, ammonium nitrate and ammonium sulphate are commonly used nitrogen ferlizers. Anhydrous ammonia, which is contained in nearly all nitrogen ferlizers, has the highest concentraon of nitrogen (82 percent). It is produced by combining nitrogen in the atmosphere with hydrogen from natural gas, along with a catalyst, at a high temperature and pressure, in what is known as the Harber-Bosch process. In addion to its use as a hydrogen source, natural gas is also used to September 2012 CERI Commodity Report — Natural Gas Expanding US Nitrogen Ferlizer Producon Global ferlizer demand is rapidly increasing to accommodate growing populaons, improving diets, and government policies that support the producon of corn- based biofuels. Prior to 2005, high natural gas costs made it difficult for US nitrogen ferlizer producers to compete with producers located in low cost regions of the world, and resulted in the closure of several producon facilies. Although domesc ferlizer output decreased, the demand for nitrogen ferlizers remained strong, and the US became increasingly dependent on imports. Today, low North American natural gas prices, coupled with high grain crop prices, are providing healthy profit margins to domesc ferlizer producers, and sparking interest in the construcon of new producon facilies. Figure 1: Operaonal US Nitrogen Ferlizer Producon Sites Source: The Ferlizer Instute 1 CERI Commodity Report – Natural Gas Editor-in-Chief: Mellisa Mei ([email protected]) Contents Featured Arcle ...................................................................... 1 Natural Gas Prices .................................................................. 4 Weather ................................................................................. 6 Consumpon and Producon ................................................. 8 Transportaon........................................................................ 10 Storage ................................................................................... 12 Liquefied Natural Gas ............................................................. 15 Drilling Acvity ....................................................................... 17
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Relevant • Independent • Objective
Nitrogen, phosphate, and potassium are the three main nutrients in fertilizers used by the agricultural industry. Of the three nutrients, nitrogen is the most important in terms of increasing crop yield, and accounts for approximately 60 percent of total fertilizer consumption.2 Although the US produces nitrogen fertilizers domestically, the country is heavily dependent on imports. The US is the world’s largest importer of nitrogen-based fertilizers, importing a total of 10.79 million tons (54 percent of total US consumption) in the 2011 calendar year.3 Figure 2 displays US nitrogen fertilizer production and imports, between 2002 and 2010. Figure 2: US Nitrogen Supply
Source: USDA4
Anhydrous ammonia, urea, nitrogen solution, ammonium nitrate and ammonium sulphate are commonly used nitrogen fertilizers. Anhydrous ammonia, which is contained in nearly all nitrogen fertilizers, has the highest concentration of nitrogen (82 percent). It is produced by combining nitrogen in the atmosphere with hydrogen from natural gas, along with a catalyst, at a high temperature and pressure, in what is known as the Harber-Bosch process. In addition to its use as a hydrogen source, natural gas is also used to
September 2012
CERI Commodity Report — Natural Gas
Expanding US Nitrogen Fertilizer Production Global fertilizer demand is rapidly increasing to accommodate growing populations, improving diets, and government policies that support the production of corn-based biofuels. Prior to 2005, high natural gas costs made it difficult for US nitrogen fertilizer producers to compete with producers located in low cost regions of the world, and resulted in the closure of several production facilities. Although domestic fertilizer output decreased, the demand for nitrogen fertilizers remained strong, and the US became increasingly dependent on imports. Today, low North American natural gas prices, coupled with high grain crop prices, are providing healthy profit margins to domestic fertilizer producers, and sparking interest in the construction of new production facilities. Figure 1: Operational US Nitrogen Fertilizer Production Sites
Source: The Fertilizer Institute1
CERI Commodity Report – Natural Gas Editor-in-Chief: Mellisa Mei ([email protected]) Contents Featured Article ...................................................................... 1 Natural Gas Prices .................................................................. 4 Weather ................................................................................. 6 Consumption and Production ................................................. 8 Transportation........................................................................ 10 Storage ................................................................................... 12 Liquefied Natural Gas ............................................................. 15 Drilling Activity ....................................................................... 17
CERI Commodity Report - Natural Gas
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generate the high temperatures required in the conversion process. Between 2001 and 2010, global production anhydrous ammonia increased at a rate of 2.5 percent per year.5 In 2010, approximately 157 million tons of anhydrous ammonia was produced, with 31 percent of the total attributable to China.6 The US, with a total output of about 10 million tons, was the fourth largest producer in 2010, after China, Russia, and India.7 Since most of the anhydrous ammonia was consumed in the country in which it was produced, global ammonia trade was limited to 19.6 million tons, or 12 percent of total production, in 2010.8 Figure 3 displays global fertilizer trade flows. Figure 3: Global Fertilizer Trade Map
Source: International Fertilizer Industry Association9
Given that natural gas is the largest cost component in anhydrous ammonia production, accounting for 70 to 90 percent of the total supply cost,10 domestic fertilizer producers now have a competitive advantage over producers located in Europe and Asia. Approximately 33.5 MMBTU of natural gas is required to produce one ton of anhydrous ammonia.11 The average Henry Hub price for natural gas has declined by 70 percent since the peak in 2008, and the US EIA does not expect the price to return to 2008 levels until 2030.12 Based on the projected average 2012 natural gas price from the US EIA’s Short-Term Energy and Winter Fuels Outlook,13 the cost of producing one ton of anhydrous ammonia in North America is estimated to be between $100.87 and $129.69 per ton, compared to $333.51 and $428.80 per ton in 2008, when the average price of natural gas was $8.96 per MMBTU.
Although fertilizer supply costs have declined over the past few years, fertilizer prices remain high due to tight market conditions for grain crops. In fact, the price of anhydrous ammonia has increased almost every year over the past decade. According to the USDA, the average US farm price of anhydrous ammonia was $783 per ton in March 2012.14 Anhydrous ammonia is a globally traded commodity, and global supply and demand factors affect the market price. Supply factors typically have a greater impact on the market price during periods of low demand, with the highest cost production region (i.e., region with the highest natural gas price) determining the floor price. Conversely, during periods of high demand, the fertilizer price is less dependent on the price of natural gas, and moves above the floor price.15 After 2005, the relationship between natural gas prices and anhydrous ammonia prices weakened, and a positive correlation between corn prices and anhydrous ammonia prices developed. Figure 4 displays anhydrous ammonia prices paid by US farmers, along with the Henry Hub price of natural gas, and the corn price received by US farmers. Figure 4: Anhydrous Ammonia, Corn, and Henry Hub Natural Gas Prices, 2000-2012
Source: USDA, CERI
Global population and economic growth are increasing the demand for grain crops, such as corn. In addition, government policies that support corn-based biofuels production are also increasing the demand for corn. Three countries, the US, China, and Brazil, are responsible for over 70 percent of the world’s corn production. A severe drought in the US, the world’s largest producer and exporter of corn, has resulted in lower corn yields, declining exports, and escalating global corn prices. The Chicago Board of Trade corn futures reached a record high of $8.43 per bushel in August,
after the USDA released a report on the impact of the drought on corn production estimates. The USDA’s latest estimates show a decrease of 13 percent and 19 percent in US corn production and export, respectively, in the 2012/2013 marketing year (September to August), compared 2011/2012.16 The International Fertilizer Industry Association estimates that the demand for nitrogen fertilizers will increase at a rate of 1.9 percent through 2015, with urea accounting for a growing share of nitrogen fertilizers.17 The US is a significant consumer of nitrogen fertilizers,18 but produces less than half of the country’s requirements. In September, two companies announced plans to construct new nitrogen fertilizer production facilities in the US. Egypt’s Orascom Construction Industries is proposing to construct a $1.4 billion production facility in Iowa by 2015. The facility, which would be the first new nitrogen fertilizer facility constructed in the US since the 1970s,19 would have the capacity to produce between 1.5-2 million tonnes of ammonia, urea, urea ammonium nitrate (UAN), and diesel exhaust fluid (DEF) per year.20 Ohio Valley Resource’s proposed $1 billion ammonia, UAN, and DEF facility in Indiana is expected to be complete in 2016.21 Over the next five years, more than $4.5 billion will be invested in upgrading existing nitrogen fertilizer facilities, and constructing new production facilities in North America. Agrium, which is investing $650 million to increase the company’s ammonia and urea production by 2016, estimates that an additional 12 to 14 North American facilities would be required in order to displace all US nitrogen fertilizer imports from offshore sources in 2011.22 A secure supply of fertilizers is critical to the success of the agricultural industry. The abundance of low cost natural gas, and growing demand for nitrogen-based fertilizers, are creating opportunities for existing and new nitrogen fertilizer producers in North America to expand domestic production capacity, and reduce dependence on foreign imports. Endnotes 1“US Fertilizer Production and Mining Facilities at a Glance”, The Fertilizer Institute, http://www.tfi.org/sites/default/files/images/usproductionmaps%28updated%29.pdf 2Yara Fertilizer Industry Handbook, February 2012 3Beckman, Jason, Wen-yuan Huang, “2011 Saw Record High Imports of Fertilizers and Increased Phosphate Exports”, United States Department of Agriculture, July 5, 2012, http://
www.ers.usda.gov/data-products/fertilizer-importsexports/summary-of-the-data-findings.aspx 4“Fertilizer Use and Markets”, United States Department of Agriculture, May 27, 2012, http://www.ers.usda.gov/topics/farm-practices-management/chemical-inputs/fertilizer-use-markets.aspx 5Yara Fertilizer Industry Factbook, February 2012. 6“Global Fertilizer Trade Flow Map”, International Fertilizer Industry Association, http://www.fertilizer.org/ifa/HomePage/FERTILIZERS-THE-INDUSTRY/Global-fertilizer-trade-flow-map 7Yara Fertilizer Industry Factbook, February 2012. 8Yara Fertilizer Industry Factbook, February 2012. 9“Global Fertilizer Trade Flow Map”, International Fertilizer Industry Association, http://www.fertilizer.org/ifa/HomePage/FERTILIZERS-THE-INDUSTRY/Global-fertilizer-trade-flow-map 10“Market Outlook Report”, Agriculture and Agri-Food Canada, Vol. 4, No. 1, April 24, 2012, http://www.agr.gc.ca/pol/mad-dam/index_e.php?s1=pubs&s2=rmar&s3=php&page=rmar_04_01_2012-03-00 11Sawyer, John E., “Natural Gas Prices Impact Nitrogen Fertilizer Costs”, Iowa State University, , April 14, 2003, http://www.ipm.iastate.edu/ipm/icm/2003/4-14-2003/natgasn.html 12“Annual Energy Outlook 2012”, United States Energy Information Administration, June 25, 2012. 13“Short-Term Energy and Winter Fuels Outlook”, United States Energy Information Administration, November 6, 2012. 14“Table 7 – Average US farm prices of selected fertilizers, 1960-2012”, Fertilizer Use and Price, United States Department of Agriculture, Economic Research Services, http://www.ers.usda.gov/data-products/fertilizer-use-and-price.aspx#26730 15Yara Fertilizer Industry Factbook, February 2012. 16“Grain World Markets and Trade”, United States Department of Agriculture, Foreign Agriculture Service, Circular Series FG 10-12, October 2012, http://www.fas.usda.gov/psdonline/circulars/grain.pdf 17Yara Fertilizer Industry Handbook, February 2012 18“Global Fertilizer Trade Flow Map”, International Fertilizer Industry Association, http://www.fertilizer.org/ifa/HomePage/FERTILIZERS-THE-INDUSTRY/Global-fertilizer-trade-flow-map 19DeWitt, Jennifer, “Natural gas prices sent most fertilizer production overseas”, Quad-City Times, July 18, 2012, http://qctimes.com/news/local/natural-gas-prices-sent-most-fertilizer-production-overseas/article_ac1798b4-d153-11e1-8b79-001a4bcf887a.html 20OGJ Editors, “Egyptian company to build Iowa fertilizer plant”, Oil and Gas Journal, September 7, 2012, http://www.ogj.com/articles/2012/09/egyptian-company-to-build-iowa-fertilizer-plant.html 21 “KBR wins FEED contract for Indiana Fertilizer Complex”, 2B1st Consulting, October 10, 2012, http://www.2b1stconsulting.com/kbr-wins-feed-contract-for-indiana-fertilizer-complex/ 22Wilkinson, Ron, “Agrium Wholesale”, http://www.agrium.com/includes/AID2012_Wholesale-Ron_Wilkinson.pdf
