What’s In Store For Nitrogen In 2016
Supply is the overriding theme for the North American 2016 nitrogen outlook. In the last 12 months, global factors have created a supply-driven market. In the next 12 months, new nitrogen capacity starting up, along with those same global factors, will build on that story. At the same time, demand in North America, while not the dominant theme ahead, will be positive for the year.
The Dynamics Of 2015
North American nitrogen during 2015 was defined by declining nitrogen prices globally while corn and the futures market traded sideways, incentivizing farmers not to sell grain. North America entered the year with excess ammonia inventory due to a carryover from the poor fall 2014 application season and customer reluctance to take on inventory due to perceived price risk.
Spring 2015 proved to be exceptionally strong for ammonia application in North America. The weather patterns that evolved in March and lasted through May were highly conducive to ammonia application throughout the Midwest and Canada. The extended season allowed us to have a record spring at some of our distribution terminals, though overall ammonia shipments were lower than the record we had shipped during the first six months of 2014.
North American growers are expected to produce a corn harvest of about 13.7 billion bushels during 2015, which would be the third largest production on record. With a continued trend of positive economic return on the incremental crop yield, growers applied nitrogen fertilizer in order to maximize their revenue per acre.
Nitrogen fertilizer trade volumes continue at historically high levels. CF Industries estimates that Chinese urea exports will total more than 12 million tons in 2015, down from the record level of a year ago, but still overwhelming the global market. High UAN volumes were also seen in 2015, particularly high exports from Russia.
Global Factors Affecting a Global Commodity
For a significant part of 2015, prices for nitrogen in North America declined. The factors were clear: Global production and delivery costs declined while nitrogen capacity expanded in low cost regions.
The energy market played a key role. Lower energy prices for natural gas and coal have reduced input costs for most nitrogen producers. On top of that, lower demand for coal and other raw materials in China have weighed on dry bulk freight rates. Combined with lower fuel costs, freight rates have continued to decline, making offshore producers more competitive in North America.
Devalued currencies have also played a key role in where global supply moves. The weak Ruble continues to give the incentive to Russian producers to export high volumes as Russian natural gas costs are priced in Rubles and very low in dollar terms. Another supply side impact was the announcement by the Chinese government to weaken its currency. This devaluation offset the impact of a new VAT tax on fertilizers and helped to keep Chinese exporters competitive in the international market. On the demand side, the devalued Brazilian Real contributed to an unstable operating environment for Brazilian fertilizer importers driving a few to bankruptcy as well as lower urea imports.
New capacity continues to come on-stream in higher quantities than usual, in China as well as the Middle East/North Africa, Russia, and Southeast Asia, from this year through 2017.
North American Nitrogen Supply Coming Online
New capacity is not coming online just in other parts of the world.
In December, CF Industries announced that it had started up the new urea plant at the company’s Donaldsonville Nitrogen Complex, with UAN and ammonia to follow. This is the first new plant to start-up as part of our capacity expansion projects at Donaldsonville and our Port Neal Nitrogen Complex in Iowa. It is also the first world-scale urea plant to be completed in North America since 1998.
It won’t be the last.
CF Industries projects more than five million tons of gross ammonia to come online in North America in the coming years. More than 40% of that total will be at CF Industries’ Donaldsonville and Port Neal sites. Despite this new capacity, North America will still depend on imports to meet nearly 30% of its nitrogen needs.
The 2016 Nitrogen Demand Outlook
The global factors helping increase the supply of nitrogen in North America will also help increase demand in 2016, though not enough to move away from the supply-driven market we are in today.
The current returns for the 2016 crop, based on new crop futures, favors nitrogen-intensive corn plantings. Weaker soybean prices due to increasing global supplies and devaluation of the Chinese yuan, along with lower fertilizer prices, has the market signaling an increase in corn acres.
As a result, CF Industries now expects 2016 corn planting to be 90.5 million acres, which is 2.1 million acres higher than last year. Along with other crops, this level of corn planted acres should lead to total North American nitrogen demand of 15.7 million nutrient tons for fertilizer year 2016, with 13 million nutrient tons in the U.S. alone. Considering the very weak fall application season the last two years, the product mix is expected to shift in 2016 and favor more direct application ammonia consumption.
As a percent of corn revenue, 2015 U.S. fertilizer costs are projected at 23%, slightly above the 10-year average of 21%.
Will anything move North American nitrogen away from the supply-driven environment we find today? There are a number of factors that could: Production curtailments and limited natural gas availability; supply interruptions stemming from political unrest; shuttering or mothballing high-cost, marginal plants. Also, the delay in purchasing and positioning of plant nutrients could result in price distortions if demand exceeds supply in the short term.
We saw all those factors affect prices in 2015 at one point or another. In the near term, though, the supply-driven outlook for nitrogen appears firm.