Nitrogen Outlook 2017
It’s no secret that the global supply of nitrogen has been increasing significantly in recent years, helping drive down prices for nitrogen fertilizers such as ammonia, urea and UAN.
The new nitrogen capacity under construction in North America has raised many questions from distributors and farmers. Will that new capacity fundamentally alter nitrogen fertilizer trade in one of the largest nitrogen-consuming regions in the world?
The wait for that answer is almost over.
With the completion of CF Industries’ Port Neal (Iowa) expansion project in December, and of our Donaldsonville (Louisiana) expansion project in October, the industry is closer than ever to operating all of the new nitrogen capacity in North America.
As we prepare to enter this new environment, I thought it would be helpful to separate fact from fiction about the global nitrogen market and the regional dynamics at play in North America.
Fiction: North America has a glut of new nitrogen supply coming online.
Through 2012, North America had a glut of announcements about new nitrogen supply being built. We counted 25 projects announced that would have added more than 15 million tons of nitrogen in the region. As of January 2017, it appears only seven of those projects will be completed, and four of them are focused on producing ammonia for industrial use.
That said, North America does have the most significant increase in nitrogen capacity coming online in at least a generation. The new urea plant that CF Industries started-up at our Donaldsonville complex late in 2015 was the first new worldscale urea plant in North America since 1998. The new nitrogen capacity being added brings the region back to levels last seen in the region in 2000, yet still far below the peak of the early 1980s.
Fact: North America will continue to be import dependent for nitrogen.
North America is the third largest nitrogen consumption region after China and India. It has been, and will remain, dependent on imports for the foreseeable future. In fact, we estimate that 30% of nitrogen consumed here during 2017 will be supplied from imports, even once all the new nitrogen capacity is operating. And that is with the flat demand we expect for nitrogen this coming year even with fewer corn acres being planted.
Imports will be affected to an extent by the new capacity, as we have already seen it displacing some freight disadvantaged imports. CF, for one, has been shipping more UAN to the East Coast of the U.S. That is a one million ton per year opportunity that has been served largely by imports as we’ve sold our production mostly in the central U.S. With our expanded capacity, we have more destination options within the U.S. that will compete with imports primarily.
Fiction: Every ton of nitrogen fertilizer made in North America is staying in North America.
North America may be import dependent as a region, but it does not always make sense for producers to only sell their products at home. CF’s Donaldsonville complex sits on the Mississippi River and has five docks that allow us to ship products north to U.S. distributors or south out through the Gulf of Mexico and to the rest of the world.
When product is not going to the ground in North America or when buyers aren’t interested in purchasing for the season ahead, we have the ability to export to other countries. We’re particularly focused on areas where freight logistics make sense. We will set a record for UAN exports this year, with significant growth in South America, where the growing season is complementary to North America’s.
Fact: Global nitrogen capacity additions will not continue at the rate of recent years.
We believe 2016 represented the high water mark for urea capacity additions globally, with capacity additions projected to drop off sharply after mid-2017. In North America, there are no other projects that have recently broken ground. We expect any new project is four to five years away from completion.
Even as new capacity has come online, high cost capacity has been going offline around the world. For example, China has added 40 million metric tons of urea capacity since 2012, driven largely by a government stimulus program. Over the same time period, we have observed China close about 26 million metric tons of high-cost urea capacity, including nearly nine million metric tons in 2016 alone as of November.
As the global nitrogen supply increased, prices fell, making many producers unprofitable. Fundamental economics are at work as exemplified through the behavior of Chinese urea producers. We believe other producers in the world are in the same situation.
Fiction: Nitrogen demand will not catch up with nitrogen supply for many years.
The nitrogen industry is in a state of significant over-capacity, with more new capacity still to come on-stream through 2017. However, global demand continues to grow between 1.5% and 2.5% per year, requiring approximately five worldscale ammonia and urea plants each year. Growth comes both from farmers worldwide applying nitrogen every year and from increasing industrial uses for nitrogen. With this underlying demand growth and recent closures, demand will absorb excess supply and the global supply and demand balance for nitrogen should start to resolve beginning in 2018.
Fact: The new North American capacity will not fundamentally alter nitrogen fertilizer trade in one of the largest nitrogen-consuming regions in the world.
Returning to our original question, the bottom line with the new North American nitrogen capacity is that global factors will continue to affect a global commodity, and North America will continue to be a net importer of nitrogen. The primary driver of the nitrogen fertilizer price in North America will be global supply capacity and the cost of producing and moving it to North America. That means we expect 2017 to look very similar to 2016 and that we expect prices to begin to rise in 2018.
Delays in purchasing and positioning nitrogen in the region could cause temporary disruptions to supply and demand, as they have in the past. But it is the global changes — from input and transportation costs to plant curtailments and shutdowns — that will have the biggest impact on what farmers pay for fertilizer in 2017.