Buyers face higher rates, less domestic supplies

Gordon Graff -- Purchasing, 3/2/2006

Ammonia prices reached dizzying heights in the past year, driven by increases for natural gas, its main feedstock. Ammonia reserves in North America are adequate, but production of the chemical in the region is on the wane as users increasingly source it offshore, where lower natural gas price tags make ammonia cheaper. Markets for ammonia are relatively healthy, largely because of its use in the agricultural sector, where nitrogen fertilizers—the most important downstream products of ammonia —are essential.

According to The Fertilizer Institute (TFI), an industry group that tracks ammonia trends, 17 ammonia plants in the U.S. have shut down permanently since 1999, and an additional six plants have been temporarily idled. As a result annual production of ammonia in the U.S. fell by 34% in the five years between 1999 and 2004, representing a decline of about 6 million tons/year of output during that period.

Economic hardships from soaring feedstock costs are largely to blame for the shutdowns, notes TFI spokesperson Harriet Wegmeyer. Prior to 1999, the industry was used to operating with natural gas prices around $2 per million BTU , Wegmeyer says. Today gas prices are hovering in the $10-$11/million Btu range. (They briefly spiked at $14-15/million BTU last fall in the aftermath of hurricanes Katrina and Rita.) Natural gas rates represent 70-90% of the cost of ammonia production.

"Domestic ammonia producers are basically being priced out of the market in the U.S.," says Jim Osten, an energy analyst with Global Insight, a Lexington, Mass. market research firm. The reason, he explains, is that domestics must compete with imports from overseas producers who can manufacture ammonia for much less because their natural gas costs are much lower. (Rates for natural gas in Trinidad, an increasingly popular site for ammonia production, can be less than a quarter of those in the U.S.)

Imports make up a large and rapidly growing percentage of ammonia consumed in the U.S. Harry Baumes, an agriculture industry analyst with Global Insight, reports that in 2005 the U.S. imported 50% of its nitrogen products. Besides Trinidad, other frequent sources of ammonia imports to the U.S. are Russia, Canada, Mexico and Venezuela. Levels of imports have kept pace with the drop in U.S. ammonia production, Baumes notes, so there are no shortages of the chemical. With natural gas rates in the U.S. expected to top those in nearly every other area for the near future, says Baumes, "I expect the U.S. to import more ammonia in the next few years."

Because natural gas is such a large part of the production cost of ammonia, prices of that commodity have surged dramatically. In the late 1990s, for example, ammonia was selling in the U.S. for about $125/ton; current contract prices are about $360/ton. Even at those rates, profit margins for domestic ammonia producers are slim because production costs are very close to their selling costs. Several ammonia producers have gone bankrupt or sold operations since 2000, he notes.

Baumes expects ammonia prices to be highly volatile in the next few years, not because of demand, which is fairly steady, but because of unpredictable feedstock pricing. He does not anticipate any major price relief for ammonia buyers as long as there is little U.S. import of natural gas.