AMMONIA & UREA
STRATEGIC BUSINESS ANALYSIS
The ammonia and urea industries have not escaped the turmoil seen in the world-wide chemical industry as a direct result of the worst global economic downturn since the Great Depression of the 1930s. Whilst urea, with its place as the most widely used fertilizer in the world, has fared better than petrochemicals and polymers (which have been particularly hard hit by the ‘perfect storm’ of a dramatic slump in consumer demand, coupled with considerable regional overcapacity), prices and margins for nitrogenous fertilizers have fallen steeply from the highs experienced during 2007 and early 2008.
Fertilizer market conditions deteriorated rapidly through the second half of 2008, as a slowdown in sales, amid rising inventories, saw farmers delaying purchases in the expectation of further price reductions, volatility in commodity markets, and tightening financial conditions. Lower natural gas costs in the U.S., which recently hit a seven year low of $2.70/MMBtu, have combined with reducing crop prices to keep prices under pressure throughout 2009.
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On a more positive note, non-traditional uses of urea are becoming increasingly important. It is clear that biofuels are becoming a significant and growing contributor to global fertilizer demand, with urea comprising a notable proportion of this. Global demand for ethanol and biodiesel has grown extremely quickly over the past decade.
Urea Requirement for Biofuels Cultivation
Historical and 2020 forecast
This implies that almost five million tons of urea applied to crops in 2008 was for biofuel use, about 3.5 percent of overall global demand, up from 1.3 percent in 2000. This is forecast to increase to about four percent by 2020 - about 7.7 million tons, equivalent to six world-scale urea units, so in Nexant’s opinion, biofuels will continue to have a significant impact on global demand for urea into the next decade and beyond.
In feedstock terms, despite the recent recovery of energy prices after their sharp decline in the second half of 2008, natural gas prices in the U.S. are not expected to reach 2008 levels. Indeed, in the short term, they will be much lower due to additional gas supply. Alaskan natural gas will be made available in most of the U.S. LNG imports will become the swing supply with plenty of regasification capacity available. High U.S. gas prices would attract LNG supply and lower prices will mean that cargoes will go elsewhere, having an influence in natural gas prices in other regions. Lower natural gas prices in the U.S. could position the ammonia industry in a better competitive position relative to LNG in gas rich regions such as Trinidad and Venezuela.
Nexant’s multiclient report “Sailing into Unknown Waters, Where Next for Global Gas Trade and Pricing?”, contains full details on our natural gas outlook .
Sailing into Unknown Waters, Where Next for Global Gas Trade and Pricing? - Click here to hear more
There is clear upward pressure on natural gas prices around the world even in locations where prices have historically been “fixed” as the high crude oil environment generates much higher returns to such gas-based projects. It therefore seems likely that no (or very few) new projects will enjoy the low gas prices currently enjoyed by existing projects. Consequently, when new projects are benchmarked against existing competitors, the customary “lower quartile” cost position expected by investors and lenders is unlikely to be achieved.
With this upward pressure on gas prices, producers have been looking with renewed interest in alternative feedstocks to natural gas, which is typically steam reformed to provide syngas which is then converted to ammonia.
However, syngas may be produced from any carbon containing feedstock, including coal and oil products. China, which is a major producer of ammonia and urea, mainly uses coal as feedstock due to the abundance of this fossil fuel in the country compared to other sources.
Further, coal gasifiers can be readily modified to accept alternative feedstocks such as refinery sidestreams such vacuum residue oil and even biomass. Even outside of China there is increased interest in coal-based projects in coal rich countries such as Indonesia and Australia.
Despite the disadvantages of using alternative feedstocks other than natural gas, currently there are numerous facilities using coal; of approximately 73 million tons per year of ammonia capacity in China, approximately 56 million tons per year, or almost three-quarters, is based on coal gasification. Global increases in gas pricing raise the production cost base and make ammonia production from other feedstocks more attractive.
Nexant’s Unique Blend of Capabilities
This analysis is presented in ChemSystems’ Ammonia and Urea Strategic Business Analysis (SBA) program subscription which provides:
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Strategic trends and challenges facing the industry such as feedstock issues, logistics, capital costs, emerging demand drivers and new pricing mechanisms.
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Business fundamentals comprising market dynamics, profitability and pricing, a technology review including coal gasification and new developments, and delivered cost competitiveness
If you have any comments on the analysis, please contact Sean Stevenson at: sstevenson@nexant.com. For details on how to access our detailed Strategic Business Analysis on Methanol please contact chemsystems@nexant.com
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See Nexant’s Methanol SBA for similar coverage for this sector.
©2009 Nexant, Inc.
