by Harry Baumes
U.S. production of anhydrous ammonia, the feedstock for downstream production of nitrogenous materials, has contracted at an alarming pace in recent years. Over the past ten years, the Census Bureau reports that U.S. ammonia production has fluctuated from a high of 18.5 million tons in 1998 to a low of 11.5 million tons in 2003. Global Insight estimates that 2004 production totaled about 13 million tons. On the whole, production over the past five years (2000–04) has averaged 25% less than the previous five-year period. A number of factors influence production, including demand and costs.
Overall demand for nitrogen (ammonia) has been stable over the past ten years. The agriculture sector is the largest consumer of nitrogen. Anhydrous ammonia—which is 82% nitrogen (N) by weight—is applied as a fertilizer, as well as a key input for the production of urea, ammonium nitrate, nitric acid, and ammoniated phosphates, among other products. On a fertilizer-year basis (July–June), farmers consumed about 12 million tons of N (anhydrous ammonia equivalent, 14.6 million tons) annually over the 2000–04 period, down just 200,000 tons/year from the previous five-year period, 1995–99. Over the same ten years, though, domestic producers lost a portion of their market share. Excluding trade, producer disappearance (production plus beginning stocks less ending stocks) dropped about 20% from the 1995–99 period to the 2000–04 period. During the first five-year period, producer disappearance averaged 14.5 million tons annually, 3.1 million tons above the 2000–04 average.
The loss of market share by domestic producers can be largely attributed to the significant rise in the cost of natural gas and the surge in nitrogen imports. The Fertilizer Institute reports that natural gas costs account for the majority of anhydrous ammonia production costs. In 1995, natural gas costs were 71% of U.S. ammonia production costs, and producers paid an average of $1.62/million Btu (mmBtu). The spot price of ammonia (f.o.b. New Orleans) averaged $207/ton, and producers realized a margin of $120/ton. As the saying goes, 1995 was the good old days. During the late 1990s, the cost of natural gas to ammonia producers reached approximately $2.00–2.25/mmBtu, accounting for about 80% of total production costs. During the same period, however, the average ammonia price dropped from its 1995 level; subsequently, so did the average margin, which declined steadily to $6.78/ton by 1999. Producers began idling facilities on a temporary and/or sometimes permanent basis.
Natural gas prices have shot up since 1999. Global Insight estimates that domestic ammonia producers faced gas costs of $5.26/mmBtu for 2004, representing nearly 90% of total production costs. Margins dropped below $2.00/ton for 2002. Although they have since recovered to the $60–70/ton because of higher ammonia prices, high gas costs and the commodity nature of the fertilizer (ammonia) business led to additional plant closures. U.S. producers are finding it increasingly difficult to compete with their foreign counterparts, since many come from energy-rich countries such as Trinidad, Mexico, and Venezuela, where they can source gas at a much lower price.
As a result, U.S. farmers have substituted nitrogen imports for domestically produced material. Nitrogen imports accounted for nearly 50% of supplies for the 2004 fertilizer year and 85% of nitrogen fertilizer use. Historically, on a fertilizer-year basis, nitrogen imports only accounted for 20–25% of total nitrogen supplies during 1985–2000. Due to the increasing competitive pressures that the U.S. industry faced, several domestic ammonia facilities were closed. As ammonia facilities were idled, urea facilities followed suit, though, because of the cogeneration from ammonia facilities. Nitrogen imports tested the U.S. distribution network, but as of yet the ports and the facilities along the Mississippi River have handled the increased flow of imported nitrogenous materials.
Ammonia is the primary imported nitrogen product. During the mid-to-late 1990s, ammonia imports accounted for about 55% of total N imports, while urea accounted for about 30%. For the 2004 fertilizer year, ammonia accounted for 62% of total N imports, down from 66% in 2003, while urea accounted for about 25% of the total nitrogen imported. Ammonia (82% N) and urea (46% N) will remain significant import products on a weight basis.
Looking forward, Global Insight does not expect U.S. demand for nitrogen nutrient by the farm sector to change markedly. Similarly, natural gas costs are not expected to retrench to their $2.00/mmBtu level of the late 1990s. Indeed, gas costs to the industry are expected to remain around $5/mmBtu for the next two years, before weakening. Moreover, the ammonia-producing industry will remain under severe competitive pressures and subject to further consolidation and facility closures. The International Fertilizer Development Center reports that in 1999, U.S. ammonia capacity was about 20.1 million tons (on a product basis), and urea capacity at 10.3 million tons. By 2005, ammonia and urea capacity had each declined 25%, to 15.0 million tons and 7.7 million tons, respectively. From a global perspective, additional ammonia capacity outside the United States expanded by 4.7% in 2004, and is expected to increase by another 5.7% this year. The added capacity will put pressure on ammonia prices and keep U.S. producer margins relatively lean. And further contraction is a distinct possibility.
