Urea prices recover despite oversupply of ammonia
By Georgy Eliseev, Principal Analyst – Ammonia, IHS Markit
The ammonia market is in oversupply after several new projects started up in different parts of the world in 2018 and the first half of 2019. Ammonia prices have been on a downward slide for 50 consecutive weeks since September 2018. Unlike ammonia, urea and nitrates—the main ammonia derivative products—although also suffering from oversupply, saw a strong seasonal recovery in prices during the first half of 2019. Recently, the upgrade margin for urea production has been moving around $100, the highest level since 2012. The upgrade margin is the additional earning per metric ton of urea if the due amount of ammonia is processed into urea instead of being sold as merchant ammonia at the market price.
The market rebalancing mechanism used to work well before the beginning of 2018, and we can clearly see in the chart that if the ammonia price goes too high with respect to urea, the integrated producers maximize their merchant ammonia output and reduce the supply of urea, and the upgrade margin turns from positive to negative, and vice-versa. However, since January 2018, the urea upgrade margin has always been positive, and we don’t see any correction, contrarily, the margin gets higher and higher. So why do producers not swing to more efficient urea production?
The number of integrated ammonia/urea producers that are flexible to swing from ammonia to urea is limited. The market mechanism works well until the oversupply is not too big. There are many plants with old technology that cannot process all their ammonia into urea because of the CO2 balance, and if they want to maximize their urea output, they inevitably increase their merchant ammonia output.
“There are many plants with old technology that cannot process all their ammonia into urea because of the CO2 balance, and if they want to maximize their urea output, they inevitably increase their merchant ammonia output.”
There is another reason why the market incentive has not reduced ammonia output adequately. The reduction in the price of natural gas, the main feedstock for ammonia production, makes the cost curve lower and flatter. The low-cost producers are not affected, but the marginal producers become much more competitive than before. This is why many plants in Europe and Asia, which would have stopped their ammonia output and started to import cheap ammonia in the case of low ammonia prices, now can afford low prices and continue to produce.
Ammonia and urea prices were relatively high in 2012-14 which led to a wave of new investment projects in North America, North and West Africa, the Middle East, Russia, and Southeast Asia. These cheap-gas regions have replaced China as a focus of growth in the industry. But, with prices declining considerably since 2014, not so many new investment decisions were taken, and the wave of new capacity start-ups reached a peak after 2018. However, this new capacity has destroyed the market’s equilibrium.
Three merchant ammonia plants successfully launched in 2018-19. They are in the US, the Yara/BASF JV at Freeport, Texas; in Russia, the Eurochem North-West Ammonia plant at Kingisepp; and in Indonesia, the PAU plant in Sulawesi. The plants are changing traditional merchant ammonia trade flows. Import substitution in the USA is squeezing ammonia produced in Trinidad and Tobago from the US import market, causing this product to seek new destinations and compete with other exporters for market share in Africa, Europe, and the Far East.
Eurochem’s new plant on the Baltic shore is feeding Eurochem’s downstream fertilizer plants in Belgium, Lithuania, and Russia, but replaces volumes previously sourced from the merchant market and is challenging ammonia exports from Yuzhny, Ukraine, to look for new outlets. The new plant in Indonesia is reducing the traditional shortage of ammonia “East from Suez” and starting to compete with Arab Gulf producers in the Indian market.
New plants usually start slowly, ramping up over several years before reaching full capacity, which leaves time for demand to catch up. However, these three new plants started very smoothly, and some of them even report that output exceeds nominal capacity.
The key factor is weak demand for merchant ammonia in 2018-19. Bad weather in North America reduced the “window” for the direct application of ammonia in the fall 2018 and spring 2019 seasons, and considerably reduced demand. A poor phosphate market is also depressing demand for ammonia.
Finally, industrial applications of ammonia, such as caprolactam, acrylonitrile, and other chemicals—which have saved the ammonia market many times in history—have now lost their dynamic. Consequently, the growth of ammonia imports into China and the Far East is slowing. Phosphates and the chemical segment consume much less ammonia than urea production, but the two sectors dominate the merchant ammonia market and influence ammonia prices much more strongly.
The outlook, however, is not so pessimistic. There are very few new projects to add ammonia capacity in the pipeline. The Middle East is the only region where a new merchant ammonia plant is under construction: the Salalah Methanol Company in Oman, due to be completed in 2021. More merchant ammonia may come onstream in 2023-24 from Saudi Arabia, if Wa’ad Al Shamal starts a new phosphate complex with the launch of its ammonia plant, to be completed later with a phosphate granulation facility.
Demand is cyclical and will slowly catch up with supply. The ammonia market is very volatile and sensitive to marginal supply/demand changes, such as unexpected maintenance stops or regional shortages due to unusually strong demand, which may change the picture dramatically and very quickly.
“New plants usually start slowly, ramping up over several years before reaching full capacity, which leaves time for demand to catch up.”