The nitrogen market has endured upbeat fortunes lately, but not universally. Strong crop markets and the resultant hike in demand for nitrogen fertilizers secured increased profits again for some key producers in H1 2011. On the other hand, country-specific factors had an overspill effect on global supply.
Benchmark ammonia and ammonium nitrate prices were up by 35% and urea prices rose by 52% year-on-year in September 2011 driven largely by a firm demand environment.
In Europe, gas prices continued to recover from the 2008 financial crisis, with the Zeebrugge DAM price exceeding US$10/MMBtu in September 2011 for the first time since the crash. High nitrogen prices, however, were generally not enough to offset rising production costs in Europe, and margins continued to behave erratically. However, developments surrounding the Nord Stream pipeline could bring much needed stability to the region’s producers in the form of lower transport costs and a more secure supply channel from Russia’s gas reserves. Construction of both Line 1 and Line 2 of the twin pipeline system under the Baltic Sea is now complete and the first delivery of natural gas into Germany from Russia was confirmed on 8 November 2011. The use of shale gas as an alternative to conventional extraction could also be an option for European producers, with Poland and the UK most recently exploring these options, though this is unlikely to influence the market for some years to come.
Despite the financial strains affecting the USA, nitrogen producers in the region fared significantly better than elsewhere. So far in 2011, nitrogen prices have stayed solid, and the region’s cost position has remained favourable. In September, the Henry Hub gas price was US$3.91/MMBtu – a 10-month low. On top of low input costs, higher-end prices allowed for healthy margins, and several major producers achieved record financial results in Q2 2011.
China is a clear exception to largely favourable global conditions. While coal prices for Chinese producers are expected to remain relatively stable until 2012, they continue to be above the long-term trend. Furthermore, margins are constrained by weak domestic end product prices. Higher costs of production impacted Chinese urea output, and while domestic urea prices continue to increase, they are decoupled from international prices, which have increased more rapidly. Chinese exports fell to 0.7 million tonnes in H1 2011, from 1.5 million tonnes in H1 2010, on the back of the first major dip in Chinese nitrogen output for years.
Taking advantage of decreased global supply and of a more favourable cost position, Russia and Ukraine stepped up production for export in order to fill the gap left by China. Lower natural gas prices secured by Group DF, which controls most of Ukraine’s plants, kept producers’ costs down in the first half of 2011. Ukrainian ammonia production totaled 2.58 million tonnes in H1 2011, increasing 26% from H1 2010. Urea production increased by a similar margin, from 1.58 million tonnes in H1 2010 to 2 million tonnes in H1 2011.
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