Nitrogen+Syngas 379 Sept-Oct 2022
30 September 2022
Ammonium nitrate markets after Ukraine
AMMONIUM NITRATE
Ammonium nitrate markets after Ukraine
The war in Ukraine has severely affected the supply of ammonium nitrate and CAN from Russia and Ukraine, with particular potential impact on Europe and Latin America. Can urea make up the difference?
The conflict in Ukraine and subsequent international sanctions have upended many markets, but perhaps none more so than for oil, gas, food and fertilizer. Oil has been perhaps the least affected of these. The US has halted Russian oil and refined products imports, and some countries have pledged to end imports of Russian oil by the end of 2022, including the EU, UK and Australia, but by and large the oil market seems to have reconfigured itself and rearranged global flows of product, and Russian oil continues to be exported, now flowing towards China and India instead.
Natural gas is a very different prospect, however. Here Russia has sought to exploit Europe’s vulnerability by stepping down exports to Europe along even the pipelines that do not cross the conflict zone, exacerbating an already tight supply situation. With the northern hemisphere winter approaching, Europe is scrambling to find LNG cargoes and switch to alternative power sources, including switching back on some closed coal-fired power plants, and gas prices have soared to truly unprecedented levels. This in turn has had a major impact on European fertilizer producers. With natural gas accounting for the bulk of operating expense in ammonia production, natural gas prices as high as $70/MMBtu such as have been seen in the Netherlands TTF price can be equivalent to a $2,500/t baseline cost in the price of ammonia. Even at the inflated prices currently being seen in the market, this makes most European ammonia production uneconomic. Producers have consequently been forced to progressively close domestic ammonia production. All UK ammonia production is now idled. German production is running at about 50%. The last line at Achema in Lithuania will close in September, and Yara reckons that overall across Europe its output is now down to only 35% of capacity. For the moment many producers are operating on imported ammonia at these record prices, but even so around half of Europe’s downstream nitrogen production is currently not producing. Furthermore, it is by no means sure that there is enough ammonia to go around. Russia accounts for 23% of ammonia production globally, as well as 14% of urea and in 2021 was the world’s second largest ammonia producer (after China) and the largest exporter. In 2021, Russia exported 4.4 million tonnes of ammonia, representing 30% of all traded ammonia.
Finally, the effect on grain markets has been equally serious. In 2020 Russia and Ukraine accounted for 26% of global wheat exports (Russia 18%, Ukraine 8%), 24% of barley exports (12% each) and 14% of corn exports (Ukraine 13%, Russia 1%). While an international deal has been done to export some grain from Odessa, around 30 million tonnes of grain is still reckoned to be sitting in silos and stores in Ukraine, awaiting export. With a storage capacity of an estimated 55 million tonnes, it is by no means clear if there is sufficient space to store this year’s harvest, though the production figure this year is bound to be down as the war has cut some of the through the most productive land in the southeast of Ukraine. This shock to the international market has driven up food prices, making fertilizer a little more affordable but also threatening famine in areas such as east Africa.
Export restrictions
The restrictions on export of nitrogen fertilizer are not just down to Russia’s inability to sell or Europe’s and North America’s unwillingness to buy. There are also domestic restrictions on sales to ensure supply to the home market. Russia had already imposed export quotas on fertilizers back in December 2021 as gas price issues in Europe led to potential production shortages. While the quota for urea was above the normal seasonal export amount, the quota for export of Russian AN for the six months from December 1st was just 744,000 tonnes; less than half the amount that would usually be exported over that period. This was followed in late January by a complete ban on AN exports during February and March, later extended to April. On May 1st exports were allowed again, but the quotas from late 2021 were still in force. Finally, by June 1st, the Russian domestic fertilizer application season having come to an end, exports were permitted at an unrestricted rate, though western sanctions on Russian banks and payment processing and consequent high shipping rates continued to complicate the actual process of exporting. There were shipments to Brazil at discounted rates of up to $50-100/t to the prevailing market price.
Meanwhile, on May 31st, the Russian government announced that it would be extending its export quotas for nitrogen and complex fertilizers. Between July 1st and December 31st 2022, only 8.3 million tonnes (product) of nitrogen fertilizers and 5.95 million tonnes of complex fertilizers will be permitted to be sold overseas; approximately 60% of what might normally be shipped. As before, the quotas will not apply to fertilizer supplies to the breakaway and largely internationally unrecognised republics of Abkhazia (Georgia), South Ossetia (Moldova) and the so-called Donetsk and Luhansk People’s Republics in eastern Ukraine.
Ammonium nitrate
Russia is a key player in the ammonium nitrate market. As Table 1 shows, when total AN melt capacity (including CAN and UAN) is taken into account, Russia’s share of world capacity is more like 15%, but its importance to the straight AN fertilizer market is much greater. In 2021 it exported 4.3 million tonnes of ammonium nitrate (1.5 million tonnes N), which represented almost 50% of the international market. This dominance in the AN trade is also shown in Table 2, which aggregates figures for both AN and CAN fertilizer. The net regional figures obscure a good degree of cross-border trade within regions, but Russia’s exceptional position in the market is clear. It also shows that, while Europe was – prior to the current crisis at least – broadly self-sufficient in AN/CAN production, many countries outside of Europe are net importers, particularly Brazil, which takes much of the 800,000 tonnes N destined for South America.
Russia’s share of the urea market is shown in Table 3. Here Russia is important though far less dominant. Russian customs figures show that 2021 exports were 7.3 million tonnes of urea (3.4 million tonnes N), slightly up on the 2020 figure in Table 3. This made it the world’s single largest urea exporter, with around 18% of the global market. It is worth noting, as IFA analyst Laura Cross pointed out at IFA’s annual conference in May, that of that 7.3 million t/a of urea exports in 2021, only around one third (2.4 million t/a) went to countries that have since imposed sanctions on Russia, while two thirds (4.9 million t/a) went to countries which have not, including Brazil and India. The impact of sanctions on the urea market are therefore likely to be far less severe than for e.g. potash, where Russia and Belarus supply most of Europe’s needs.
Russia also exports around 2.2 million t/a of urea ammonium nitrate (UAN). This became a bone of contention in July last year when CF Industries brought a case before the US International Trade Commission alleging that UAN solutions from both Russia and Trinidad had been illegally “dumped” (i.e. sold at below the notional cost of production and export) on the US market. The ITC came to its conclusions on the case in June 2022, and agreed that Russian imports had been dumped at rates ranging from 8.16% to 122.93%, and unfairly subsidised at rates ranging from 6.27% to 9.66%. In addition, the ITC found that imports from Trinidad had been dumped at a rate of 111.71% and unfairly subsidized at a rate of 1.83%. However, in its finally injury determination, and no doubt with an eye on the current international market situation, the Department of Commerce elected not to impose import tariffs on these products, presumably in a bid to at least partially cushion US farmers from rising fertilizer prices. In a press statement CF Industries said it was “disappointed” in the decision, since it was clear that “unfair trade practices from state-subsidised entities underpinning UAN imports from Russia and Trinidad… were clearly established through thorough and impartial investigations”.
Europe’s dilemma
The current crisis for Europe in particular is thus twofold. Firstly, sky-high gas prices have forced the largest shutdown of European nitrogen fertilizer capacity ever seen, while the continent’s ability to substitute using ammonia or ammonium nitrate from overseas is greatly reduced by Russia’s export quotas and financial sanctions.
European leaders are still scrambling to adjust to the new reality. The Spanish and Dutch governments have said that they have “a new focus” on treating animal manure and using it instead of traditional synthetic fertilizers. However, this would require a derogation to, or amendment of, the EU Nitrates Directive. The directive, introduced in 1991, aims to protect water quality across Europe by preventing nitrates from agricultural sources from polluting ground and surface waters and by promoting the use of good farming practices. The Dutch government has proposed a ‘derogation’ from the existing law for allowing the application of fertilizers with recovered nutrients from manure for a minimum period of eight years. Nevertheless, ramping up projects to recover nutrients from manure to a sufficient level to make a difference to EU nitrogen consumption is a long term plan, with gains possibly several years away.
Substitution of ammonium nitrate with urea is possible, though European farmers have traditionally preferred AN because it is more quickly available to the plant in the field during short growing seasons without having to be hydrolysed first as urea is. Urea and AN prices tend to end up linked in this way, with AN prices capped by the equivalent nitrogen nutrient value of urea. As Tables 2 and 3 show, the urea market is roughly four times larger than the ammonium nitrate market, both in terms of production/consumption and international trade, and Europe’s share of it much smaller. This in theory should make sourcing urea easier than ammonium nitrate. The issue is that, given Russian export quotas, there still may not be enough spare urea capacity available around the world to supply sufficient for all that consumers wish to buy. We may have moved into a market which, rather than being demand limited as is traditional, has become supply limited. This will play out at the farm level, with crop prices, farm incomes, subsidies, crop mix etc all playing a part in deciding which farmers can and do afford fertilizer over the coming months. IFA’s recent analysis of this indicated that Latin America was one of the regions with the most exposure to high market prices for nitrogen. IFA’s pessimistic scenario – something which seems increasingly likely – predicts a 7% fall in global fertilizer use in the 2022-23 fertilizer year, comparable to the 8% fall in 2008-09, though this overall figure represents only a 5% fall in nitrogen consumption and up to 13% in potash consumption. South and East Asia show the sharpest total decline, followed by Latin America and Africa, but Africa shows the largest percentage decline.
Looking to the future, with the conflict in Ukraine showing no signs of winding down, the reconfiguration of the global nitrogen industry seems set to continue. Though there is new urea and other nitrogen capacity due to come on-stream in the next few years, a proportion of this is in Russia and the timescale for completion is now much more doubtful, as discussed elsewhere in this issue. Even with demand destruction this year caused by high prices, nitrogen markets look set to be tight for a couple more years to come.
