The nitrogen business: recent developments and prospects. Oliver Hatfield Director Fertilizers, Integer Research Ltd, UK Foro PPQ 2014, September

Transcription

1 The nitrogen business: recent developments and prospects Oliver Hatfield Director Fertilizers, Integer Research Ltd, UK Foro PPQ 214, September

2 Presentation overview Breaking news! Nitrogen fundamentals Global supply and demand Summary for Mexico Recent changes in the industry Price changes and influences Profitability Energy costs and competitiveness; impact of shale Growth of China Focus on key nitrogen markets UAN AS DEF Outlook General market balance Impact of shale and cheap gas in North America Conclusions and implications for Mexico

3 Breaking News: Yara and CF Industries merger talk CF Industries Yara Total revenues US$5.5 billion US$13.6 billion EBITDA US$2.7 billion US$2.1 billion Volume sales 11.7 million (mostly UAN) 3.8 million (ammonia, nitrates, urea, NPKs) Ammonia capacity 7 million tpy ~8.5 million tpy Geographical interests North America Base in Europe, production in 15 countries, trading worldwide Plans Spending $4 billion on US expansion NewCo would control approaching 1% of world nitrogen capacity Various ongoing

4 Nitrogen fundamentals

5 213 Global nitrogen demand is dominated by fertilizers, and urea is the dominant product. Non-fertilizer demand is highly diverse. Global demand for nitrogen (Million N tonnes) World non-fertilizer demand World fertilizer demand Source: Integer, IFA

6 Global nitrogen demand is dominated by fertilizers, and urea is the dominant product. Non-fertilizer demand is highly diverse Global demand for nitrogen (Million N tonnes) World non-fertilizer demand World fertilizer demand Urea Nitrates UAN Ammonia 16 AS NP, NPK, NK Other Explosives, nylon, resins, feed, emissions control and other end-uses Source: Integer, IFA

7 Global nitrogen demand is dominated by fertilizers, and urea is the dominant product. Non-fertilizer demand is highly diverse Global demand for nitrogen (Million N tonnes) World non-fertilizer demand World fertilizer demand Urea Nitrates UAN Ammonia 16 AS NP, NPK, NK Other Explosives, nylon, resins, feed, emissions control and other end-uses East Asia South Asia North America Europe SE Asia 14 Latin America Middle East Former USSR ROW Source: Integer, IFA

8 Global nitrogen production is relatively widespread. The growth of China has been phenomenal Global nitrogen production (Million N tonnes) Ammonia Urea UAN Ntrates AS Merchant ammonia and other Source: Integer, IFA

9 Global nitrogen production is relatively widespread. The growth of China has been phenomenal Global nitrogen production (Million N tonnes) Nitrogen production by region Former USSR East Asia 33% 14% 1% South Asia % ROW 5% 6% SE Asia Latin America 1% Europe 9% North America 9% Middle East Ammonia Urea UAN Ntrates AS Merchant ammonia and other Source: Integer, IFA

10 Global nitrogen production is relatively widespread. The growth of China has been phenomenal Ammonia Source: Integer, IFA Global nitrogen production (Million N tonnes) 75. Urea 5.6 UAN 17. Ntrates 5. AS 37. Merchant ammonia and other East Asia East Asia 33% 5% ROW 5% 6% SE Asia Latin America % 14% Europe Former USSR 1% 9% South Asia North America 9% Middle East Change in nitrogen production by region 14 ROW Nitrogen production by region

11 Mexican production is under-represented by urea Nitrogen production balance (thousand N tonnes) NH3 Urea AS AN Dir. Other, App. inc industrial Source: Integer estimates, IFA

12 Mexican production is under-represented by urea Nitrogen production balance (thousand N tonnes) Nitrogen trade balance (thousand N tonnes) 1, NH3 7 Urea AS AN Dir. Other, App. inc industrial Exports Imports Various, inc NP Urea Nitrates Ammonia AS Source: Integer estimates, IFA

13 Mexican production is under-represented by urea Nitrogen production balance (thousand N tonnes) 25-1 Nitrogen trade balance (thousand N tonnes) 1,55 Nitrogen fertilizer consumption share Other Ammonia 1% 17% 75 8 NP/NPK 11% 51% Urea AS 2% NH3 7 Urea AS AN Dir. Other, App. inc industrial Exports Imports Various, inc NP Urea Nitrates Ammonia AS Source: Integer estimates, IFA

14 Recent changes in the industry

15 In general, nitrogen pricing is predominantly supply-driven, and tends to track energy costs, with shorter cyclical fly-ups Supply-side nitrogen price drivers: energy prices and production costs Ammonia (US$ per ton) 1, Black sea FOB (LHS) Caribbean FOB (LHS) Brent crude (RHS) Pricing was lower in the 2s as the market was supply driven, and energy prices were significantly lower. Nevertheless underlying demand was still increasing. +97% +169% Higher raw materials costs drove up price. Prices were demand driven, in line with strong crop pricing. The price of crude oil increased by 37% in % +146% Global demand for fertilizer collapsed in 29 due to the economic downturn. Demand recovers post-29 due to growing demand in developing economies. New supply creates cost-driven N pricing again in 213. Jan- Jan-2 Jan-4 Jan-6 Jan-8 Jan-1 Jan-12 Jan-14 US$/bbl Source: ICIS, IMF, Integer

16 Regional gross margins vary between and within regions, with MENA generally the most profitable and Ukraine the least; the utilization rate defines the cycle Nitrogen producer gross margin average and range, % Ukraine India Europe China SE Asia Russia N Pakistan MENA America Source: Company sources, Integer

17 Regional gross margins vary between and within regions, with MENA generally the most profitable and Ukraine the least; the utilization rate defines the cycle Nitrogen producer gross margin average and range, 213 World nitrogen capacity utilization and % change in capacity 7 Cap mil tpy Util % Ukraine India Europe China Source: Company sources, Integer SE Asia Russia N Pakistan MENA America NH3 util % NH3 cap change

18 Feedstock Price Energy costs in to nitrogen producers are increasingly a function of energy competitive advantage; direct energy subsidies are reducing US$/MMBtu Feedstock prices paid by nitrogen producers in Europe (Russian gas) Ukraine Brazil Europe (traded gas) Trinidad India Canada Egypt Indonesia Russia China (coal) US Pakistan (Sui field) Saudi Arabia 5, 1, 15, 2, 25, 3, Ammonia production nutrient tonnes Source: Integer Nitrogen costs service

19 European, Ukrainian, and Chinese producers represent the current marginal producers, determining the nitrogen price floor US$ per short ton ammonia US$ per tonne ammonia US producers are competitive in the first quartile of the cost curve Global ammonia cost curve, 213 Ammonia capacity (million nutrient tonnes) Marginal producers in 213 included European, Ukraine, and Chinese anthracite based producers The future of Ukrainian producers is most uncertain Saudi Arabia Iran USA Algeria Libya Nigeria Qatar Egypt Australia Canada Venezuela United Arab Emirates Pakistan Oman Source: Integer Nitrogen costs service Russia ROW low India China Germany - oil Indonesia Vietnam anthracite Lithuania Romania Belarus older Hungary Argentina Belgium Ukraine - state gas China - gas based modern Austria Bulgaria Trinidad & Tobago - modern plant ROW high Spain China - anthracite coal modern Brazil Germany - gas Italy Trinidad & Tobago - old plant Netherlands France China - gas based old United Kingdom Slovakia Ukraine - non-state gas Poland Czech Rep.

20 The effect of lower gas prices has transformed US production economics; and the same for Mexico Selected annual ave gas prices (US$ per MMBtu) Japan cif Ukraine wholesale Ave German import Zeebrugge term (BEL) US (Henry Hub) Pemex reported Canada (Alberta) *Terra Nitrogen prior to 28 Source: CF Industries, Integer, IMF

21 The effect of lower gas prices has transformed US production economics; and the same for Mexico Selected annual ave gas prices (US$ per MMBtu) Japan cif Ukraine wholesale Ave German import Zeebrugge term (BEL) US (Henry Hub) Pemex reported Canada (Alberta) US$/MMBtu Profitability of CF Industries nitrogen segment Natural gas cost Gross margin % % *Terra Nitrogen prior to 28 Source: CF Industries, Integer

22 * Chinese exports and consumption of urea have been steadily growing Chinese apparent consumption and exports of urea Million tonnes, product Export Apparent consumption Source: Integer; China Urea, Assessing the Global Impact

23 * Chinese exports and consumption of urea have been steadily growing Million tonnes, product Chinese apparent consumption and exports of urea Export Apparent consumption Domestic urea apparent consumption has increased steadily and growing production has resulted in increased exports, despite recent export controls. Chinese urea export volume have tripled in Jan-May 214, with shipments to India, USA and Bangladesh rising dramatically. With fiscal stimulus, new plants continue to be built Changing energy balance of the Chinese economy has led to cheaper coal Source: Integer, China Urea, Assessing the Global Impact

24 Key market developments: UAN

25 UAN basics What is it? UAN consists of a mixture of around 35% urea and 45% ammonium nitrate in solution, with 28-32% N content depending on grade. Why use it? It can be combined with other nutrients and agricultural input products where suitable mixing, storage and application equipment is available It can be measured and applied more uniformly and accurately It contains nitrogen in different forms: nitrate, ammoniacal and amide, and therefore contains nitrogen available immediately (nitrate) and with retarded action. Potentially, losses are smaller But It requires appropriate storage and specialist handling equipment and tends to be suited to larger scale, more sophisticated farming.

26 The UAN business is highly concentrated and dominated by the US. Much of production is for domestic delivery or to a few key markets World production of UAN (million tonnes) World consumption of UAN (million tonnes) ROW UK Australia Argentina Canada Germany France USA ROW Belarus Canada Russia T&T USA Source: Integer *Note data is prelminary

27 Global UAN trade is relatively stable. For now Million product tons per year Trinidad and Tobago* Russia* Netherlands* Global UAN trade: million product tons per year 213* million product tons per year 213* UAN exports 212 UAN exports Romania Poland* Others USA France Canada Germany United Kingdom 213 UAN imports 212 UAN imports Others Source: Integer *Note data is prelminary

28 Key market developments: ammonium sulphate

29 AS production and consumption is diverse. It is consumed primarily as a relatively cheap source of N; the value of S varies from market to market World demand for AS 213 (million tonnes) CIS South Asia Africa Australasia Central Europe Middle East Western Europe North America East Asia Latin America South East Asia Source: Integer Outlook for Ammonium Sulphate study

30 AS production and consumption is diverse. It is consumed primarily as a relatively cheap source of N; the value of S varies from market to market. World demand for AS 213 (million tonnes) World AS supply (million tonnes) CIS South Asia Africa Australasia Central Europe Middle East Western Europe North America East Asia Latin America South East Asia Africa Middle East Australasia South Asia Central Europe South East Asia Latin America FSU Western Europe North America East Asia Source: Integer Outlook for Ammonium Sulphate study

31 AS production is also highly variable by production source and grade. It is non-commoditized; sophisticated markets will only take larger white product AS capacity by grade, 212 Genuine granular Compacted granular 4% 3% Large crystals 12% Low grade 22% 6% Standard grade Total capacity in 212: 31 million tpy Source: Integer Outlook for Ammonium Sulphate study 31

32 AS production is also highly variable by production source and grade. It is non-commoditized; sophisticated markets will only take larger white product AS capacity by grade, 212 Genuine granular Compacted granular 4% 3% Large crystals 12% AS capacity by technology, 212 Gypsum Other* MMA Ni-PAL and metals 4% 4% 1% 5% Synthetic 12% 46% Low grade 22% 6% Emissions 13% Caprolactam Standard grade 15% COG Total capacity in 212: 31 million tpy * Includes ACN and cyanuric acid Source: Integer Outlook for Ammonium Sulphate study 32

33 AS pricing premium : big crystals (2-3mm) obtain a premium compared with standard grade crystals (<1mm) US$/tonne 13 Range of premiums obtained for larger crystal sizes The listed premiums are estimates based on prices in 212 and 213. The difference in premiums is widest in developed markets such as Europe, North America, Australia and New Zealand. It is lower in Asia, SE Asia, Africa and the Middle East Premiums are partly a result of the fact that there is stronger competition amongst suppliers in standard grade markets than in bigger crystals Large crystals are not available in some markets that are not included in this chart, such as FSU countries, India and China. N America W Europe E Asia (Japan) SE Asia L America (Brazil) L America (Mexico) Source: Integer Outlook for Ammonium Sulphate study

34 China is also transforming the AS market: in 212 East Asia was the biggest exporter mainly exporting to SE Asia AS trade matrix, 212 ( tonnes) Exporters Importers Africa Australasia CIS East Asia Eastern Europe Latin America Middle East North America South Asia South East Asia Western Europe Total Africa Australasia CIS East Asia eastern europe Latin America Middle East North America , , South Asia South East Asia Western Europe , , Total 2 4 1,566 3, , ,541 Source: Integer Outlook for Ammonium Sulphate study

35 Huge investment in caprolactam in China is changing the supply balance; and with it the AS market AS capacity expansion projects in China from CPL, ( tpy) Company Location CPL capacity Projected AS capacity Comment / Completion time Shandong Haili Jiangsu 2 28 On-stream in August 213 Hubei Sanning Hubei 2 32 On-stream in August 213 Luxi Chemical Group Shandong 1 16 On-stream in June 213 Fuzhou Yaolong Chemical Fujian Hebei Xuyang Chemical Hefei Dongju Chemical Shandong Juhua Group Zhejiang Shanxi Lanhua Kechuang Shanxi Inner Mongolia Qinghua Inner Mongolia Dongxin Oil & Chemical Fujian Shandong Huamao Shandong Sinopec Balin Petrochemical Fujian Sinopec Balin Petrochemical Guandong Yangquan Coal Shanxi Jiangsu Sanding Petrochemical Jiangsu Fujian Shenyuan Fujian Pingmei Shenma Henan Source: Integer Outlook for Ammonium Sulphate study 35

36 Jan-May 213 Jan-May 214 Chinese export volumes have increased substantially in 214, with volumes growing to SE Asian markets as well as Central America and Turkey Chinese AS export volumes Million tonnes Million tonnes Other Brazil Turkey Central America SE Asia..2. Jan-May 213 Jan-May 214 Source: Integer Outlook for Ammonium Sulphate study

37 AS trade: East Asia will remain the biggest exporter by 225 AS trade matrix, 225 ( tonnes) Exporters Importers Africa Australasia CIS East Asia Eastern Europe Latin America Middle East North America South Asia South East Asia Western Europe Total Africa Australasia CIS East Asia eastern europe Latin America Middle East North America , , South Asia South East Asia Western Europe , , Total , , ,538 Source: Integer Outlook for Ammonium Sulphate study

38 Key market developments: urea for emissions control/def

39 The relationship between air quality, emission standards and DEF Emission Standards PM HC CO NO x CO 2 Fuel Economy Standards Health Environment Climate Change Air Quality Standards PM particulate matter, HC hydrocarbons, CO carbon monoxide, NO x nitrogen oxide, CO 2 carbon dioxide Source: Integer DEF publications and services

40 Regulations are gradually being introduced to reduce emissions of NOx and PM Emission limits for NO x and PM in the US and Canada have been significantly lowered since the first set of standards in The chart shows the evolution of NOx and PM emissions for heavy-duty trucks. The years indicated in the chart refer to the vehicle model year and not to the calendar year Source: Integer DEF publications and services

41 Different standards can be achieved with different technology, but at a certain point, SCR technology is necessary, which consumes urea Aftertreatment technologies to reduce NO x and PM levels Exhaust Gas Recirculation EGR Lean NO x Trap LNT Diesel Oxidation Catalyst DOC Diesel Particulate Filter DPF Selective Catalytic Reduction SCR Selective Catalytic Reduction (SCR) AUS 32 (urea solution, 32.5 wt%) DEF NO, NO 2 (NO X ) from combustion Ceramic catalyst (Vanadium, Iron, Copper) N 2, H 2 O Source: Integer DEF publications and services

42 Different standards can be achieved with different technology, but at a certain point, SCR technology is necessary, which consumes urea Aftertreatment technologies to reduce NO x and PM levels European truck manufacturers choices for Euro IV and V Exhaust Gas Recirculation EGR Lean NO x Trap LNT Diesel Oxidation Catalyst DOC Diesel Particulate Filter DPF Selective Catalytic Reduction SCR 3.5 ton 16 ton Selective Catalytic Reduction (SCR) AUS 32 (urea solution, 32.5 wt%) DEF NO, NO 2 (NO X ) from combustion Ceramic catalyst (Vanadium, Iron, Copper) N 2, H 2 O In the U.S. and Canada: SCR is the best aftertreatment technology to meet EPA 27 NO x levels The Averaging, Banking and Trading (ABT) system allowed OEMs to accumulate emission credits since EPA 24 and engines between 27 and 29 did not necessarily meet standards In 21, all OEMs implemented SCR in medium and heavy-duty vehicles, except Navistar, which was still benefitting from the credit system Navistar has the last OEM to switch from EGR to SCR, with a full implementation in December 213 Source: Integer DEF publications and services

43 Emission standards are the main driver to the development of DEF markets worldwide Canada EPA 1 Jan 21 U.S. EPA 1 Jan 21 EU Euro VI Jan 213 Russia Euro IV (new models) Jan 21 Euro V new/all Jan 214/16 China China IV (new) Jul 213 Mexico EPA 4 Jul 28 JAPAN EPA EU VARIE S Brazil PROCONVE P-7 (Euro V) Jan 212 India Bharat IV (Euro IV) 11 major cities Bharat III (Euro III) nationwide Apr 21 European Union, U.S. and other developed countries have the most stringent emission standards for medium and heavy-duty vehicles Source: Integer DEF publications and services

44 The countries and regions with the strictest regulations drive the DEF market: Europe, U.S. and Canada are forecast to remain the main DEF/AdBlue consumption markets tonnes 5, 4,5 4, 3,5 AdBlue consumption, Europe DEF consumption, US+Canada ARLA 32 consumption, Brazil AdBlue consumption, Russia 3, 2,5 2, 1,5 1, Source: Integer DEF publications and services

45 DEF production process overview DEF is produced using two methods: 1. From hot urea melt: Plants that produce urea can produce DEF directly from the hot urea melt at the same location. This is the most common method to produce DEF, 15 plants in total. The product can be shipped as finished DEF to distributors and customers, or transported as a high concentration urea fluid (~5%), which is then diluted at blending plants. 2. From dry urea: Urea plants can also produce prilled urea and then ship this product to blending sites closer to a consumption market. Prilled urea is then mixed with deionized water to produce DEF. There are approximately 42 blending sites operating in North America. Urea used in DEF production is distinct from agricultural urea and needs to meet much higher quality standards in terms of purity. Source: Integer DEF publications and services

46 DEF production process overview DEF is produced using two methods: 1. From hot urea melt: Plants that produce urea can produce DEF directly from the hot urea melt at the same location. This is the most common method to produce DEF, 15 plants in total. The product can be shipped as finished DEF to distributors and customers, or transported as a high concentration urea fluid (~5%), which is then diluted at blending plants. 2. From dry urea: Urea plants can also produce prilled urea and then ship this product to blending sites closer to a consumption market. Prilled urea is then mixed with deionized water to produce DEF. There are approximately 42 blending sites operating in North America. Urea used in DEF production is distinct from agricultural urea and needs to meet much higher quality standards in terms of purity. Dry urea Urea solution Blending plant AUS 32 AUS 32 Fleets Truck stops Retail Urea plant Dealerships Distributors Source: Integer DEF publications and services

47 The future: opportunities and challenges

48 General outlook is that the market will remain supply driven: there will be significant spare capacity for several years Global nitrogen capacity utilization rate (%) Source: Integer Nitrogen service Legacy of investment over the last few years contributes to supply surplus Shale gas has inspired significant investment interest in North America China continues to build new capacity, though we are seeing a slowdown Low cost gas locations like the Middle East can still justify the investment, but cap-ex costs are escalating, driving up the incentive price Utilization expected to pick up around 217/218 as we enter the next phase of the cycle

49 In response to low gas prices in North America, numerous nitrogen projects are planned, but not all are likely to go ahead. The objective is nitrogen import displacement Agrium, Kenai, AK US nitrogen capacity expansion projects by likelihood Existing nitrogen production facility Advanced, under construction, or with few barriers to finance Dakota Gasification, Beulah, ND Magnida, American Falls, ID CHS, Jamestown, ND Northern Plains Nitrogen, Grand Forks, ND CF Industries, Port Neal, IA IFCo Iowa Fertilizer, Wever, IA New nitrogen capacity only likely after 218, or unlikely Simplot, Rock Springs, WY PotashCorp, Lima, OH Ohio Valley Resources, Spencer County, IN Nitrogen consumption by state: Geneva Nitrogen, Orem, UT BioNitrogen, Lubbock, TX Summit Power Texas Clean, Penwell, TX Agrium, Borger, TX Midwest Fertilizer Corp, Posey County, IN EuroChem, Iberville, LA Mosaic, St James Parish, LA US Nitrogen, Greene County, TN Koch Nitrogen, Enid, OK Pasadena Nitrogen, Pasadena, TX LSB, El Dorado, AR CF Industries, Donaldsonville, LA Incitec Pivot, Waggaman, LA BASF/Yara joint venture, US Gulf, location to be decided Notes: Project likelihood assessed in April 214. Source: Integer

50 The US imports around 1 million tons of N, primarily as ammonia, urea and UAN. There are numerous ports of entry for imports, but the US Gulf Coast dominates Nitrogen production facility: Ports of entry: Canadian border imports, 212: West Great Falls, MT:.7 million tons N Midwest: Pembina, ND:.8 million tons Detroit MI.3 million tons Duluth MN:.1 million tons Total: 1.2 million tons N Nitrogen fertilizer consumption by state (thousand tons N): East Coast imports 212: Charlotte, NC:.3 Norfolk, VA:.1 Philadelphia, PA:.1 Other ports:.3 Total:.8 million tons N West Coast imports, 212: San Francisco, CA:.4 million tons Columbia-Snake, OR:.2 million tons Seattle, WA, Los Angeles (CA), San Diego (CA) and Nogales (AZ):.1 million tons Total:.7 million tons N Gulf Coast imports, 212: New Orleans, LA: 3.4 million tons Houston-Galveston, TX: 1.6 million tons Tampa, Fl: 1.5 million tons Port Arthur, TX:.3 million tons Mobile, AL:.4 million tons Total: 7.2 million tons N Source: AAPFCO, Integer

51 Conclusions and implications for Mexico

52 General outlook is that the market will remain supply driven: there will be significant spare capacity for several years. Product level dynamics will be important In the mainstream, the nitrogen business remains a commodity energy derived business Profitability is a function of low cost (cheap raw materials, high efficiency) and achieving the highest prices being close to customers. In the near term the nitrogen business will remain relatively weak compared to the period As investment starts to slow down, and some suppliers are rationalised, the market will start to balance and utilization rates will rise once more The market will remain dynamic at product level China is reshaping AS UAN and urea displacement in North America will shake up trade New industrial markets like DEF offer diversification opportunities to suppliers worldwide

53 Challenges and implications for Mexico The Mexican market is expected to continue to grow slowly but steadily. There is potential to increase fertilizer demand as crop yields rise Mexico production will remain cost competitive with gas influenced by US market prices Like in the US, there appears to be an opportunity to use relatively cheap gas to displace urea imports building new capacity or increasing utilization There are specific challenges at product level: Ammonium sulphate competition is likely to intensify as China extends its reach. Product quality may become more sophisticated. The nitrogen import substitution drive in the US will have a knock-on effect. Displaced volumes of ammonia, urea, AN and UAN from Russia, Ukraine, Europe, and Trinidad will look to adjacent markets like Mexico New niche markets like DEF offer potential diversification opportunities

54 Thank you Oliver Hatfield Director of the Fertilizer Team Integer Research /fertilizers-chemicals