WASHINGTON, July 25, 2014 – The U.S. nitrogen fertilizer market will soon reach a point of saturation, following the sharp increase in capacity in recent years as the cost of natural gas – used in fertilizer production – fell with the fracking boom.
That’s a key finding in a report from Rabobank with the title, “A Shale Tale: the Aftermath of the U.S. Nitrogen Fertilizer Boom.” The report says further capacity addition in the short term is unlikely, considering market saturation and increasing fixed and variable costs for production.
The recent rapid capacity expansion, however, could see the U.S. become self-sufficient in urea -- a key nitrogen fertilizer – as soon as 2017, according to the study. In the long term, further increases in U.S. nitrogen fertilizer capacity should not be ruled out.
“Lower natural gas costs meant U.S. fertilizer producers were able to realize their dream of converting low cost inputs into higher priced outputs,” Rabobank analyst, Suzanne Pera said in a news release. “As a result, the U.S. is set to move away from being a net importer of urea and is en route to self-sufficiency, which is set to have sizeable impact on global urea markets.”
The report outlines production cost challenges the U.S. nitrogen fertilizer industry is facing. It notes that the recent surge in availability of cheap natural gas may be offset by exports of liquefied natural gas (LNG) as the U.S. moves toward shipping part of its shale gas reserves to Europe and other regions.
“Disappointing returns on investments in shale exploration could also lead to a decrease in supply and put upward price pressure on natural gas prices in the short to medium term,” Rabobank said. Prices had already been pushed to record highs by the long cold winter of 2013-2014.
Higher construction costs are providing another challenge, as costs for engineering and procurement rise, according to the study. Investors for plant financing area also becoming harder to find as nitrogen fertilizer prices are pressured as a result of increased capacity supply outweighing global demand.
The report notes that nitrogen fertilizer capacity that is due to come online will first feed into domestic demand, meaning that the U.S. could potentially reach self-sufficiency in urea by 2017. And if U.S. demand for granular urea imports starts to fade, producers will be forced to look for other destination markets such as Europe.
“Further capacity expansions in nitrogen fertilizers in the longer term in the U.S. cannot be ruled out,” Rabobank said. “Even when U.S. oversupply in the medium term continues to put pressure on nitrogen fertilizer prices, producers there can still incur lower fertilizer prices and make a return on invested capacities.”
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