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Nitrogen Outlook
Laura CrossSenior Analyst, Integer Research Limited
The outlook for nitrogenLaura Cross, Senior Analyst, Integer ResearchTFI Outlook and Technology Conference, Jacksonville FLWednesday 11th November, 2015
Introduction
• Setting the scene – what is driving price developments?
Introduction
• Setting the scene – what is driving price developments?
• The impact of China
Introduction
• Setting the scene – what is driving price developments?
• The impact of China
• Opportunities and outlook for North America
Setting the scene – what is driving price developments?
The impact of China
Opportunities and outlook for North America
The nitrogen market is in the throes of a supply-driven phase
050
100150200250300350400450500550600650700750800850900
2013201020052004 201520032001 201220092002 2007 2011200820062000 2014
Source: ICIS, Integer
US$/tonne Black Sea nitrogen prices
Ammonia, Black Sea FOBUrea, Black Sea FOB
UAN Black Sea FOBAN, Black Sea FOB
2012: Influx of new Chinese capacity moves the market into a supply
driven phase
8%
8%
-9%
-22%
Market weakness has been passed onto producers
Source: Company sources, Integer
Gross margin, 2014 %
-120
-100
-80
-60
-40
-20
0
20
40
60
80
Europe SE AsiaIndiaUkraine PakistanChina MENARussiaNorth America
Average
2013
2014
17%
1%
13%
15%
30%
25%
40%
33%
39%
34%
32%
45%
58%
58%
Improvements in key countries’ cost position have furthered the impact
Source: Bloomberg, BP, Integer
0
1
2
3
4
5
6
7
8
9
10
11
12
13
2015 3050 3510 25
Venezuela
Oman
Brazil
Iran
Egypt
Indonesia
US
Pakistan (Sui field)
Canada
Saudi Arabia
Ukraine
TrinidadIndia
China (gas)
China (anthracite coal)
Central and West Europe
Russia
N capacity (million tonnes N)
Algeria
Energy price (US$/MMBtu)
Asia
Europe and Eurasia
Americas
MENA
Improvements in key countries’ cost position have furthered the impact
Source: Bloomberg, BP, Integer
0
1
2
3
4
5
6
7
8
9
10
11
12
13
2015 3050 3510 25
Venezuela
Oman
Brazil
Iran
Egypt
Indonesia
US
Pakistan (Sui field)
Canada
Saudi Arabia
Ukraine
TrinidadIndia
China (gas)
China (anthracite coal)
Central and West Europe
Russia
N capacity (million tonnes N)
Algeria
Energy price (US$/MMBtu)
Asia
Europe and Eurasia
Americas
MENA
Source: Integer, EIA, IMF, APX
Recent energy price developments
US$ per MMBtu
0
2
4
6
8
10
12
14
16
18
20
22
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
Apr-14Apr-12 Oct-13Apr-13 Apr-15Oct-14 Oct-15Oct-12 Jan-13Jan-12 Jul-12 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Natural gas: Henry HubCrude Oil: WTI Natural gas: German border
Anthracite coal: China average
Global energy price developments
US$ per barrel
Index
Source: Integer, EIA, IMF, APX
Recent energy price developments
US$ per MMBtu
0
2
4
6
8
10
12
14
16
18
20
22
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
Apr-14Apr-12 Oct-13Apr-13 Apr-15Oct-14 Oct-15Oct-12 Jan-13Jan-12 Jul-12 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Natural gas: Henry HubCrude Oil: WTI Natural gas: German border
Anthracite coal: China average
Global energy price developments
US$ per barrel
Index
Source: Integer, EIA, IMF, APX
Recent energy price developments
US$ per MMBtu
0
2
4
6
8
10
12
14
16
18
20
22
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
Apr-14Apr-12 Oct-13Apr-13 Apr-15Oct-14 Oct-15Oct-12 Jan-13Jan-12 Jul-12 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Natural gas: Henry HubCrude Oil: WTI Natural gas: German border
Anthracite coal: China average
Global energy price developments
US$ per barrel
Index
Source: Integer, EIA, IMF, APX
Recent energy price developments
US$ per MMBtu
0
2
4
6
8
10
12
14
16
18
20
22
0
10
20
30
40
50
60
70
80
90
100
110
120
130
140
Apr-14Apr-12 Oct-13Apr-13 Apr-15Oct-14 Oct-15Oct-12 Jan-13Jan-12 Jul-12 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15
Natural gas: Henry HubCrude Oil: WTI Natural gas: German border
Anthracite coal: China average
Global energy price developments
US$ per barrel
Index
Where next?
Setting the scene – what is driving price developments?
The impact of China
Opportunities and outlook for North America
China’s position on the global urea cost curve
US$ per tonne ex-works
180170150110 1601400 907040 6030 80502010 130100 120
HungaryUS
Egypt
Canada ItalyVietnam
SlovakiaIndonesia
SpainBrazil
India
LithuaniaVenezuela
GermanyChina – anthracite coalLess efficient
Ukraine
BelarusAustria
Trinidad - Older
China - anthracite coal efficient
China - gas
France
Russia Argentina
RomaniaChina - bituminous coal efficient
China - bituminous coal less efficient
Trinidad - Modern
Netherlands
Australia
Algeria
QatarPakistan
SaudiIran
Nigeria OmanLibya
Poland
Production (million tonnes)
Average annual Black Sea urea price average = US$321 per tonne
Integer global urea cost curve, 2014
Source: Integer Nitrogen Cost and Profit Margin Service Issue 4Note: Typical values based on average local input costs
China’s position on the global urea cost curve
US$ per tonne ex-works
5020 180140 170130120 150110100806010 9040 70 160300
HungarySlovakiaNetherlands
China - bituminous coal less efficient
Russia
Qatar Vietnam
Poland
Ukraine
Belarus
Romania
Indonesia
China – anthracite coalLess efficient
LithuaniaTrinidad - Modern
Argentina
FranceChina - anthracite coal efficient
BrazilAustria
India
China - bituminous coal efficient
US
Italy
Trinidad - Older
Germany
Australia
Algeria
Spain
China - gas
Egypt
Canada
Pakistan
Nigeria SaudiIran
VenezuelaOman
Libya
Production (million tonnes)
Average annual Black Sea urea price average = US$321 per tonne
Integer global urea cost curve, 2014
Source: Integer Nitrogen Cost and Profit Margin Service Issue 4Note: Typical values based on average local input costs
Source: GTIS, Integer
Monthly Chinese urea exports, 2011-2015
2.2
0.0
2.0
2.4
0.6
1.0
0.2
1.2
1.4
1.6
0.8
0.4
1.8
OctAugJulMarJan JunApr MayFeb Sep Nov Dec
20152012 201420132011Million tonnes
2014 Jan-Sep exports8.0 million tonnes
Source: GTIS, Integer
Monthly Chinese urea exports, 2011-2015
2.2
0.0
2.0
2.4
0.6
1.0
0.2
1.2
1.4
1.6
0.8
0.4
1.8
OctAugJulMarJan JunApr MayFeb Sep Nov Dec
20152012 201420132011Million tonnes
2015 Jan-Sep exports9.5 million tonnes
2014 Jan-Sep exports8.0 million tonnes
Currency depreciation has furthered China’s impact
US$ per MMBtu
6.9
9
6.5
8
Jan-12
7
Jan-1405
6
Jan-16Jan-15Jan-13
6.8
7.0
6.7
6.6
6.4
6.3
6.2
0.0
10
USD/CNY
Anthracite coal: China averageUSD/CNY Exchange rate
Source: OECD, Integer
Chinese currency and energy prices
Currency depreciation has furthered China’s impact
US$ per MMBtu
6.9
9
6.5
8
Jan-12
7
Jan-1405
6
Jan-16Jan-15Jan-13
6.8
7.0
6.7
6.6
6.4
6.3
6.2
0.0
10
USD/CNY
0
20
40
60
80
100
120
140 160
140
120
60
40
100
80
20
0Jan-16Jan-15Jan-14Jan-12 Jan-13
Crude oil: BrentUSD/RUB Exchange rate
US$/bbl
Anthracite coal: China averageUSD/CNY Exchange rate
Source: OECD, Integer
USD/RUBChinese currency and energy prices Russian currency and energy prices
However, China is also caught in a cycle - margins are likely to suffer further
Source: CNFA, China Customs, GTIS, Integer Nitrogen Cost and Profit Margin Service Issue 5
US$ per tonne
Typical urea ex-works cost per tonne
0
50
100
150
200
250
300
350
NW Europe
RussiaSaudi China UkraineEgyptNorth America
Sep-15Sep-14
However, China is also caught in a cycle - margins are likely to suffer further
%
Regional comparison of nitrogen industry gross margin %
Source: CNFA, China Customs, GTIS, Integer Nitrogen Cost and Profit Margin Service Issue 5
Chinese margins unlikely to overtake the key performers
US$ per tonne
Typical urea ex-works cost per tonne
0
50
100
150
200
250
300
350
China UkraineNorth America
Saudi NW Europe
EgyptRussia
Sep-15Sep-14
-120
-100
-80
-60
-40
-20
0
20
40
60
80
North America
India MENAChina
Average
Setting the scene – what is driving price developments?
The impact of China
Opportunities and outlook for North America
Revenues have fallen year-on-year since 2012, but North America has been more sheltered than other regions
Source: Integer, company sources
0
5
10
15
20
25
30
35
40
45
50
-0.5
1.0
2.5
2.0
1.5
3.0
0.0
0.5
$7.1 billion
Q3 2014 Q4 2014Q3 2013 Q1 2014
$9.1 billion
Q1 2013Q4 2012Q2 2012Q1 2012 Q3 2012 Q4 2013
$6.4 billion
Q2 2014Q2 2013
National Fertilizer CF industriesAverage margin Yara upstream
AgriumPotashcorpSafcoTata fertilizers Limited
Eurochem
Average margin %Sample nitrogen gross profits
US$ billion
The two factors for success in the nitrogen market: costs and prices
Source: Integer
US$/tonneCombined total = average selling price
90100 100-100
130
-200
140
400
600
300
120110
500
0
100
15040
200
8060 70503020
China - Lump anthracite
UkraineChina - Powder anthracite
India
Southeast Asia
China - Natural gasLatin AmericaPakistan
EuropeMENA Russia
North AmericaChina - Bituminous coal
Sales volume (million tonnes)
Cash production costsMargin
The two factors for success in the nitrogen market: costs and prices
Source: Integer
US$/tonneCombined total = average selling price
90100 100-100
130
-200
140
400
600
300
120110
500
0
100
15040
200
8060 70503020
China - Lump anthracite
UkraineChina - Powder anthracite
India
Southeast Asia
China - Natural gasLatin AmericaPakistan
EuropeMENA Russia
North AmericaChina - Bituminous coal
Sales volume (million tonnes)
Cash production costsMargin
The two factors for success in the nitrogen market: costs and prices
Source: Integer
US$/tonneCombined total = average selling price
90100 100-100
130
-200
140
400
600
300
120110
500
0
100
15040
200
8060 70503020
China - Lump anthracite
UkraineChina - Powder anthracite
India
Southeast Asia
China - Natural gasLatin AmericaPakistan
EuropeMENA Russia
North AmericaChina - Bituminous coal
Sales volume (million tonnes)
Cash production costsMargin
The perfect recipe for investment
Investment update: it seems a conservative view on greenfield projects was best
Comparison of world scale greenfield nitrogen projects projected start up datesSponsor Location Country Ammonia capacity
(thousand tpy)Market view start-up
date in 2013Integer projected start date in
2015 where known/firmAgrigen LA US 800 NK NKAgrium Midwest US 800 2017 CancelledCHS ND US 840 2016 CancelledCronus IL US 800 2016 NKFNA SK Canada 800 NK NKIFFCO Quebec Canada 800 2017 Delayed indefinitelyMagnida ID US 800 2016 NKMidwest Fertilizer IN US 800 2016 NKND Corn Growers ND US NK 2016 NKIFCo (OCI) IA US 850 2015 2015/2016Ohio Valley IN US 800 2016 NKSCS Energy CA US NK 2017 NKSummit Power TX US 400 2017 NK
Source: Integer Nitrogen 10-year Outlook Service
Million nutrient tonnes
US supply-demand balance if we only include “committed” projects
Is there an arbitrage opportunity for North American producers to export?
+ = ?
Developments in energy markets will dictate the scale of the opportunity
Conclusions
Conclusions
• The cyclical nature of the nitrogen market will soon kick in
– High-cost capacity will begin to close at current prices,reducing oversupply
Conclusions
• The cyclical nature of the nitrogen market will soon kick in
• China is at the peak of its nitrogen cost competitiveness
– Developments in coal prices and the global economywill dictate how long Chinese producers can stay afloat
Conclusions
• The cyclical nature of the nitrogen market will soon kick in
• China is at the peak of its nitrogen cost competitiveness
• North America remains the hub of investment
– Although the scope for new capacitybeyond currently announced plans is tight
– The arbitrage potential for North American producers to export depends entirely on energy price developments, both home and away!
Industry consolidation is accelerating changing product markets
27%
Nitrates
2% DAP/MAP6%
Other7%
NPK7%
Urea21%Ammonia
27%
UAN
US nitrogen demand
DAP/MAP3%
10%22%
NPK12%
Urea
11%UAN
Other
Nitrates
43%
European nitrogen demand
And there is still room for further consolidation following recent M&A activity:
