All,
Couple of thoughts on changing trade flows and energy while things are quiet in the fertilizer markets.
Nitrogen
Could it be that North American nitrogen producers quietly like the decision of the Federal Trade Commission? (FTC recently rejected tariff protection for UAN imports to the USA from Russia and Trinidad/Tobago)
Does this now allow them to happily export UAN, NH3, and urea over to Europe or even maybe to customers of Russia and Ukraine without that guilty feeling of exporting while tariff relief is in place?
Although publicly they expressed disappointment, I think privately they were jumping for joy. Now they are free to export any ton the US farmer does not want to anywhere in the world.
Its just MATH…..
A couple weeks ago I showed you this chart on natural gas: Update…U.S. NG(natural gas) is up close to $8 now.
55 dollars for NG in Europe vs 8 in US means nitrogen costs of production per ton look a little like this:
Urea NH3 UAN(32%)
USA $225 $300 $200
Europe $1300 $1800 $950
If you are a North American nitrogen producer or natural gas exporter you must be licking your chops!
Lets say freight from New Orleans/Tampa to Rotterdam runs about $50/ton. So If you’re a north American producer you could sell UAN for $700/ton in Europe back off $20 ton for unload fee, $50 ton for ocean freight, $20 barge to Ocean vessel fee and net $600/ton FOB NOLA(New Orleans). The first thing you ask is why not sell it for $950/ton FOB Europe…..well you will not be the only one doing this math so competition for the European business will likely take it under their cost.
Either way….you are selling UAN in North America right now for $425-$450 so anything above that number is a big win and it moves product out of America in time for spring so you can raise prices on what is left to sell to the American Farmer in the spring…….YES, I think the North American nitrogen producers are notlosing sleep about not getting tariff protection.
I would not be surprised if UAN has already been exported. Production levels of N in the USA will likely be higher than at any other time in the past trying to fill the hole left not only by Ukraine but by the entirety of the European production market.
I don’t think you need a calculator to decide if it is a good trade.
CREDIT:
Now, the obvious restriction will be the depth of that market. But with European producers restricting output because of cost not only will supplying Europe be an opportunity there will be shortages in the global supply chain all over the world.
13 million metric tons of nitrogen sales will be up for grabs as Europe idles back production. Then throw in the decision of China not to export nitrogen(5-million-ton exporter 2021) and you will see a major shift in nitrogen trade flows for the next several years.
The question that bothered me is “WHY” did China not return to the Urea export business when NOLA was trading a whopping $900/ton!!
It all comes down to ENERGY!
ENERGY and TRADE
It all comes down to energy cost. China is energy deficient and when they export UREA they are basically exporting energy…this does not make sense long term. Russia, Arab Gulf, USA, Southern Caribbean are all long energy and will fill the void left by Europe and China. This will fundamentally drive our Nitrogen costs higher in the USA as we will compete in the newly organized supply stack to gain as much market share as possible.
I still feel we will get the best deal as we are the Sams Club buyers and are logistically set up for volume and cheap freight to our endpoints, but it does not mean we live on an island. I remember the founder of MAC, Herm Geers, telling me that the semi-trucks will keep grain elevators honest as farmers can arbitrage price difference between locations within a region. Same can be said of ocean-going vessels that will equalize price differences created by war, geopolitics and energy demand.
One past example of this freight arbitrage is the fact that Russian potash can compete in North America against Canadian producers as evidenced by Canadian and American use of Russian potash for many years out of east coast terminals.
Three reason Nitrogen will move higher for next several years:
1.)Energy Policy
In the west, energy policy has been taken hostage by the thought that we can convert all fossil fuels to renewables and anyone who thinks otherwise is ANTI-EARTH, ANTI-ENVIRONMENT, or pick any other adjective that would be an ill-advised political position to stand on. You see BIG OIL is the enemy de jure right now and it is politically expedient to be for GREEN policy and almost UN-AMERICAN to be against renewables. So, capex in the traditional energy business has been scaled way back as politicians vote time after time to regulate/stifle/smother any energy expansions whether it be exploration or even lord forbid a pipeline went in. Not only have they regulated out expansion they overtly threaten traditional energy business with windfall taxes and the like. I am afraid it may take hunger or hypothermia for the west to change course on this front.
2.) Russia/Ukraine war. Well, I think Europe has found itself putting the GREEN horse before the GREEN cart. In other words, their reliance on unreliable/intermittent power that is wind and solar as Plan A in lieu of Nuclear, Gas, or Coal generation has put them in a sticky spot politicly as well as economically given Russia is squeezing price higher as they know they are the only easy option for Europe this winter when it gets cold.
3.) China Policy
China has argued that they are curtailing nitrogen exports as an initiative towards cleaner air, but I have read that it is simply a choice to keep lights on or sell urea for export. Exporting energy vs population unrest is an easy choice for the CCP.
So, given China’s decision to stay out of Energy (nitrogen) export business, European policy error on their energy mix and timing, and fundamentally a lack of support for any traditional energy expansion in North America we are going to pay the price as an industry for higher N costs for the next few years. Likely this will spill over and provide support for P and K markets as well.
If you have been following my charts over the past many years you will recall that the long-term trend for Nitrogen has been lower but given factors noted above, Obviously, this trend has changed…see below:
There will be volatility. It will not be a straight line up. There will be air pockets that will offer a drop in price or a favorable spread. Knowing when to buy inputs vs your outputs is where MAC can help. If you follow our affordability charts, they will signal you when opportunity knocks.
Please feel free to contact me for updated charts anytime you’re thinking about it. It is as simple as sending an email!
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John
John Ezinga
VP-Agronomy
Michigan Agricultural Commodities, Inc.
PO 195 Middleton MI , 48856