The recent and almost unprecedented decline in energy prices has had a huge impact on the world economy. The fertilizer manufacturing industry is not immune to the effects of low oil and natural gas prices either. There is a correlation between fertilizer prices and gas prices, and this is exacerbated by the increasing competitiveness in the fertilizer market.
Shawn Rana is a seasoned Senior Executive and Consultant with 26 years of success in manufacturing, fertilizers, oil and gas, and agrichemicals. He has had numerous roles ranging from a plant manager and engineering/project manager all the way to the president and CEO of different companies in the fertilizer industry. Shawn thinks that the current global recession which could turn into a depression could lead to the shrinking of overall profitability for fertilizer manufacturers.
Fertilizer Producer Margins
When energy prices go down, that usually results in an uptick in the world economy, notes Shawn Rana. Low energy prices mean reduced cost of production which increases the profit margins for many industries. When energy prices went down in 2015, European fertilizer producers saw healthy profits as a result. This was true for all forms of fertilizer and both calcium ammonium nitrate (CAN) and ammonium nitrate (AN). However, an increase in production especially from Mideast producers who started to target South American and Asian markets more aggressively led to a decline in these profits. We might be seeing a repeat of that scenario now as energy prices hit their lowest and a glut in supply keeps fertilizer profits at a minimum, especially once transportation costs are considered and Rest of the World (ROW) sending products to America becomes less likely. However, North America is still a net importer of Nitrogen based fertilizers and this creates a great opportunity for American producers to take advantage of the low gas prices and construct new plants to meet the needs that are created by less imports coming into the USA. Trinidad has recently shut down several world scale plants and the timing for new production in the US could not be better. Especially in the heavy use regions of the Midwest USA.
Shawn Rana on Low Demand in Developing Countries
To complicate things further for fertilizer manufacturers, the past few years have seen a decrease in demand in Asian markets notably from China and India. The governments in both countries have moved toward cutting down on fertilizer imports as they ramped up local production. Other countries, such as Brazil, which are having economic problems of their own have also reduced their demand for imported fertilizer.
For most countries, other than North America, more difficulties loom on the horizon for the fertilizer industry in relation to low energy prices, warns Shawn Rana. The diminished profitability of biofuels, for example, weakened the demand for nitrogen fertilizers to grow crops such as sugarcane in Brazil used to produce ethanol. Natural gas prices are still higher in much of the world compared to the US and instead of waiting for fertilizer prices to recover before adding capacity, the smart ones start to build capacity when the market is down and become ready to fully capture the upswing in fertilizer prices that we all know is coming.