American fertilizer industry officials say soaring natural gas prices threaten to “irreversibly cripple” the U.S. nitrogen fertilizer industry.
A recent report issued by the investigative and audit arm of the United States Congress lends credence to that claim.
It says a spike in natural gas prices in 2000-2001 forced the closure of many manufacturing plants and that same scenario could easily play out in 2003.
Canadian nitrogen fertilizer manufacturers also face rising input costs, but they are better equipped to handle those price hikes.
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“Canadian manufacturing plants are the most energy efficient in the world,” said Roger Larson, president of the Canadian Fertilizer Institute.
He doesn’t foresee any closures, which means there shouldn’t be a shortage of product on Western Canadian store shelves come spring 2004.
Agrium is one of the biggest nitrogen fertilizer producers in Western Canada. Company spokesperson Richard Downey agrees prairie farmers don’t have to worry about a lack of supply.
Western Canada is a net exporter of nitrogen fertilizer, shipping large quantities into the northern plains and Pacific Northwest regions of the U.S. Filling domestic needs is not a concern.
“There will be a supply of product,” said Downey.
But at what price?
That’s where the American situation could have an impact on Canadian growers. Global demand for nitrogen fertilizer is strong and if supply is curtailed, it could drive fertilizer prices higher.
In its report the United States General Accounting Office or GAO detailed the destruction caused by the last spike in natural gas prices, which happened in 2000-2001.
“Between January 2001 and June 2003, eight U.S. nitrogen fertilizer manufacturers permanently closed their plants and a ninth plant has not operated since 2001.”
The agency said the sharp rise in gas prices led to a 25 percent reduction in domestic nitrogen fertilizer production and to a 144 percent increase in the U.S. Gulf Port spot price for anhydrous ammonia. The GAO warned that the 2003 price spike could have similar consequences. As of June 2003 the industry was operating at 50 percent capacity.
“If gas prices in this country remain relatively high, more U.S. manufacturers are likely to curtail nitrogen production and some could permanently shut down their plants,” stated the Sept. 30 report.
Larson estimates natural gas prices have quadrupled since the late 1990s. It’s an input that accounts for 70 to 90 percent of the cash costs of producing nitrogen fertilizer.
“It’s a huge impact and it’s dramatically affecting the cost structure of fertilizer production in Canada as well as the United States,” he said.
But most Canadian plants were built in the 1980s and 1990s. They are more modern than many of their U.S. counterparts and better able to cope with higher gas prices.
There are seven “world scale” urea plants and 11 similar-sized ammonia plants operating in Canada. Only one small urea operation has closed in the last few years.
Canadian plants are “operating flat-out” at more than 90 percent of their capacity, said Larson.
Downey said that’s because worldwide demand for nitrogen fertilizer has been “very strong,” driven by a huge appetite for the product in South American countries like Brazil.
So there is high demand and a static supply.
“All farmers all over the world are facing higher nitrogen prices because things are tight,” he said.
That situation isn’t likely to change any time soon. Few new plants have been built or are scheduled to be constructed in the next two to three years.
Downey wasn’t comfortable making any long-term price projections but he anticipates the nitrogen fertilizer market will remain tight for at least six months, meaning farmers shouldn’t expect prices to drop dramatically this spring.
