Fertilizer Matters: EP16- Ammonia – New capacity, price outlook, trade flows

Ruth: Hello and welcome to another episode of "Fertilizer Matters." I'm Ruth Sharpe, ammonia editor at Argus. And in this episode, we're going to focus on the ammonia market and discuss some key factors driving sentiment globally, particularly regarding the progress of some significant new capacity additions this year and how it could impact trade routes in the second half of 2024. To help me break this down, I have asked my colleague Sophie Mason to join me. Sophie manages Argus's ammonia and urea analytics and consulting services. Hi, Sophie, and thank you for joining me.

Sophie: Thank you for having me.

Ruth: Let's kick things off. We've both had a relatively busy Q2. I think there's been a lot of events and conferences going on, and I know both of us were out at the annual IFA conference in Singapore as well, weren't we? How did you find IFA and tell us about any other travel you've done?

Sophie: IFA was great, thank you. Travel for this year for me has been relatively, I guess, limited so far. It's picking up, though. I did get to visit our office out in Mumbai just before Singapore, which was really great. So, we're expanding our fertilizer coverage there. Feedback from the market suggests that it's very much appreciated, which is good. And then, of course, we came to Singapore, and we kicked it off with the EXMAR ammonia boat party, which was good fun. I would say that conversation was a little less fraught than it has been in previous years. It seems as though the ammonia market has settled somewhat following the events of the last few years, so the gas crisis in Europe and, of course, the Russia-Ukraine situation. Really, it feels like the two questions that everyone's asking is centered on the Taman export terminal projects and new capacity with Gulf Coast Ammonia wondering when that's going to come on, I think particularly as we've had a number of outages dotted about this year, which have had quite an impact on the market. So, people really seeking out that new supply to hopefully reduce some of the volatility that we've seen in the market. And, of course, everyone discussing the Red Sea and how long that might be going on for. But I think they were the key themes throughout the...

Ruth: I agree. I think particularly from IFA and some of the other events, I went out to Argus's fertilizer conference in Abu Dhabi, and then a few weeks later went to Tokyo for our clean ammonia event, and then to Singapore for IFA, and then I've just been out in Houston actually a few weeks ago for our other clean ammonia event there. So, I've had this really great opportunity to check in with most parts of the market, and very much agree with everything you picked up. I think one of the other main things in the market is just the ongoing uncertainty because, obviously, there has been a lot of supply disruptions in the last few years, like you said, and the one big disruption this year for ammonia trade flows has been the issues around the Red Sea and vessels having to divert around the Cape. But interestingly, that hasn't actually translated into higher prices, but this ongoing uncertainty and potential volatility that's plagued the market over the last few years, maybe slowing traders taking firm positions. Everyone's just trying to get their contractual shipments into place and there's obviously been some demand destruction. So, there's not been a huge amount of opportunities.

But like you said, the big two topics always seem to be around the new capacity that's coming. The market's obviously been very supply-driven with not too much underlying demand changing. But the two big things, I guess, everyone's got their eyes on is when the new Gulf Coast ammonia plant comes online and if we'll see this resumption of Black Sea. I don't know what you see. I don't think there's really any firm timeline around each of these yet. We think maybe GCA might potentially be able to come online in Q3 this year. With Taman, obviously they did kind of make an official announcement that there could be something happening in June, but it looks like they might be waiting for some kind of export licenses. It's not completely clear. With this in mind, what we're looking at is big new capacity additions at some point in Q3. How do you see it, Sophie, be, particularly GCA impacting the supply and demand balance if it did come online in Q3?

Sophie: The reason people are talking about it so much is because there hasn't really been a firm timeline for either of these projects. We get these timelines, and for various reasons, the start of these projects keeps being pushed back. It feels like when we write our outlook every month, it's us waiting for these projects to come online to give us clear direction because, of course, as you say, there's so much uncertainty going around the market, especially when some of these production outages have the potential to swing the market so significantly. As it stands, we think that we may see an export cargo from Taman this month. It seems more likely than it has done in previous months. It seems as though stocks are building at the port. But as you say, it seems as though the first export cargo is going to need to wait for this export license to be granted. But for now, we are accounting for a cargo to move this month.

In terms of GCA, I think the timeline is a little less clear for us. But given the time the plant of that size to take to commission, we're probably expecting cargoes towards the end of the third quarter, maybe even the fourth quarter, and align with the time when we typically expect peak domestic demand to pick up. If we take a look at how both of those projects impact our balance, the Taman one is a little less clear for us in terms of our supply and demand balance because, of course, the capacity of the first phase of that project is quite significant. There were reports that suggest that the producer could export as much as the nameplate capacity of that terminal. And they certainly have the ammonia capacity to do so, and did once upon a time have that ammonia capacity to be exported to the market. But in terms of what we hear from some players, the logistics wouldn't support that much ammonia going each month. So, it's quite a big risk to our forecast, this project.

At the moment, we're only accounting for about a cargo a month in its first few months of operation. So, this year and probably into 2025 as well. And it's a situation that we're going to have to monitor closely. So, a cargo a month won't have that much of an impact on our balance, certainly not as significant as the Gulf Coast Ammonia project. But, of course, as I say, it's a big risk because trying to gather information from that project is understandably quite difficult. The Gulf Coast Ammonia project, of course, naturally is going to have a much greater impact on our balance. That's a 1.3 million tonne a year ammonia plant. So, capacity could probably export about, I think, over 80,000 tonnes a month. And when you see some of these production outages, some of these more extensive ones that are taking about 100,000 tonnes out of the market, you can quite clearly see the impact it would have. It would mitigate some of that risk quite significantly.

And, of course, when we look back to 2018, 2019 when we had quite a few projects, then commission also of a similar size, we saw it had quite a big impact on prices and sold prices very flat for quite a long time. Of course, we're not expecting the same. The ammonia market is quite different today than it was back then. And it's smaller as well because of the loss of Russian ammonia we've had there. So, the impact will be different. I mean, if we looked at this fourth quarter when we expect Gulf Coast Ammonia to come online, we are expecting still some price rises just because of the time of the year. So, peak fertiliser seasons coming into play and also the potential for higher gas prices in Europe to push up production costs there, creating a higher price floor. But we do expect it to minimize the extent to which prices could rise because of that additional ammonia in the market. And, of course, it's also likely to have quite a key impact on trade patterns. Of course, we've seen more ammonia move from east to west given the loss of Russian ammonia and the way that Middle East has reacted to replace some of that tonnage for demand in the West. But with Gulf Coast Ammonia coming online, it might mean that we see less ammonia moving from the Middle East to Morocco in particular as it takes more volumes from the Americas.

Ruth: Yeah, that's the kind of the key bit. I think when you're looking at it from a trade flow perspective, the US plant is going to feed a lot of Moroccan demand. And these voyages around the Cape, well, depending on what happens in the Red Sea, are likely to slow down perhaps, definitely by next year, I guess, once new supply agreements are reached. But a lot of it will obviously depend on timing. And like you said as well, with the volatility remark, I think I remember when we did see those big two or three capacity additions in 2018, 2019. I think in terms of volatility, I remember looking back at the price spread of August, I think it was our FOB Black Sea price. And I think over a 12-month period, the spread of it trading was about $20 throughout the whole year, which seems completely crazy, isn't it? When you see what's been happening to the price over the last few years. I guess on paper, it all points towards some downward price momentum. Like you said, the backdrop is, you know, you could see less volatility, you could see lower prices, but then you do have these high gas costs in Europe, don't you? And a lot of question marks really over what will happen to some European ammonia plants. Do you think it's possible we'll see some shutdowns maybe in Europe or in other places if the price did come down a bit?

Sophie: I'd say it's possible. We've seen over the last few years how European production has had to continue to react to the difference between gas costs and the resultant domestic production costs versus the cost of import. And naturally, it's a very difficult point to forecast. While we had expected lower gas prices this year, which would have allowed European production to run uninterrupted, of course, just like with the ammonia market, there is maintenance and unscheduled outages and unforeseen events that happen in the gas market as well, which has led to some higher gas prices there. And I think once again, we're at that point where people are starting to question whether European production needs to come down when I don't think we would have expected to be asking that question at this time of the year if we looked at it back in January.

So, even now, it's possible that maybe some producers are looking at turning down their production and might have to look to import more ammonia. But, of course, there's that interaction between the two. If they start to import more ammonia, perhaps the price of ammonia creeps up and it becomes more viable to produce again. So, I think this is why we see some producers not react instantly as they have done, I guess, in the past. And, of course, in the past, when they'd reacted very quickly, we'd seen much sharper increases in gas prices. So, while gas prices are...though they're higher, somewhat relatively more stable, it becomes less clear as to what producers are going to do. But should gas prices continue to come down, which is what we are expecting over the next couple of months, and should we see any of these production outages that are currently ongoing be delayed further, or should some demand appear that we hadn't been expecting, we could see the cost to import increase as well, which would suggest to us that we'll continue to see European producers run. But Europe is a region that we have to monitor very closely.

Ruth: It's unpredictable and uncertain. I mean, you're seeing it again at the moment, we kind of essentially should be heading into a bit of an off-season, weak pricing in the West. And you've suddenly seen the European, North West Europe price creep up again the last few weeks. And you've seen Tampa just announced for July at 4.15. That seems to be linked to a sudden buildup of outages and prompt market being sold out. Again, because of all these logistical hurdles that are happening, people are looking quite far ahead and just buying a lot further out than they normally would. And that is supporting the market quite well at the moment in terms of price. It's going to be all about timing when we see this new capacity come online and how are these other places, like in Saudi and Trinidad and North Africa and how and when they bring their production back up. But, you know, ammonia seems just a world of unscheduled outages all the time, driving sentiment. So, we'll see. Perhaps we'll have to check in again in a few months and see what's happened and see if we're any closer to getting this new capacity. I think we are out of time. Thank you very much, Sophie, for joining. That was really interesting insights.

Sophie: Thank you for having me.

Ruth: Yes. Hopefully, we'll get to do it again soon. And thank you very much for listening. We hope you've enjoyed this episode of "Fertilizer Matters," and we'll see you next time.