Urea prices have been under pressure this year, with over-supply, record Chinese exports, uneven demand, and a strong U.S. dollar all factoring in.
The bear market for nitrogen prices is set to continue. Over the past several years, Green Markets has been tracking a large number of global ammonia/urea projects. Many of these projects will finally begin to come online as 2015 progresses, and capacity will continue to expand well into the end of the decade. These projects will lead toward lower overall global utilization rates, which should keep a lid on pricing for the foreseeable future.
The key to our continued bearish outlook is both lower global utilization levels and increased localization of production. Key importers like North America, Brazil, and India are maturing markets that are reducing their need for traded product at the same time that export availability is rising. This is compounded by Chinese over-capacity with a loose export policy.
We reiterate our bearish outlook on nitrogen pricing, and believe urea prices have a distinct possibility to drop well below the tenuous floor of Chinese production (~$240/mt FOB) in the coming years.
North American expansion has been the centerpiece of the global rise in capacity, driven by an outlook for inexpensive natural gas that has spurred global interest in investment in nitrogen capacity in the region. A longtime net importer is now poised to become self-sufficient.
Green Markets currently projects that North America is highly probable to stop importing both urea and UAN, while ammonia imports should fall by at least half. Outside of North America we are tracking ~22 high probability urea projects that will come online by the end of 2018. Capacity is set to rise in Russia, Brazil, Argentina, Saudi Arabia, Bangladesh, India, Indonesia, Vietnam, Romania, Slovakia, Mexico, Nigeria, Malaysia, Azerbaijan, and Iran.
Brazil is one of the largest importers of urea, but that market could be maturing as the economy cools. Multiple projects have been in the works for the country, although several have met with delays in the past few years.
The most advanced project is Petrobras’s Tres Lagoas with capacity of ~1.2 mln mt of urea, which was ~82 percent complete at the end of 2014. While the plant has reportedly seen contract issues, there is a high probability it could begin production this year and displace imports. Petrobras also has other projects that have met with delays, such as the Linhares plant, which could still be completed toward the end of the decade. Petrobras’s standalone ammonia plant, Uberaba, will likely start up in 2017.
India is also a major consumer, producer, and importer of urea, and imports will likely fall in the future. For the past several years the country has continually set its goal on becoming self-sufficient on product. Multiple projects and restarts continue to get suggested under ever-changing plans. In the past few years we’ve tracked up to 15 project proposals in India, although currently we see less than five with any realistic probability of getting built by the end of the decade. The biggest obstacle for India remains a source of hydrocarbons, but the recent pooling of costs, lower global oil prices (LNG linked), and the long-run potential for a TAPI (Turkmenistan-Afghanistan-Pakistan-India) gas pipeline could begin to alleviate those concerns.
It is likely that two things could happen over time that will lower imports into the India. Capacity will eventually rise, and demand could fall. The government’s strategic intentions could lead to some restarts by the end of the decade, and projects could also be located in Iran and/or Turkmenistan.
While India’s capacity increases could take much longer than anticipated, it is now more a matter of when and not if. The Indian government is also likely