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Fertilizer rising

Blame high natural gas prices for the recent wave of fertilizer company bankruptcies, buyouts and reorganizations. Though only about 2% of all natural gas used in the U.S. is used in the production of nitrogen fertilizer, fertilizer industry figures show that natural gas accounts for 70 to 90% of the cost of producing nitrogen fertilizer.

Demand for natural gas has grown rapidly over the past 20 years. Its clean-burning characteristics, plus once-low prices of $2.00 to $3.00/Mcf (Mcf = thousand cubic feet) helped encourage more than half of U.S. households to heat with natural gas. More recently, electric utility companies have aggressively augmented their generation capacity with natural-gas-powered turbines called “peakers.” These high-efficiency, low-pollution turbines can fire up quickly and produce electricity to feed the electric grid during peak use periods.

Although natural gas is abundant in the world, it is not easily or cheaply distributed. Insufficient natural gas pipeline and storage capacity to meet increasing demand has led to increasing natural gas prices in the United States. North American production has stagnated, and companies are hesitant to invest in expensive liquid natural gas terminals that would allow shipping natural gas from overseas.

Pundits and politicians say the imbalance in supply and demand in the United States is likely to get worse before it gets better. President George Bush and Federal Reserve Chairman Alan Greenspan have warned of an impending crisis in which natural gas prices could spike to as high at $10.00 to $15.00/Mcf.

Obviously, what we need is improved natural gas infrastructure. But even if we started building today, a natural gas pipeline from the abundant natural gas fields in Alaska, for example, would take years, perhaps a decade, to complete.

Today, the price of natural gas fluctuates around $6.00/Mcf. That has proven too high for many domestic fertilizer producers, which have had to cut back capacity or close down entirely. Meanwhile, the price of natural gas in places such as Russia, Venezuela, Trinidad and the Middle East remains cheap, ranging from $0.80 to $2.00/Mcf.

As fertilizer companies merge and readjust to achieve economies of scale, they also do so with an eye toward manufacturing fertilizer in countries where natural gas is cheap and then importing it into the United States. Another option, finding domestic alternatives to natural gas, such as coal, holds promise but will be slower in coming.

Agriliance upgrades shipping

In early August, crop input company Agriliance announced it had assumed the lease and purchased the assets of River Materials at the Port of Galveston in Texas. The new facilities will bring in bulk fertilizer products manufactured by plants in Trinidad, Venezuela and other countries.

“With the Galveston port, we're enhancing our crop nutrients distribution position and capabilities across all U.S. crop nutrients markets, especially for rail shipments to western regions,” says George Thornton, Agriliance president and chief executive officer. Agriliance also anticipates that moving some shipments through Galveston will allow the company to divert some rail loads from Mississippi River terminals, thereby helping to prevent bottlenecks in normal river product movement.

Thornton says the Galveston port facility provides a number of other benefits to improve company distribution efficiencies, including year-round ability to handle and distribute product from inbound vessels, access to both the Burlington Northern and United Pacific railroads through the port facility rail yard, and unit train-loading capabilities that can service key hub plant and warehouse destinations.

Agriliance began importing bulk fertilizer in 2003 through a port in Louisiana. Expansion into Galveston is just the latest step in the company's importation of fertilizer, which it expects to increase significantly in the near term.

Bruce Vernon, Agriliance director of Heartland Crop Nutrients marketing, says that, industry-wide, much more urea has been imported over the last seven years. “The last four years have seen a very big increase in fertilizer imports,” he says. “And farmers' use has been trending toward more urea and UAN [urea ammonium nitrate], and a decrease in anhydrous ammonia.”

Vernon points out that, while more farmers are using granular forms, significantly less urea and UAN are being produced domestically. “Domestic production is still the bulk of what we sell,” he says. “It comes from plants in the Midwest, New Orleans and Canada, but domestic plants are not running at full capacity, even though fertilizer demand is high. Many are scaling back because of high natural gas prices. The past few years have seen domestic producers go bankrupt, further reducing domestic production. Consequently, production is being shifted overseas. When companies such as Terra close a stateside plant, suddenly almost half a million tons of production must come from somewhere else.”

Terra survives, buys MissChem

Terra Industries, with 2003 revenues of $1.4 billion, is a leading international producer of nitrogen products. Terra closed its nitrogen products manufacturing plant at Blytheville, AR, on May 31, 2004, putting more than 60 employees out of work. Michael Bennett, president and chairman of Terra, says the company decided to close the plant because of high natural gas costs. Terra has struggled with natural gas prices for some time. In late 2000, when natural gas prices hit an all-time high, surpassing $9.00/Mcf, the company reported that it chose to sell natural gas it had on hand rather than manufacture fertilizer with it.

“We decided to permanently close our Blytheville production plants now because of continuing high natural gas costs, the upcoming lull in off-season nitrogen markets and the likelihood that competition from imported ammonia and urea barged up the Mississippi River will make future major maintenance and capital investments at the Blytheville facility unsound,” Bennett says. “We believe that investments in our other facilities provide better prospects for returns.”

In August, the fertilizer giant moved to strengthen its position in the fertilizer import business by agreeing to buy the bankrupt Mississippi Chemical Company for roughly $270 million. Terra's stated objective in the deal will be to expand manufacturing capabilities and diversify its natural gas sources into regions of the world where natural gas costs are lower.

Included in the deal will be MissChem's 50% interest in Point Lisas Nitrogen, a joint venture with Koch Industries in Trinidad that has the capacity to make 715,000 tons of ammonia per year from low-cost natural gas. MissChem also makes nitrogen products in Yazoo City, MS, and Donaldsonville, LA, and has terminals in Houston and Donaldsonville.

Ken Nyiri, a nitrogen fertilizer analyst for British Sulphur Consultants, says the deal will strengthen Terra's 36% share of the 12-million-ton-per-year U.S. market for urea nitrogen fertilizer and give it a 23% share of a 14.5-million-ton ammonia market. Nyiri lauds the purchase as a positive move by Terra in a consolidating market that faces high natural gas feedstock costs and plant closures.

Cargill and IMC pieces form Mosaic

In the spring of 2004, Cargill Crop Nutrition and IMC Global agreed to combine their fertilizer businesses into one large publicly held company named Mosaic. On August 31, the U.S. Department of Justice approved the merger. If the deal goes through, a significant piece of privately held Cargill Corporation will go public in the form of Mosaic stock traded on the New York Stock Exchange. The other part of the equation, IMC, will roll all the assets of its extensive fertilizer business into Mosaic.

The end result promises to be the formation of a fertilizer “super company” with a global reach and annual revenues of more than $4 billion. Company officials on both sides are positioning the formation of Mosaic as an important step forward in creating a competitive, efficient fertilizer business. Cargill would become the majority shareholder, with 66.5% of Mosaic stock.

“This transaction underscores our confidence in the industry and commitment to growing the fertilizer business,” says Cargill's Chairman and CEO Warren Staley. Douglas Pertz, chairman and CEO of IMC Global, says the deal was necessary because crop nutrient companies “can remain competitive only by becoming more efficient and more global, continually driving costs lower and expanding product and service offerings to customers.”

The deal will create a worldwide powerhouse in the fertilizer industry by combining IMC Global's domestic business (5,000 employees in North America) with Cargill Crop Nutrition's strength in the international market (3,200 people in 17 countries). The combined production would represent more than 14% of global phosphate capacity and 15.5% of worldwide potash capacity, according to a joint statement.

As proposed, the new company would operate phosphate production facilities in Florida and Louisiana in the U.S. and potash production facilities in Saskatchewan, Canada, as well as in New Mexico and Michigan in the U.S. It also will be a 50% owner in Saskatchewan-based Saskferco Products, one of the world's most efficient nitrogen production facilities; have equity interests in phosphate production facilities in the key growth markets of Brazil and China; and operate key distribution facilities in 11 countries, serving customers in 33 countries.

Royster-Clark hands off to Rentech

The Royster-Clark fertilizer plant is a key supplier of nitrogen fertilizer for Illinois farmers, and has been since 1965. Within a few years, a proposed deal with a small, 23-year-old technology company called Rentech could convert the plant from using natural gas to Illinois coal. In mid-August, Rentech agreed to purchase the stock of Royster-Clark Nitrogen and thereby acquire 100% ownership of its 830-ton-per-day, natural-gas-fed nitrogen fertilizer production plant in East Dubuque, IL.

Under the terms, Rentech will pay $63 million for the business, which includes $13 million in net current assets, working capital and inventories. Rentech intends to continue to operate the plant as a natural-gas-fed nitrogen plant while converting it to a coal-fed gasification process using Illinois coal instead of expensive natural gas as its feedstock. The new and expanded gasification process will generate the synthesis gas necessary to produce nitrogen fertilizer, Fischer-Tropsch (FT) ultraclean fuels and surplus electricity. Additionally, Royster-Clark has tentatively agreed to provide sales and marketing services for all the fertilizer products produced by the facility after the transaction is completed. Rentech estimates it will take approximately three years to convert the plant from natural gas to coal.

Mark Koenig, director of investor relations for Rentech, says the technology to accomplish the task is proven and patented. Rentech's patents refine the Fischer-Tropsch process developed by Hans Fischer and Franz Tropsch in the 1920s. The process uses a mixture of hydrogen and carbon monoxide and reacts it in the presence of an iron or cobalt catalyst. Methane, synthetic gasoline and waxes, and alcohols are made, with water or carbon dioxide produced as a byproduct. An important source of the hydrogen-carbon monoxide gas mixture is the gasification of coal.

“Rentech's process combines the production of ammonia or urea with Fischer Tropsch technology,” Koenig says. “It enhances the overall process efficiencies and improves the performance of a given process plant. When producing ammonia fertilizer or clean fuels, these are commodity products, and the key to a successful project is to strive to be the low-cost producer.”

Because Rentech's proposed business promises a way to keep fertilizer production in Illinois despite high natural gas prices, the state of Illinois has provided a grant of $500,000 in matching funds for the initial development evaluation of the Royster/Rentech project. An initial study indicated that the renovated plant could produce 1,000 to 1,400 tons of ammonia by early 2008.

Fertilizer futures

Agriliance's Vernon notes that farmers, too, will have to adapt to a market more and more dependent on overseas fertilizer supply. “Farmers need to change the way they buy fertilizer because there can be significant time delays on supply,” he says. “Contracts for fertilizer out of the Middle East, Venezuela and Trinidad take a minimum of 90 days.”

Vernon advises farmers to start buying fertilizer the way they think about selling grain. “Work closely with a dealer to plan your purchase,” he says. “A knowledgeable dealer can help you utilize services such as the new online Crop Nutrients Exchange that can let you lock in the price of fertilizer 12 months in advance.”

Since June, Agriliance has been the lead market maker for fertilizer futures, taking buy and sell orders on the Chicago Mercantile Exchange to provide liquidity in trading. Vernon says the idea of fertilizer futures is catching on slowly. “Some UAN and urea are currently being traded, but not a tremendous amount yet,” he says. “Speculators haven't shown up in big numbers yet, either. To date, fertilizer futures have been used most by dealers who want to offset risk on a physical position in fertilizer.”

What is the risk on fertilizer prices? Volatility, Vernon states. “Urea was $225 per ton in July. I don't think we'll see a continued rise, but the new floor will be higher and urea will probably behave more like a commodity, with prices that rise and fall more rapidly.”

Nitrogen won't be the only nutrient affected, he says. “The U.S. has been a net exporter of phosphate, but ammonia is used to produce MAP [monoammonium phosphate] and DAP [diammonium phosphate].” Consequently, high natural gas prices could influence phosphate fertilizer prices too.

And if you are missing your friendly neighborhood fertilizer supplier, you aren't alone. Vernon points out the fertilizer distribution points are and will be fewer and farther between. “Agriliance's view is to bring product to customers when and where they need it, but larger hubs, fewer and bigger distribution centers, and 20,000- to 40,000-ton sheds will be the rule. Dealers have come to realize that, with fertilizer, the fewer times you handle it, the more efficient you become.”

U.S. nitrogen imports

In thousand short tons of material, years ending June 30
1998/99 1999/00 2000/01 2001/02 2002/03
Ammonia 4,650 4,708 6,304 5,501 7,325
Nitrogen Solutions 713 898 2,199 1,299 1,462
Ammonium Nitrate 931 982 1,076 938 1,112
Ammonium Sulfate 345 391 374 388 329
Urea 3,561 3,607 5,701 4,091 4,537
Source: The Fertilizer Institute
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