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Even as natural gas prices have remained steady in recent times, the prices of commodities that use natural gas as the key input have not followed suit. Prices of downstream products produced using natural gas have remained weak; ammonia is one such.
Natural gas is the key input that is used to manufacture ammonia. Even as the price of NG1 contract rose by nearly 40 per cent since May, ammonia’s price at Tampa has corrected by 35 per cent during the same period. From $320/tonne in May 2016, the price of ammonia (Tampa) has tumbled to $210/tonne currently. Why this disconnect between the price of raw materials and finished goods? Well, besides the cost of raw material, demand for the end product and purchasing power of consumers also have a bearing on the price of the final product.
Though ammonia is a key ingredient used to manufacture other chemicals such as nitric acid, the largest use of ammonia is in agriculture.
About 85 per cent of the ammonia produced globally is used in agriculture, either directly for application or further processed to make nitrogenous fertiliser such as urea.
Given that most of the ammonia produced worldover is used for agriculture, the prospects and price of ammonia are now closely linked to the global agricultural prospects. Hence, the raw material (natural gas) to end product (ammonia) price linkage has weakened over the last few years.
Medium-term outlookWhere is the price of ammonia headed in the medium term? According to the International Fertiliser Association, barring any major economic or policy changes, fertiliser production and demand is expected to grow at a modest 1.6 per cent annually until 2020-21. Within this, the demand for nitrogen nutrient is expected to grow at 1.2 per cent annually.
Despite large ammonia capacity reductions in China, the planned expansions in North America, Africa and Eastern Europe should keep the supply stable. Thanks to the capacity additions, global ammonia capacity is expected to reach 230 million tonnes by 2020, according to the International Fertiliser Association (IFA), implying a 10 per cent increase over 2015.
According to the IFA, excess supply is expected to continue over the next five years and this may keep the commodity’s price under check. However, a recovery in agri commodity prices, particularly corn, if that happens, can potentially aid recovery in the international price of ammonia.
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