|Hmmm, here's a post on Seeking Alpha about natural gas prices, they are apparently becoming problematic in certain parts of the world for fertilizer production.|
We should all be aware of what is happening on the cost side for nitrogen fertilizer. Natural gas has gone from$1.75 to $4.75 in the US in the last year. That will cut into profits for the nitrogen producers (I have used $4.30 for my projections going forward which is a lot more than the forward curve for next year, but I may have to adjust for Q4). But what is happening in Europe (and Asia) is astonishing. In the same period, natural gas has gone from $2 to over $18.
To give some perspective to this, $18 gas means that $860 worth of gas goes into a ton of ammonia (current price about $665 in the corn belt). That does not include any labor or capital or maintenance costs. For UAN, it takes $375 worth of gas to make a ton, again with no other expenses. What that means is that nitrogen fertilizer made in Europe (or Asia from gas) is now done at a huge loss. To what extent they will start shutting down production is not something that I can judge, but economically they should shut it all down.
China has always been the marginal producer of nitrogen fertilizer, but they make it mostly from coal (which is very expensive there). Those producers still need an extremely high price to keep producing, but that price is now less than the price in Europe.
Bottom line is that while I have focused on the demand for NH3 and UAN, the supply side is at least as important. And the supply is going to start contracting without much higher prices. Very scary if you are a farmer, but really good for CVR owners.