Europe’s ammonia market hit by rising gas prices

Europe’s ammonia market is coming under renewed pressure as natural gas prices climb to their highest levels since 2022. Low gas inventories, strong competition for LNG cargoes from Asia, supply disruptions and geopolitical uncertainty are creating a challenging environment ahead of winter. For ammonia producers, the consequences are significant, with rising energy costs sharply increasing production costs and raising concerns over supply, fertilizer affordability and agricultural competitiveness.

Rising Gas Prices Drive Production Costs Higher

European gas stocks are sitting at around 70% of capacity, well below the historical average of 90% for this time of year. At the same time, LNG prices have surged above $26/MMBtu as stronger Asian demand and supply disruptions tighten the market.

For ammonia producers, where natural gas is the primary feedstock, the impact is clear. At current gas prices, baseline production costs are approaching $970/t before those additional charges are considered.

The competitiveness challenge becomes even clearer when compared with the US Gulf Coast, where ammonia production costs have been estimated at around $175/t.

European Producers Face Difficult Decisions

Higher costs are already influencing production strategy. Some producers have reduced run rates, while others are evaluating further curtailments if gas prices remain elevated. At the same time, ammonia producers have become more active in the spot market, highlighting growing interest in securing imported supply.

This matters not only for ammonia but for the wider nitrogen fertilizer sector. Any reduction in ammonia production can affect supply of downstream products such as nitrates and urea, tightening availability across the nitrogen value chain.

Imports Gain Ground as Cost Gap Widens

Current economics strongly favour imported ammonia. Delivered ammonia into Europe is available at around $675/t cfr, creating a production cost gap approaching $300/t compared with domestic manufacturing costs.

For producers with access to import infrastructure, imported ammonia is becoming an increasingly attractive option. However, companies with captive production requirements or inland facilities have less flexibility and remain more exposed to rising gas costs.

Is CBAM Making a Difference?

The Carbon Border Adjustment Mechanism (CBAM) was introduced to account for carbon intensity differences between European production and imports. Average ETS costs for northwest European ammonia producers have been estimated at around $27/t, while CBAM charges on imports range roughly $50-70/t.

While CBAM helps level the playing field, it does little to offset the much larger cost disadvantage created by expensive natural gas. Even after carbon-related charges are applied, imported ammonia is still much cheaper than domestic production.

Food Security and Fertilizer Affordability Concerns

The implications extend beyond the fertilizer industry. Reduced ammonia production could increase Europe’s dependence on imports and contribute to higher fertilizer prices.

For farmers already facing pressure from lower crop prices and challenging growing conditions, higher fertilizer costs may encourage lower application rates. That could affect crop yields at a time when drought has already created concerns across parts of Europe.

Can Decarbonisation Offer a Solution?

Decarbonisation remains an important long-term objective, but it is unlikely to solve the immediate challenges facing the ammonia market. Investments in carbon capture and storage can reduce emissions but do not remove exposure to natural gas prices, which remain the dominant driver of production costs.

Renewable ammonia offers future potential, but capacity expectations have been scaled back as fewer projects move towards commercial production. Significant investment and lower production costs will be needed before renewable ammonia can provide a meaningful alternative at scale.

Outlook: Gas Remains the Key Market Driver

As Europe enters winter, natural gas prices remain the most important factor shaping ammonia market fundamentals. The industry has shown resilience through recent geopolitical and logistical disruptions but sustained high gas prices could trigger further production curtailments across Europe.

If regional output declines, supply could tighten and Europe’s dependence on imports would increase. While additional supply from other regions may help balance the market, the direction of gas prices will continue to determine whether the ammonia market remains stable or enters another period of heightened volatility.

Argus Ammonia: The source of this analysis

The source of the analysis in this article is the Argus Ammonia price reporting service - the industry's leading source of global conventional (grey) and clean (low and zero-carbon) ammonia market intelligence.

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