The US nitrogen market's evolution took another step inland last week with the announcement of OCI and Dakota Gasification's new marketing joint venture N-7.
N-7 will market urea, ammonia, UAN and diesel exhaust fluid (DEF) produced by the companies' plants in Iowa, North Dakota and Texas — furthering a trend of collaboration between producers in order to adapt to increased domestic production, lower prices and just-in-time demand.
Dakota Gas and OCI aim to leverage freight advantages, bolster established distribution systems and share assets through the joint venture.
The Northern Plains is the largest consumer of granular urea in the US at an estimated 2.8mn st/yr and is a growing UAN region, according to market estimates. The market has primarily relied on the river system to meet the bulk of urea needs. But a slew of new urea plants and expansions that have been brought on line since late-2016 have brought product closer to the field and lessened the need for imports.
The result has been increased competition in the key consumption region between established producers CF Industries, Koch and Nutrien, and newcomers OCI and Dakota Gas, both of whom recently finished new granular urea plants. In total, N-7 will have access to 12pc of total UAN capacity in the US, about 10pc of urea production and 9pc of ammonia between Dakota Gas' and OCI's production facilities, according to Argus estimates.
The partnership is the latest consolidation in a North American fertilizer market. Nitrogen producers Agrium and PotashCorp merged to form Nutrien earlier this year, while CF Industries partnered with CHS to broaden nitrogen distribution in 2015 and attempted previously to merge with OCI.
Leveraging logistics
The considerable amount of nitrogen fertilizer involved in N-7 should give OCI and Dakota Gas leverage to negotiate more favorable freight rates.
Ease of access to BNSF's line allows both producers to position various nitrogen products by utilizing back-haul shipments to broaden market share in the Northern Plains.
Dakota Gas estimates it meets about 15pc of regional urea demand through its new 401,500 st/yr urea unit at its Beulah facility in North Dakota, which was brought on line in late-January. N-7 opens up the region to OCI's Wever facility in Iowa and would allow both companies to expand the customer base. Argus estimates OCI can produce up to 800,000 st/yr of urea at Wever, depending on product mix.
Additionally, OCI could capture growing UAN demand in the Northern Plains through N-7. Local market participants said UAN has been the largest growing nitrogen fertilizer in the region in recent years and OCI primarily produces UAN, with an estimated capacity of 1.4mn st/yr of at Wever. Both companies indicated OCI could potentially utilize Dakota Gas' facility for future UAN storage.
N-7 would also reduce Dakota Gas' trucking costs for deliveries of anhydrous ammonia to customers within a 250-mile radius of the Beulah facility.
OCI and Dakota Gas will also look to build DEF distribution through the alliance on growing demand for the product. Dakota Gas director Ken Rutter said utilizing DEF volumes from two facilities in the Midcontinent will broaden sales to truck stops throughout the region.
"A lot of the customers for DEF don't like the risk of a single production facility, that if they're entering into contracts for a long period of time they need that secure supply," Rutter said. "By partnering with another facility, being able to say two facilities can backstop each other for the DEF sales, it allows us to reach out to those new customers."
Production checks and balances
Dakota Gas said the partnership will allow both producers to share equipment and mechanical assets to maintain stable production when unplanned outages arise.
In the event of a production outage, the producers could leverage internal logistics and position product at shared distribution sites to ensure warehouse inventories remain comfortable and avoid lost business.
One market participant said the ability to coordinate freight between three production facilities will improve product positioning and marks a new trend of collaborative effort between producers.
