European ammonia production remains uncompetitive

Domestic ammonia production remains uncompetitive with imports into Europe, even as European gas prices have fallen to their lowest since July 2021.

The front-month contract at the Dutch TTF — Europe's most traded gas hub — closed below €35/MWh on Wednesday for the first time since July 2021. It has fallen by around 50pc since the start of the year, and is almost 90pc below its all-time high of €319/MWh in August last year (see TTF graph).

Gas accounts for the majority of European ammonia production costs, meaning that the dramatic fall in gas prices has dragged down domestic production costs. But import prices have fallen even further, meaning it is still more economical to import ammonia than to produce it domestically.

Domestic ammonia production briefly became competitive with imports again early this year, having been uneconomical for the second half of last year. But imports have again become cheaper than domestic production since 16 March, although the gap has narrowed in recent weeks (see production vs import graph).

This has led to production curtailments in Europe in favour of imports. As of the end of April, Europe's largest ammonia producer Yara had curtailed 2.8mn t/yr — or 58pc — of its European capacity. It took its 600,000 t/yr Ferrara plant off line in late April, just three weeks after bringing it back on line following a nine-month shutdown, and is planning maintenance at its 383,000 t/yr Tertre plant in Belgium in the second quarter.

German chemicals giant BASF similarly reduced its first-quarter ammonia production, and plans to permanently close one of its ammonia plants.

Instead of trading its own output, Yara has said it will "use its global sourcing and production system to import ammonia to Europe and supply global customers where possible". Its European production facilities are located near ports, "enabling imports of raw materials like ammonia to limit production costs when European gas prices are high", Yara said.

Yara's EU plants — excluding its UK facility in Immingham — consume roughly 36mn Btu of gas per ton of ammonia produced according to Argus consulting services. This suggests that 2.8mn t/yr of idled capacity as of the end of April equates to an annual loss of just under 2.5bn m³/yr of gas consumption. And if the 42pc production rate at Yara's plants were mirrored across the entire EU's 19.6mn t/yr of production capacity, this would translate into a gas demand cut of just over 10bn m³/yr.

Weak chance of 3Q demand revival

The significant reduction in ammonia production costs is yet to stimulate much greater downstream demand for fertilisers, and seasonally low third-quarter demand makes it unlikely that there will be an uptick later this summer.

The significant fall in ammonia production costs in recent months has only spurred a small amount of additional demand in Europe, India and China.

And global fertiliser demand is normally at its lowest in the third quarter, while the US' 1.3mn t/yr Gulf Coast ammonia plant in Texas is due to come on line in July, suggesting an oversupplied market, according to Argus' latest ammonia outlook.

Ammonia demand may only pick up from around September, which is when buyers typically begin accumulating fertiliser stock for the autumn application season.

By Brendan A'Hearn

Ammonia production vs import cost $/t

TTF month 1 Jun 2021-present €/MWh