Nitrogen fertilizer production costs in the US are primed to hit historically low levels through the third quarter, potentially creating favorable margin and arbitrage opportunities during the offseason as bloated natural gas inventories depress key feedstock prices.
Estimated ammonia production costs for most US producers tied to Henry Hub natural gas prices have spent the last 12 consecutive weeks below $100/short ton (st) on sub-$2/mmBtu feedstock prices. They should benefit from sub-$3/mmBtu natural gas costs through October, based on the 7 May Nymex futures curve.
A mild winter stemmed seasonal withdrawals from natural gas storage and mitigated heating demand. US natural gas inventories exited the 2023-24 winter at the highest seasonal levels in eight years. High inventories help contain US gas prices by easing concerns about spikes in demand or supply shortfalls.
Slackened natural gas demand has continued through April and has maintained downward price pressure, even as producers curtail output. The US Energy Information Administration (EIA) said that it expects inventory growth to lag average levels in the coming months as producers cut output in response to lower prices. But inventories were still expected to exit the injection season, when gas stockpiles are replenished to meet winter heating needs, at an all-time high above 4.1 Tcf, the EIA said.
Natural gas is the primary feedstock for US ammonia producers, comprising on average 60-70pc of total production costs at current prices. Ammonia production costs have not spent this long below $100/st since May-July 2020, according to Argus data.
Ammonia is a key feedstock for urea and UAN manufacturing. Sinking feedstock ammonia costs lowers the cost floor for upgraded nitrogen alternatives and fosters favorable margin opportunities.
US producer CF Industries said during its first quarter results the energy curves between North America and Europe — with the latter a higher-cost ammonia production hub — remain wider than historical levels, creating potential arbitrage scenarios.
Ammonia production costs based on the Dutch TTF natural gas day-ahead contract, which serves as the European benchmark, have averaged more than three-times more than those tied to Henry Hub since January, according to Argus data.
"Longer term, we expect the global energy cost structure to continue to provide significant margin opportunities for our North American production network," CF chief executive Tony Will said during the company's earnings call.
