US eyes import duties on EU nitrogen, DEF

The US has threatened to impose a tariff of up to 100pc on EU nitrogen products.

This would include automotive grade urea, which could displace 60mn gallons (230mn litres) of DEF equivalent sent as urea liquor by fertilizer producer Yara from the EU to the US.

The United States Trade Representative (USTR) could impose import duties of up to 100pc on a wide range of products including nitrogen fertilizers sent from the EU following the dispute over EU subsidies on large civil aircraft manufacturing. The USTR held a public hearing on 5 August to review its second list of products released in July that included all mineral or chemical nitrogenous fertilizers listed under HTS 3102. This includes certain speciality nitrogen products that are not manufactured in the US, such as liquid calcium ammonium nitrate and sulphur-urea compounds, as well as automotive-grade urea (AGU) that is used to produce diesel exhaust fluid — DEF, or AdBlue.

The USTR is evaluating sanctions on EU goods, under WTO rules, in response to its claim that Airbus received unlawful subsidies from the EU to the sum of $22bn. The preliminary list of products published in April 2019 covered $21bn in EU imports. This was supplemented by an additional list of $4bn worth of goods in July that featured nitrogen products listed under HTS 3102.

US imports

US imports of nitrogen fertilizers from the EU are relatively low in volume and value.

It imported 771,000 short tons (st) in product tons (700,000 metric tonnes) of nitrogen products listed under HTS 3102 from the EU last year, which represented less than 2pc of the US nitrogen market, with a total value of $99mn. This included 186,000st of AGU, equivalent to 24pc of all US nitrogen imports from the EU, according to estimates based on customs data. Most AGU imports in 2018 were shipped in liquid form, that if converted to solid urea terms, would be equivalent to 89,000st.

The sole European exporter of automotive-grade urea to the US is Yara. Yara North America is a major player in the US DEF market with an estimated market share of 15pc. It sources AGU from some North American urea production sites, including its own in Canada, but most of its volumes are imported from its urea facilities in the EU. Yara exported the equivalent of 60mn gallons of DEF to the US in 2018, equivalent to 7pc of the US market. These shipments would be subject to the potential increased tariff being considered by the USTR.

Yara North America's vice president of corporate affairs, Gary Vogen, gave testimony to the USTR at a public hearing on August 5 on these potential tariffs. In his testimony, Vogen argued against the proposed tariff on nitrogen products for two main reasons. The first point was that it would put a "disproportionate burden on a segment of US farmers that no longer have access to [certain speciality nitrogen fertilizers]" that are "not manufactured in the US". The second was that the "value represented by the increased duties on these [nitrogen] products is negligible in relation to the larger trade dispute, [representing] only 0.64pc of the total value [$22bn]".

US DEF market impact

Yara ships AGU — mostly as 50pc aqueous urea solution — to its network of eight coastal terminals in the US, as well as one in Canada.

Given the competitive nature of the US DEF market, a tariff could displace EU imports, which are not subject to a tariff at present. This would accelerate a trend that has already been observed in the US, with liquid AGU imports representing a declining share of total DEF demand — it has fallen to 8pc in 2018 from 9.2pc in 2015.

If liquid AGU imports from the EU did decline after a tariff, these volumes could be substituted with domestically-sourced product on the east and Gulf coasts as there is sufficient surplus AGU capacity in these areas to cover the increased requirement. But on the west coast, EU imports could be replaced with imported AGU prill as domestic urea plants are mostly located in the Midwest, and rail freights may be uncompetitive.

This proposed tariff on urea has come at a crucial time for Yara, as it is in the process of evaluating an initial public offering for its industrial nitrogen business, which will include its DEF business in North America. An important part of the preliminary scope for this new business is that Yara would guarantee AGU from its urea plants in the EU, which may now be subject to a 100pc tariff in the US.

But there is still uncertainty whether urea will be included in the final list of sanctioned EU products and what duty will be attached to it — which may be 6.5pc to match the EU tariff set on US urea exports. But the most likely outcome if a tariff were imposed is that EU liquid AGU exports to the US will fall and be replaced with domestic supply.