How Lower U.S. Natural Gas Prices Are Shaping the Fertilizer Industry

Impact on Production Costs

Lower U.S. natural gas prices have significantly reduced production costs in the fertilizer industry, boosting gross margins for companies like CF Industries by millions. This cost advantage is also seen in other sectors, highlighting the broad impact of cheaper natural gas on operational efficiencies and profitability.

"These factors that decreased gross margin were partially offset by the impact of a decrease in realized natural gas costs, including the impact of realized derivatives, which increased gross margin by $99 million, and including the impact of the Waggaman acquisition completed on December 1, 2023, a 41% increase in sales volume, which increased gross margin by $39 million." --- (CF, sec filing, 2024/Q1)

"Today, about 2 thirds of our capacity is in the cost advantaged Americas, where our access to growing U. S. Natural gas and natural gas liquids production and large oil to gas spreads allows us to capture margin momentum." --- (DOW, event transcript, 2024/05/16)

"LYB's U.S. and Middle East production should continue to benefit from advantaged natural gas-based feedstock and energy costs compared to oil-based peers." --- (LYB, earning call, 2024/Q1)

"Cost of Sales and Gross Margin Cost of sales of $1,991.5 decreased 13%, or $291.3, due to lower energy cost pass-through to customers of $201, lower costs associated with sales volumes of $43, lower other costs of $28 driven by lower power costs in our merchant business, and a favorable impact from currency of $19." --- (APD, sec filing, 2024/Q2)

"The decrease in average selling prices was partially offset by a decrease in realized natural gas costs, which increased gross margin by $10 million, a 4% increase in sales volume, which increased gross margin by $4 million, and a net decrease in manufacturing, maintenance and other costs, which increased gross margin by $2 million." --- (CF, sec filing, 2024/Q1)

Capacity Changes and Expansion Plans

Fertilizer industry leaders are actively expanding capacity to meet growing demand. CF Industries highlights new nitrogen capacity and clean ammonia applications, while Dow Inc. plans to add 800,000 tonnes of capacity by mid-decade. Both companies emphasize disciplined approaches and technological advancements to align with market needs and carbon intensity requirements.

"But also because the new capacity that is currently under construction doesn't meet traditional growth of, call it, 1.5% to 2% within the nitrogen markets, let alone any new applications for clean ammonia going into either electricity generation or into marine fuels or some of the other applications that are beginning to develop." --- (CF, earning call, 2024/Q1)

"Between 2021 and the middle of the decade, we will have realized around 800,000 tonnes of additional capacity through a combination of expansions as well as operating efficiencies." --- (DOW, Investor Day, 2024/05/16)

"And then you're going to have to talk to them about what their future plans are as far as expansion." --- (MOS, earning call, 2024/Q1)

"We continue to emphasize a disciplined approach based on the return profile of new capacity, the technologies needed to meet customers' carbon intensity requirements and the global demand outlook." --- (CF, earning call, 2024/Q1)

"And to capture this increasing demand, we will bring online new capacity next year." --- (DOW, Investor Day, 2024/05/16)

Competitive Landscape Shifts

Mosaic is leveraging its extensive distribution network in Brazil and investing in its top-performing assets to maintain a competitive edge in the shifting fertilizer industry landscape.

"Bruce Bodine: We believe Mosaic has a competitive advantage in Brazil. We have a large and geographically diverse distribution network across the country." --- (MOS, earning call, 2024/Q1)

"In terms of our vision for the broader portfolio, we're continuing to invest in our competitively advantaged and best-performing assets." --- (MOS, earning call, 2024/Q1)

Pricing Strategy Adjustments

Fertilizer companies are adjusting pricing strategies by leveraging low carbon ammonia for margin advantages and responding to global structural pricing drivers. Additionally, India's expected increase in maximum retail prices to support importer economics highlights the global impact on pricing strategies.

"What that premium is? We'll make we're coming out with it in 2025. I think there's a couple layers to that as well because you not only have the 45Q premium or incentive that we're receiving for it, but as you look at European putting in carbon border adjustment mechanism, to have low carbon ammonia and be the first to do that before everyone else is doing it is going to provide us a margin advantage that's, quite frankly, going to be very similar to what the 45Q incentive is." --- (CF, conference, 2024/05/15)

"India's demand will surely exceed China's ability to supply the nation. We expect the Indian government to increase the maximum retail price to allow importer economics to work in the current global pricing environment." --- (MOS, earning call, 2024/Q1)

"And so we tend to in these conversations and others, especially with our customers focus on just the North American market, but the drivers of the pricing are structural and global." --- (CF, conference, 2024/05/15)

International Trade and Export Competitiveness

Duties have leveled the playing field, reducing unfair subsidies and injuries to the industry. Lower imports and deferred demand in Europe, along with balanced potash markets, highlight shifting trade dynamics. Pullbacks in demand across regions and significant export reductions further illustrate the evolving competitiveness in the fertilizer industry.

"So I think the duties from our perspective, have worked as intended. They are leveling the playing field and eliminating unfair subsidies that were quite honestly and proven again with the International Trade Commission earlier this year, we're causing injury to the industry." --- (MOS, earning call, 2024/Q1)

"Lower imports of urea to India, including the impacts of lower volumes taken in the recent tender, lower-than-expected deferred demand in Europe and other countries and good production from the era Gulf in North Africa all played a role." --- (CF, earning call, 2024/Q1)

"We believe the potash market is balanced. Russian and Belarusian producers are getting back to prewar and pre-sanctioned export levels, but the demand is there to absorb it, and we continue to expect near-record shipments this year." --- (MOS, earning call, 2024/Q1)

"And you've really had some pullback in demand in some areas. I would say the EU when you look at Italy, Germany, Belgium, France on this year basis and on a fertilizer both a fall in demand along with Mexico, Philippines and then there's India tender that took place where they had a tender, had 3 million tons put into the tender announced 750,000 tons of purchases with LOIs issued and then canceled that would not cancel, but cut it to 350,000 tons the traders and producers that had positions allocated towards that then had to move that into the market and got aggressive." --- (CF, earning call, 2024/Q1)

"And exports from a few years ago are down 25% from some of the high watermarks on that side, which is a significant reduction of 4 million or so tonnes out of the supply side." --- (MOS, earning call, 2024/Q1)

Environmental and Regulatory Impact

Regulatory challenges, such as the broad definition of WOTUS, increase the time and cost for compliance in the fertilizer industry. Companies like CF Industries face delays in capital expenditures due to regulatory approvals. Meanwhile, firms like Dow and Mosaic are focusing on sustainability and decarbonization to mitigate environmental impacts.

"A broad definition of WOTUS, and thus the scope of federal jurisdiction, increases the time required to identify wetlands and waterways subject to federal regulatory and permitting requirements, and the amount and type of mitigation required to compensate for impacts to jurisdictional WOTUS caused by our mining operations." --- (MOS, SEC filing, 2024/Q1)

"Planned capital expenditures are generally subject to change due to delays in regulatory approvals or permitting, unanticipated increases in cost, changes in scope and completion time, performance of third parties, delays in the receipt of equipment, adverse weather, defects in materials and workmanship, labor or material shortages, transportation constraints, acceleration or delays in the timing of the work and other unforeseen difficulties." --- (CF, SEC filing, 2024/Q1)

"This revolutionary hydrogen-fueled boiler eliminates greenhouse gas emissions in its process. Each DCC™ installation makes a substantial environmental impact." --- (DOW, press release, 2024/04/17)

""In 2023, we continued to build strategic partnerships to help amplify our impact while refining our sustainability strategy to align with core business objectives that support both the environment and our people, customers, supply chain partners, communities and shareholders." Further demonstrating its commitment to shape future agriculture leaders, Nutrien subsidiary Nutrien Ag Solutions announced a multi-year commitment of nearly $850,000 to the National FFA Organization." --- (MOS, press release, 2024/05/09)

"Helping us identify opportunities for deeper collaboration with customers than ever before. Here's how we're pushing the accelerator on growth our scientists are focused on unlocking solutions that prioritize safety and performance technologies like silicones polyurethane foams and adhesives are helping solve crucial industry challenges like battery fire protection. In line with our decarbonize and grow strategy, we're also working with partners to push the bounds of what's possible in circularity and carbon reduction." --- (DOW, event transcript, 2024/05/16)

Technological Advancements and Innovations

Technological advancements in the fertilizer industry are accelerating, with agritech innovations meeting sustainable agriculture demands (ADM). Breakthroughs in catalyst, process, and product technologies are essential (DOW), while new technologies and patents are being deployed for tailored solutions (APD). Biological products are emerging as alternatives to chemical fertilizers (Bee Vectoring Technologies). Additionally, CF Industries is focusing on reducing carbon intensity in ammonia production.

"To meet the rising demands for sustainable agriculture, agritech innovations are accelerating." --- (ADM, press release, 2024/05/17)

"of the near virgin resin quality. So we're investing in partnerships and opportunities that will change the game, but also accelerate our progress towards our Transform the Waste goal.Last but not least, breakthrough innovation in Catalyst, process and product technologies have been and will continue to be essential to our success." --- (DOW, event transcript, 2024/05/16)

"But I think today we're incredibly excited at Air Products to take that body of work, 60 years of leadership experience, technological know how patents, new technologies that we've added to our portfolio and being able to deploy the right solution for the right situation for our customers." --- (APD, conference, 2024/05/23)

"Actively pioneering this method is Bee Vectoring Technologies International Inc. (CSE:BEE) (OTCQB:BEVVF), which is emphasizing biological agricultural products ("biologicals") poised to supplant chemical pesticides and fertilizers." --- (Bee Vectoring Technologies International Inc., press release, 2024/06/04)

"We and our partners are progressing two additional FEED studies focused on technologies that would further reduce the carbon intensity of the proposed low-carbon ammonia facility, namely a FEED study evaluating autothermal reforming (ATR) ammonia production technology and a FEED study assessing the cost and viability of adding flue gas capture to the greenfield SMR ammonia facility." --- (CF Industries, sec filing, 2024/Q1)

Future Outlook and Industry Predictions

The fertilizer industry is collectively working towards a promising future, with CF Industries and Mosaic expressing positive outlooks for 2024. Despite seasonal market resets, both companies anticipate strong nitrogen demand and favorable energy spreads, maintaining cautious optimism and realistic planning for the upcoming fertilizer year.

"So, our whole industry is working towards this future that's coming, and we're going to play a vital part of it." --- (CF Industries, earning call, 2024/Q1)

"To conclude, despite the seasonal reset of the market as we transition out of North America planting season, our outlook for the year is positive." --- (Mosaic, earning call, 2024/Q1)

"Severe Cold, High Maintenance Activity Leads to Challenging Production Environment Continued Strong Cash Generation Outlook for Positive North American Spring 2024 Nitrogen Demand, Favorable Energy Spreads CF Industries Holdings, Inc. (NYSE:CF), a leading global manufacturer of hydrogen and nitrogen products, today announced results for the first quarter ended March 31, 2024." --- (CF Industries, press release, 2024/05/01)

"But as we progress through the balance of 2024, obviously, some of it should probably subdue our optimism, but it seems like we're very much moving in the right direction and the prices -- top line prices hold essentially where they are even a bit lower, your profitability should be in a very good position as we progress on a quarterly basis." --- (Mosaic, earning call, 2024/Q1)

"Usually you guys seem more constructive around this time of year. Yes, I think we are appropriately realistic in our outlook and in terms of what's happening during the we look at it from a 6 month period spring through June and then go into the reset in the new fertilizer year." --- (CF Industries, conference, 2024/05/15)