Changes in Nitrogen Fertilizer Cost Positions

Dr Dimitrios Dimitriou

Agenda

Nitrogenous Fertilizer Value Chain

Drivers for Developing Nitrogenous Fertilizer Capacity

Natural Gas Prices

Oil Price Influence on Natural Gas Prices

Cost Curve at Low Oil Environment

Cost Curve at Medium Oil Environment

Cost Curve at High Oil Environment

New Natural Gas Production Locations

Summary

2

Nitrogen Fertilizers Overview

3

Fertilizer Value Chain Fertilizer Types

Type N content (%)

Ammonia 82.2 (N)

Urea 46 (N)

AN 32 - 35.5 (N)

CAN 26 – 30 (N)

UAN 28 – 32 (N)

TSP 46 (P)

MAP 11(N):48(P)

DAP 18(N):46(P)

NPK varies

Phosphate Rock

Natural Gas

Potassium Chloride

(Potash)

Dolomite

Phosphoric

Acid

Nitric

Acid

DAP

MAP

Urea

AN

CAN

UAN

NPK

Compounds

and

Bulk Blends

Ammonia

Sulphuric Acid

Source : Nexant

Raw material costs typically make up the largest proportion of a

producer’s total costs per ton of output.

4

Source : Nexant

Variable Costs

Fixed Costs

Freight &

Handling Costs

Duties

Margin

Price

Low Gas / Coal

Prices

Low Labour &

Financing Costs

Location close to

target markets

Trade within duty

free zones

Goal Maximise

Minimise

Most Influential

Factors

Producers have no influence on prices but can aim to lower costs in order to

maximise margins.

Investment decisions are typically driven by expected high achievable margins

(excl. political motivations).

Cost of

Production and

Marketing

Choices

Supply/Demand

+

=

During market upturn high cost producers generate positive margin.

5

Leader L

aggard

Leader margin

Price

All capacity operates

$/ton

Cumulative Capacity

Price Setting in Supply Limited Environment

Laggard

margin

New investment caps margin and creates long term price ceiling

Laggards set prices in demand limited environment.

6

Leader

Laggard

Leader margin

Price at margin producer’s cost

Market Demand

$/ton

Cumulative CapacityIdle Capacity

Price Setting in Demand Limited Environment

Lower cost of production will also increase a company’s competitiveness.

Global crude oil price have been rather volatile particularly in recent

history.

Brent Crude in Constant 2015 US Dollars

How are natural gas prices affected around the world?

7

0

20

40

60

80

100

120

140

1985 2001 2017

Dol

lars

per

Bar

rel

Brent Crude History Brent Crude $100/bbl Brent Crude $70/bbl Brent Crude $40/bbl

Unsurprisingly natural gas pricing mechanisms can vary

substantially from country to country.

Pricing mechanisms for natural gas vary greatly and are typically influenced by a

variety of factors:

Demand vs. supply volumes

Level of competition on demand and supply side (e.g. monopolies, oligopolies, high

competition, etc.)

Expansion of a domestic natural gas networks (transmission and distribution)

Cross-boarder connectivity of natural gas grids possibility to purchase from and sell into

other national natural gas markets

Governmental influence on the market

Regulation

Existence of trading hubs

Although there are a many different gas pricing mechanisms and consequently

different gas price levels the three basic concepts include:

Government controlled / fixed price

Pricing formulae (often with link to oil prices)

Free trade (large degree of independence from oil prices)

8

Volatility in crude oil prices has different effects on individual

pricing mechanisms.

Government controlled / fixed price Little to no effect

Pricing formulae (often with link to oil price) Medium to high effect depending on

individual formulae

Free trade – low to medium effect depending on energy mix structure and energy /

feedstock substitution options

Pricing mechanisms (and levels) in individual countries can also change for various

reasons:

US & WE – move towards free (hub) trade of natural gas

Indonesia – move towards LNG netback pricing

Middle East – Step increase of fixed prices due to various factors (e.g. demand increase)

Various natural gas pipeline transition countries move to netback pricing from end-

consuming markets.

As such cost curves are dynamic and change constantly depending on natural gas

prices (and other cost factors).

9

Lack of global market and the social importance of gas leads to

different pricing mechanisms in different regions.

…

10

Regulated

Market prices at

wholesale level

Regulated

Market prices at

wholesale level

Combination of market

prices and some oil linkage

Regulated / imports

oil linked

Regulated / imports

oil linked

Regulated / imports

often market priced

North America

~$2-3/MMBtu

South America

$3-4/MMBtu

Western Europe

$6/MMBtuCIS

~$1.5-3/MMBtu

North East Asia

~$5-6/MMBtu

South East Asia

$9/MMBtu

Middle East

$1.25-2.5/MMBtu

West Africa

$0.5-1.5/MMBtu

North Africa

~$3-4/MMBtu

The concept of “stranded” gas gives rise to pricing below that of major fertilizer markets but logistics is an issue.

Source: Nexant – Strategic Business AnalysisSource : Nexant

2015

Gas price has tracked oil price in Europe, but has decoupled from

oil price in the US

European gas price is in transition, whereas U.S. gas has already decoupled from oil since 2008.

11

WE Crude Oil and Gas Prices(1990 – Q22015)

U.S. Crude Oil and Gas Prices(1990 – Q22015)

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

1990 1994 1998 2002 2006 2010 2014

Dol

lars

per

MM

BT

U

Dol

lars

per

Bar

rel

Brent CrudeNatural Gas (MMBtu)

0

2

4

6

8

10

12

14

0

20

40

60

80

100

120

140

1990 1994 1998 2002 2006 2010 2014

Dol

lars

per

MM

BT

U

Dol

lars

per

bar

rel

WTI(Dollar per Barrel)Natural Gas (HH, MMBtu)

Decoupling of U.S.

gas and oil; Impact

of Shale Gas

Source : Nexant

0

100

200

300

400

500

600

700

800

900

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20142015.1 2015.3 2016.1

Dol

lar

per

Ton

USGC,fob

NWE,c&f

Far East,c&f

Black Sea,fob

Arab Gulf,fob

Global urea prices continued to decline in the second quarter of

2016 as a result of continued oversupply.

Prices in export regions are typically lower than in import regions reflecting the cost of

freight.

Despite this, investment in nitrogen is on-going…….

12

Integrated urea cash cost margins also decreased globally due to

global oversupply and low urea prices.

Margins for the Middle East Leader (feedstock not linked to oil prices) have been

decreasing due to rise of feedcost cost and lower product prices.

The profitability gap between lowest and highest cost producers has

been slashed resulting in a flatter industry curve.13

-200

-100

0

100

200

300

400

500

600

700

800

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Dol

lars

per

ton

United States (Leader) Western Europe (Leader)Middle East China CoastalChina mine mouth

Indicative global cash cost curve on low oil based on a “typical”

plant representing the average plant in the respective global region.

At low oil environment oil the global cash cost curve is rather flat indicating lower

margins.

In a low oil price environment the US and several Middle Eastern

countries has a lower feedstock advantage.

14

Indicative global cash cost curve medium oil based on a “typical”

plant representing the average plant in the respective global region.

The steepness of the global cash cost curve increases with a higher oil price.

Gas prices in most countries still have a correlation to crude oil

prices.

15

Indicative global cash cost curve at high oil based on a “typical”

plant representing the average plant in the respective global region.

Countries with fixed gas prices or largely decoupled natural gas prices have a higher

cost advantage in a high crude oil price scenario.

An increase in oil price often does not have a strong effect on the

positioning of individual countries on the cash cost curve.

16

Competition, trade flows and cost curves will also be influenced by

new market entrants.

Nitrogenous fertilizer production and sales are often an attractive option for monetizing

natural gas reserves.

Countries with new and developing natural gas industries could potentially increase

global competition, alter trade flows and change positions of individual producers on

the cost curve.

Major new recent natural gas finds & potential new feedstock locations?

17

Summary

Competitive landscape of nitrogen industry has changed with range of production

costs narrowing as a result of lower energy prices. This makes it hard to locate

industry margins.

Cost of raw materials / natural gas is typically the largest component in determining cost of

production for nitrogenous fertilizers.

Lowering cost of production increases margins as well as enhances competitiveness.

A low oil prices scenario typically results in a flatter cost curve shrinking the competitive

advantage of low cost producers which have low degree of oil linkage.

An increase in oil price typically results in a steeper cost curve with considerable difference

in producer’s margins and competitiveness.

Potential new low cost producers in different parts of the world can alter trade flows,

increase competition and even push high cost producers out of the market.

Traditional low cost producers look out for opportunities elsewhere such as improving

operational efficiency and cost, downstream value chain optimisation.

18

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