In Part 1 of this article, we looked at the relationship between the world production of corn and wheat and how the three-month forward price for a crop could potentially lead the fertilizer market. Today we'll explore the raw materials and feedstocks that affect the fertilizer markets.
In general, when fertilization of crops occurs, single nutrients are not added -- they tend to be added in mixes that complement each other. The major nutrient sources used in the Fertilizer industry are as follows:
Ammonia and Urea (Nitrogen source)
Potash (Potassium source)
Phosphates (Phosphorus source)
To produce nitrogen in a form that can be used by plants, it must first be transformed into ammonia via the Haber-Bosch process. This requires a huge amount of energy -- over 1% of all manmade power is consumed in this process. Natural gas is used as a feedstock for this process so naturally the price of ammonia should follow the trends of natural gas closely.
Around 80% of ammonia produced is used in fertilizers, either directly applied or converted to other nitrogen sources before being applied. Around 160 million tons of ammonia are produced annually, of which 20 million tonnes is used in North America.
Urea is a derivative of ammonia that is used as a nitrogen source for plants, with 80% of the urea produced annually being put to this use. Urea can be broken down by bacteria present in soil to produce two molecules of ammonium and one of carbon dioxide, thus effectively giving the plants a double shot. Approximately 150 million tonnes of urea are produced annually with almost 15 million tonnes used in North America.
North America does have the advantage of lower costs of natural gas, however, due to locally available supplies. North America is large importer of ammonia, and responsible for 40% of the world trade.
Energy markets: Europe overview and recent movements
Gas has a tendency to be linked to the price of crude oil in Europe. As 30% of Europe's natural gas is exported from gas-rich Russia, the double premium price continues as. Energy prices strengthened in the month of February as geopolitical tension in the Middle East boosted prices of crude oil, and freezing temperatures experienced across continental Europe in the first weeks of the month resulted in higher demand for electricity, gas and heating oil.
The only conclusions you can draw from the information above is that energy costs are a very important part of any fertilizer process. The price of fertilizer will be affected differently depending on the local environment and potential to export base materials. As most of the base materials are heavy and need processing, it makes more sense to convert at source, even if the input costs are higher than in other regions of the world. They export the end fertilizer product. Rather than go into detail, below is a quick US-facing overview of the other major fertilizer sources.
Mined and manufactured salts of potassium are more commonly referred to as potash. Around 33 million tonnes of potash are produced annually and Canada is the world largest producer (30%) of potash. Currently around 90% of potash is used in fertilizers as a source of potassium. It is commonly converted to potassium chloride (Muriate of potash, MOP) or sulphate of potash.
Phosphate rock, a salt of phosphoric acid is a naturally occurring deposit that is mined for its high phosphorus content. Phosphate rock is converted into fertilizers such as Single Superphosphate (SSP), Triple Superphosphate (TSP), mono ammonium phosphate (MAP) and diammonium phosphate (DAP). Ammonium phosphates are popular as they are a source of both nitrogen and phosphorus. 180 million tonnes of rock phosphorus was produced in 2010, of this 29 million tonnes was used in North America; around 40% went to make ammonium phosphates.
The starting point for all these processes is phosphoric acid.
Primary Feedstock Materials for Phosphoric Acid:
- Phosphate Rocks (Secondary driver)
- Sulphuric Acid (Primary driver)
The production costs in the manufacture of phosphoric acid will only account for a smaller proportion of the end cost -- around 20-40%. For further information please refer back to an article in October 2011 -- Carbonated Commodities: An Unpleasant Taste in the Mouth.