Nitrogen Results
2007 vs 2006
Highlights
- Nitrogen generated gross margin of $536.1 million, surpassing the previous record of $318.7 million set in 2005 and representing an increase of 70 percent over that in 2006.
- In Trinidad, where we have long-term, lower-cost natural gas price contracts, we generated $298.9 million in gross margin in 2007. Our North American facilities contributed $178.2 million, while our natural gas hedging program added $59.0 million.
- Strong fundamentals led to realized price increases in all major nitrogen products year over year, with the exception of ammonium nitrate. Manufactured fertilizer sales volumes increased 39 percent with higher fertilizer demand, as we had more product to sell than in 2006.
- Transportation and distribution costs declined despite the increase in sales in 2007 compared to 2006. A change in sales volumes with certain customers lowered transportation and storage requirements. North American sales volumes (which had lower transportation and distribution costs but higher freight) increased. Freight increased with higher sales, higher market freight rates and a 10 percent increase in volume of CFR urea sales.
- Cost of goods sold was negatively impacted by natural gas costs that, including our hedge, were 12 percent higher than 2006. Our hedge gains were $14.5 million lower than 2006.
Sales and Cost of Goods Sold
Total gross margin increased $220.5 million, primarily as a result of the following changes:
- Realized prices for urea were up 33 percent on strong agricultural demand, supplemented by production disruptions in the Middle East and delays in new capacity early in 2007. Realized prices for ammonia increased only 6 percent as we recovered through the year from a decline in the first quarter when high natural gas costs from the aftermath of Hurricane Katrina increased prices. Tight fundamentals that pushed ammonia prices up early in 2007, decoupling them from the price of natural gas, continued, driven by strong North American agricultural demand and low product inventories. Price increases in nitrogen solutions contributed $62.0 million to the gross margin increase for the year, as price increases were significant through the second, third and fourth quarters. These price increases were partially offset by a 9 percent decline in per-tonne realized price for ammonium nitrate prills because our primary customer contracts are impacted by natural gas prices on a time-lag basis. This negatively impacted gross margin by $14.1 million.
- Manufactured ammonia sales volumes were up 26 percent as we benefited from the strong overall demand for nitrogen, the additional tonnes available from the final stage of our Trinidad debottlenecking projects and from fewer shutdown days at Lima, despite a planned 35-day turnaround at Augusta during the fourth quarter. Manufactured urea sales volumes also increased, due in large part to significant demand for field application. Total manufactured fertilizer sales tonnes were up 39 percent on strong demand, compared to last year when US farmers were purchasing less as we believe they were anticipating lower prices. Total industrial demand remained strong, rising 15 percent from last year and representing 64 percent of manufactured nitrogen sales volumes.
- Cost of goods sold increased, negatively impacting gross margin. Our average natural gas cost was $4.30 per MMBtu, 12 percent higher than 2006. Costs associated with production start-ups last year after completion of the debottlenecking projects in Trinidad and mechanical problems at our Lima facility raised costs for ammonia and related downstream products that were not incurred in 2007. The price component of the cost of goods sold variance was higher in other products than in ammonia and urea; the cost of a planned turnaround at Augusta increased the costs of nitrogen solutions and ammonium nitrate, while higher production of nitrogen solutions from Geismar, where we purchase ammonia, further increased the relative cost for that product. Our US natural gas hedging activities contributed $59.0 million to gross margin, compared to $73.5 million last year.
2006 vs 2005
Highlights
- Rising global natural gas prices led to nitrogen production curtailments, particularly in Western Europe, and high prices overseas in 2006. With higher ocean freight also a factor, less nitrogen from Baltic and Arabian Gulf producers found its way to the US, reducing competitive pressures in North America.
- North American natural gas spot prices dropped significantly throughout 2006 compared to the high levels seen in late 2005 during the aftermath of hurricanes in the US Gulf region, which negatively affected realized prices. However, ammonia and urea prices strengthened significantly later in the year as heightened demand and tight global supply conditions led to a decoupling from US natural gas costs.
- Our Trinidad facility, which benefits from long-term, lower-cost natural gas price contracts, delivered $182.5 million (or 58 percent) of nitrogen gross margin for the year. Our US operations contributed $59.6 million in gross margin, and we gained $73.5 million from our natural gas hedges during the year.
Sales and Cost of Goods Sold
Total gross margin declined $3.1 million, primarily as a result of the following changes:
- High natural gas prices that were sustained at more than $13 per MMBtu during the fourth quarter of 2005 caused ammonia prices to climb rapidly in late 2005 and led to industry production curtailments, tightening market supply. Though North American natural gas spot prices dropped significantly during the first half of 2006, ammonia and urea prices continued to exceed 2005 levels until the third quarter. Tight global supply conditions led to nitrogen prices decoupling from gas costs through the second half of 2006, but fourth-quarter ammonia and urea prices were lower compared to the peaks reached in fourth-quarter 2005 when the aftermath of Hurricane Katrina was still affecting natural gas costs. Realized annual manufactured ammonia prices were 1 percent higher than in 2005 although manufactured urea prices were 5 percent lower. Realized prices for manufactured nitric acid and ammonium nitrate generally followed the rise in ammonia prices. Higher manufactured ammonium nitrate realized prices contributed a favorable $29.6 million to the change in gross margin as a result of our customer contracts tied to either natural gas prices or the NOLA ammonia price, but on a quarterly time-lag basis.
- Total manufactured nitrogen sales volumes declined by 3 percent. Manufactured nitrogen fertilizer sales represented the majority of this drop, down 23 percent primarily due to mechanical production problems and gas input supply constraints.
- Cost of goods sold declined on a per-tonne basis, positively contributing to the change in gross margin by $2.6 million. Higher natural gas costs earlier in 2006 curtailed production at Augusta and Lima. Mechanical problems at Lima also limited its production in the second and third quarters. Finally, reduced production at our 01 and 02 plants in Trinidad due to additional plant turnarounds related to debottlenecking projects increased costs. These were partially offset by lower natural gas costs later in the year. Natural gas costs continue to be the single most important contributor to cost of goods sold, typically representing between 75 percent and 90 percent of the cash cost of producing one tonne of ammonia. The company's total average natural gas cost, including the benefit of our hedge and lower-cost Trinidad gas contracts, was $3.83 per MMBtu, 14 percent lower than in 2005. Our US natural gas hedging activities contributed $73.5 million to gross margin, compared to $48.6 million last year.