Year in Review

Prices impacted by lower energy costs and increased supply

Nitrogen prices were pressured through most of the year by lower global energy costs and increased supply – including in North America, where several new projects began ramping up.

In ammonia, increased global supply and weaker demand for certain downstream industrial and phosphate products weighed on market fundamentals. After reaching historical lows, prices recovered late in the year on tightening supply conditions, including significant curtailments in Russia and plant turnaround and gas availability issues in other key exporting regions.

Similar to ammonia, increased global supply and reduced import demand from the US and India led to weaker urea fundamentals and prices through much of the year. Chinese exports declined by 36 percent compared to the previous year, most notably through the second half as rising energy costs, weak export economics and environmental policy changes resulted in a sharp reduction in operating rates. This reduction, combined with seasonally strong buying patterns, provided pricing support in the second half of the year.

In this environment, our nitrogen gross margin of $361 million fell short of the $706 million realized in 2015. While our cost of goods sold benefited from lower natural gas costs, the impact was more than offset by significantly weaker prices for all our products. We sold 6.4 million product tonnes during the year, up from 5.9 million tonnes sold in 2015, reflecting a full year of increased production at our expanded Lima facility.

Outlook

New capacity could impact prices in the second half

We anticipate nitrogen demand growth of approximately 2 percent in 2017. Tighter supply and seasonally strong demand are expected to support nitrogen markets early in 2017. However, we expect continued market volatility – especially in the second half of the year – as new capacity is added, trade flows adjust and production economics fluctuate.

Many completed projects in the US are just now starting to produce at commercial levels, and we expect these plants will continue to reduce offshore imports into the US. In this environment, we expect the sharp rise in pricing experienced early in 2017 could abate, although changing energy costs and urea export levels out of China will remain key variables to watch.

We anticipate modestly higher energy prices to increase the global nitrogen cost profile. While we expect US gas costs to stay advantaged, we anticipate a lower price environment could keep gross margin below 2016 levels.

NITROGEN PRICES (2016)

Graph of NITROGEN PRICES (2016)

NITROGEN PRICES (2016)

Graph of NITROGEN PRICES (2016)

NITROGEN CAPACITY ADDITIONS (2017)*

(million tonnes NH3)
Graph of NITROGEN CAPACITY ADDITIONS (2017)*

NITROGEN CAPACITY ADDITIONS (2017)*

(million tonnes NH3)
Graph of NITROGEN CAPACITY ADDITIONS (2017)*

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