Dynamic changes in the competition for fertilizer
Major changes are occurring in the U.S. fertilizer industry. One is the change in composition of crops and the more robust commodity market, which has caused an increase in fertilizer demand.
Second is the dramatic reduction in the price of natural gas, a primary input for fertilizer manufacturing. This change varies regionally and gives advantages to fertilizer plants in lower-cost natural gas states.
Another change is in competitive pressures. A number of new groups are looking to enter the industry, and some plants are looking to expand.
We analyzed the spatial competition in the U.S. fertilizer sector and tried to determine the likely future spatial distribution of production and flows of nitrogen fertilizer.
The industry has been dominated by a few major firms that will have to confront a number of new entrants in the market. There are at least 12 to 15 (some claim 25) new fertilizer plants being proposed in the U.S., with each costing about $1.5 billion or more.
This industry has a number of important structural characteristics that impact competition and conduct. Domestic manufacturers have to compete with imports, demand is volatile, and firm processing functions have high fixed and low marginal costs.
Through the years, fertilizer use has increased substantially in the U.S. and use in other countries also is expanding. Fertilizer demand varies across crops and geographically, which has important implications for spatial competition.
The expansion of corn production in the northern Plains is a major source of new demand.
Traditionally, the industry has been dominated by a few large players mainly in Oklahoma, Louisiana and Texas, and a few plants in the Midwest. The industry imported significant amounts of fertilizer to meet its needs, with nitrogen fertilizer imports amounting to 57 percent of consumption. Gulf imports are in the area of 13 million tons, mostly in the form of dry and ammonia that primarily funnel through Louisiana and Texas.
Imports and domestic prices are volatile and impact domestic plant utilization.
Urea prices in the gulf have ranged from $100 to $200 per ton in the early 2000s to a peak of more than $800 in 2008 and nearly that level again in 2012. Since then, prices have declined to the $300 level. It is important to note that, in contrast to price relationships within the U.S., import prices have little relationship to U.S. or international natural gas prices. Also, the correlation between prices in the gulf and those at export origins, such as Trinidad, Russian or Black Sea ports, are very low.