In 2012, when US Nitrogen broke ground on its new plant in Tennessee, the resurgence of the North American nitrogen industry was just beginning. Ammonia sold at high prices but, thanks to the shale gas revolution, the natural gas feedstock was cheap. As a result, profit margins were high and forecasts were rosy.
Now, it’s different. Ammonia and its derivatives don’t command high prices, which makes it a poor time to begin operating an expensive new plant – but those same low prices might make this a good time to begin construction.
Recent news regarding both completed and future projects illustrate the sometimes painful relationship between product pricing in a cyclical industry and the timing of investment decisions.
On one hand, for example, US Nitrogen has a plant “now capable of full production” that it claims it can’t afford to operate due to “market conditions.” When US Nitrogen began construction five years ago, market prices had made this look very attractive.
On the other hand, Northern Plains Nitrogen has been trying for years to begin construction on a huge plant in North Dakota, but progress stalled in 2015 when the market sank. It is now using the cyclical industry argument to encourage investors to jump in near the bottom.
US Nitrogen would be in a far stronger position if it had finished construction on schedule, or even near schedule, but its March 2014 start-up date has been dragged out over a full three, very expensive years of inadequate engineering design, questionable operational ability and management oversight, and acrimonious local opposition. There’s been so much news about the Greeneville plant that it’s hard to know where to begin. I’ll note just one recent impression: it seems that the local regulator has finally lost patience – refusing to extend permit conditions – and may now force US Nitrogen to get its act together.
Northern Plains Nitrogen is also very delayed – it was originally proposed to start-up in 2017 – but recent news is more encouraging. They are still pulling together the project financing, possibly for a 2021 start-up, and hope to attract “a more sophisticated investor who is familiar with the nitrogen industry and its cyclical nature.”
“As a farmer, I’d love to see more nitrogen, I’d love to see more competition in that market, but at the end of the day, for the next five years or so, I don’t know how that economic viability is going to look,” Weckerly [a member of the North Dakota Farm Bureau’s Board of Directors] said on Monday. “Long term, I would be bullish, but you have to get through the next five years, which I don’t think are going to be bullish.”
Larry Mackie, [Northern Plains Nitrogen’s] COO, said that means the timing is just right.
“You know why? There’s one year’s worth of engineering to do … and three years of construction,” he said. “That’s four years. Five years is perfect. The best time to build this project is right now.”
Grand Forks Herald, A ‘state nitrogen plant’? Grand Forks council member sees opportunity, 04/24/2017
Full information is in my Research Notes for both Greeneville, TN, and Grand Forks, ND.
For more analysis, see my separate article, Ammonia industry cycles and fundamentals: timing capex, in which I look at CF Industries’ earnings. The economic argument for investing in a new ammonia plant today is that ammonia prices, being cyclical, will recover from their present short-term low, but that natural gas prices, being fundamentally altered by the shale gas revolution, will stay low in the long-term.