Two major mergers have been announced in the last seven days – CVR Partners with Rentech, and CF Industries with OCI.

It’s fair to say that the competitive landscape for ammonia will soon change, but you could look at both these transactions as companies running fast to stay still.

Any gain in market share caused by each merger is likely to be short-lived, because there are no less than 15 expansion projects already under construction, with more yet to get underway.

Any market share projections that fail to take these expansions into account will be short-sighted, so I’ve put together some charts, derived from my database, which I hope explain the situation.

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Today’s ammonia market

Click the charts if you want to make them bigger.

• 14 companies own
• 33 ammonia plants in North America, with an annual capacity of
• 18.76 million metric tons of ammonia
  [see Methodology]

Today, CVR Partners owns a plant in Coffeyville, KS, representing 2.2% of the market. Rentech owns a plant in East Dubuque, IL, for 1.8%.

Looking at today’s competitive landscape, its new 4.0% market share would make CVR, as it correctly claims, the fifth largest ammonia producer in North America.

CVR will fall from this lofty height very quickly – as soon as OCI starts up its Wever, IA, greenfield, which is due the end of this year. In fact, Wever may start up before the merger closes, in which case CVR will have to accept sixth place, and even that only for a matter of months. In the pie charts, I’ve highlighted some of the names to watch.

Regardless of market position, I think the CVR-Rentech merger is a smart combination.

These are two (public) subsidiaries operating in a non-core segment: CVR’s parent is an oil refiner and for Rentech’s parent “the transaction is an important step in executing our strategy to … establish Rentech as a pure-play fibre business.”

By merging, the new CVR will save costs, diversify its feedstock base (Coffeyville uses petcoke, East Dubuque uses natural gas), diversify its distribution base (the Southern plains, and the mid-corn belt), and reduce its one-plant risk (the risk that all revenue is lost if there’s a plant failure). These all seem good reasons to combine – and, as always, but especially in this expanding market, every bit of scale will help.

CF Industries currently owns 7 ammonia plants representing 37.3% of North American ammonia capacity (note: I am not including assets in Trinidad & Tobago in any of this analysis). OCI currently owns one plant in Beaumont, TX, with only 1.6% of the market.

Over the next few years, both OCI and CF will start up new world-scale ammonia plants – so you’d think their market share would be sure to increase. Not so easy.

To complicate matters, many other market participants are also working on their own expansion projects. Calculating a meaningful market share for the post-merger CF-OCI is entirely objective, depending on which projects you think will succeed.

To illustrate the situation, I’ve projected market share under three future scenarios, with and without the CF-OCI merger.

If the CF-OCI merger falls apart, CF Industries will lose market share, in every scenario, despite its expansion plans.

SCENARIO 1: the most conservative option

This scenario assumes no expansion projects will become operational except those already under construction.

• By the end of 2017,
• 17 companies (18 counting OCI) will own
• 41 ammonia plants in North America, with an annual capacity of
• 24.43 million metric tons of ammonia.

By the end of 2017, we can reasonably expect new plants to be up and running for Dyno Nobel in Waggaman, LA, and OCI in Wever, IA, each of which will exceed CVR’s post-merger output.

Additionally, new plants for Yara in Freeport, TX, (counting only its 68% equity stake of output, and assuming no delays) and LSB Industries in El Dorado, AR, will push CVR further down the pecking order.

Again, despite its two huge expansions at Donaldsonville, LA, and Port Neal, IA, CF Industries will actually lose market share if the CF-OCI merger falls apart.

If we assume the CF-OCI merger goes through – and this seems to me a highly realistic scenario – the post-merger CF will own 41.4% of North American ammonia capacity, despite becoming a UK company by 2017.

Oddly, this would mean that, at the end of 2017, Nassef Sawiris would own slightly over 6% and Bill Gates something more than 2% of the total North American ammonia capacity. To put that in perspective, Charles and David Koch would each own roughly 4.8%, as far as I can tell.

This chart could be misleading: you might think Mosaic had become a minor player in the fertilizer market, with only 2.4% of the ammonia production capacity, but they will be purchasing huge amounts of ammonia from CF’s new plant (they deemed this more advantageous than building their own brownfield at Faustina, LA), and you’d be overlooking their dominance in the phosphate market, which I’m not analysing here.

It’s also important to view the ammonia market participants within their target segments. The industrial blasting agent producers aren’t necessarily competing with the nylon producers, for example.

Additionally, much of the new ammonia capacity will be consumed by its owners: new plants for Simplot in Rock Springs, WY, BASF in Freeport, TX, US Nitrogen in Greeneville, TN, LSB Industries in El Dorado, AR, and Dyno Nobel in Waggaman, LA are all, to a great extent, supplying themselves.

These new plants may not be flooding the market with salable ammonia, but nor will these newly self-sufficient companies be buying ammonia on the market like before.

SCENARIO 2: my personal projections

This scenario assumes that all projects I presently deem “Likely” will become operational, but none of the others will.

• By the end of 2019,
• 20 companies (21 counting OCI) will own
• 44 ammonia plants in North America, with an annual capacity of
• 26.54 million metric tons of ammonia.

Primarily, the difference in this scenario is that the CHS plant in Spiritwood, ND, would be operating by 2019 – my opinion, despite their challenges. [Update: As I wrote those words, CHS announced it was canceling the Spiritwood plant.]

Even if CHS fails, there are exactly a dozen other world-scale ammonia plants currently in various stages of pre-construction development. My guess is that some of these will succeed. In other words, more capacity will become operational between now and 2019 than is presently under construction.

In this scenario, which I think is likely, the post-merger CVR is pushed all the way down the ranks to tenth largest ammonia producer.

CF Industries, if its merger fails, begins to lose significant market share – or, if its merger succeeds, retains its position despite all the new tons on the market.

I believe that, from CF Industries’ perspective, the difference between a 37.3% market share today and a 38.1% market share in 2019 is marginal at best – which is why I characterize the OCI merger as running fast to stay still.

However, in 2019, the difference between a 38.1% market share with the merger and a 33.5% market share without the merger is more dramatic. I’d suggest that CF needs this merger.

CF Industries is not alone in needing to build market share: the big losers in this scenario – which, again, I think is likely – are Agrium (11.9% in 2019, down from 16.8% today) and Koch Industries (10.4% in 2019, down from 13.3% today).

Agrium’s dwindling position surprises me. They seem content with their fate, having cancelled more potential expansion projects than any other company: a greenfield in the Midwest, an expansion at Redwater, AB, and – just this week – 145,000 extra tons of ammonia at Borger, TX, “cancelled to minimize project risk.” The only potential project they still have in play is the restart of the Kenai, AL, plant – but it’s been a long time since I heard news of that.

SCENARIO 3: utterly implausible

This scenario assumes that every active expansion project now in play becomes operational (this will NOT happen).

I find this scenario informative because it illustrates the maximum potential market dilution or, for some companies, the worst case scenario.

• By the end of 2021,
• 35 companies (36 counting OCI) will own
• 64 ammonia plants in North America, with an annual capacity of
• 37.84 million metric tons of ammonia.

I like this scenario, for all its implausibility, as I’m always partial to the underdogs.

This would be an entirely different competitive landscape in 2021. CF Industries would see its market share drop all the way down to 23.5%, or 26.7% with the OCI merger.

CVR would go from being the fifth biggest ammonia producer all the way down to the twentieth.

Farmers’ co-ops would become major producers, owning 9.8% of the total North American ammonia capacity, counting CHS in Spiritwood, ND, with its stake in TCEP’s plant in Penwell, TX, Northern Plains Nitrogen in Grand Forks, ND, IFFCO / La Coop Federe in Becancour, QB, and Farmers of North America in Belle Plaine, SK.

Foreign investors would own huge chunks of the competitive landscape by 2021 in this scenario, including Russia in Edgard, LA, India in Killona, LA, Pakistan in Mt Vernon, IN, Lithuania in Pollock, LA, and Egypt/Kuwait (possibly) in American Falls, ID. And who knows how many of the projects rumored to have Chinese investors will make any headway: Wallaceburg, ON, Rockport, IN, and others.

Not all these projects will happen, of course, but it would only take two or three greenfield surprises to significantly dilute the competitive landscape.

And that, of course, would be great news for the mergers and acquisitions department because, after OCI and Rentech, there are precious few other realistic options for future industry consolidation.[/memberful]