In May 2016, Phibro announced that it was going to invest $450 million to open a half million ton per year ammonia plant in Indiana. There’s been precious little news about the project since then, but a lack of news doesn’t mean that nothing is happening.
The original announcement stated that Phibro was “targeting a mid-2018 completion date.” Perhaps this “completion” referred to financial close rather than start-up. In any case, construction has not begun but, as I understand it, both the equity and the debt are in place, and the project has now targeted a commissioning date in the fourth quarter of 2020.
Ammonia Plant Capex: less than $900 per ton ammonia annual capacity
As we’ve learned from the cost overruns across the US, new greenfield and even brownfield ammonia plants are very expensive. But that’s not what Phibro is building: it plans to convert an existing gasification plant, so the only thing to build is the ammonia synthesis loop. This avoids the need to build the entire front-end (feedstock preparation) of the plant.
I understand that Phibro’s ammonia loop will be a new build, not a second-hand asset like LSB’s El Dorado unit, although neither the technology licensor nor the EPC partner has been disclosed. In any case, Phibro’s plan to repurpose existing assets reduces the investment cost significantly, like the Yara/BASF project in Freeport, TX.
The reduced upfront investment cost (capex) has another impact: reduced ongoing operating costs (opex), because there is less debt to service.
A useful metric is the capex per ton of annual capacity. The rule of thumb used to be that a new ammonia plant would cost about $1,000 per ton of ammonia capacity; ie, a plant with an ammonia capacity of a million tons per year would cost roughly $1 billion to build. However, in the last few years, we’ve seen new ammonia plants – greenfields and brownfields – being built for twice that.
The Phibro plant will cost far less than these other projects, assuming its announced cost and capacity remain as announced, at less than $900 per ton ammonia capacity. In fact, by this metric, it will be an even cheaper plant than the Yara / BASF plant, which will end up costing roughly $910 per ton ammonia capacity.
Ammonia Feedstock Costs: is petcoke more affordable than natural gas?
Construction at West Terre Haute has not begun, and there’s no guarantee that it ever will. However, I’d note that the other proposed ammonia projects that may or may not move forward are all being developed by fertilizer market mavens, like Cronus or Midwest or EuroChem or Northern Plains Nitrogen.
The Phibro project is different: the team behind it is drawn from the talent pool of the Morgan Stanley commodities business, and it has different investment criteria.
As one of the project developers explained to me earlier today, the Phibro ammonia plant is being developed under a very simply financial condition: the project should be able to break even under any pricing scenario (like ammonia at $200 or below per ton) for an extended period of time (like two years).
This means that its cost of producing ammonia, which is mostly energy / feedstock costs and debt service, must be low enough to allow Phibro to stay in business through the most severe market downturn. I explained above how this project’s capex per ton is reduced, which lowers the debt service, so it’s notable that Phibro also expects its feedstock costs to be lower than for other ammonia producers: Phibro claims to have secured a 10 year supply of petcoke for “about 50 cents per million British thermal units,” which it equates to being “about 75 percent less than [natural] gas.”
I don’t know how Phibro is able to finance its project under these worst-case assumptions. It could be because it employs an unusually long investment horizon or, perhaps, because its additional role as a global commodities trader will provide exposure to profit margins unavailable to the regular commodity producer.
Full details are in my Research Note for West Terre Haute, IN.