Prices are unlikely to fall to their pre-pandemic levels as increased focus on renewables and carbon pricing pushes investment away from more polluting fossil fuels and towards gas. AME’s long term forecasts see natural gas prices in Asia around US$6/MMBtu, US$3/MMBtu in the US and US$5.50/MMBtu in Europe, a roughly 20% increase from their 2019 levels.

World LNG supply is expected to increase at a CAGR of 4.1% out to 2030, reaching 568Mt, and natural gas production and demand will continue to rise out to 2040 as developed nations move away from oil and coal fired power. Natural gas’ continued rise will continue to put cost pressure on nitrogen-based fertiliser production but increasing availability of LNG may see the development of local fertiliser production in smaller nations, rather than importing finished products.

Investment in natural gas production is at a high, with Qatar and the US investing massive capital into the development of new LNG exports, increasing the accessibility of natural gas to a wider variety of countries.

The natural gas share of the energy market is expected to grow out to 2030 before renewable power truly takes off and will remain a key part of the energy mix out to net zero in 2057 as the “least worst” fossil fuel, and least polluting fossil fuel. With an abundance of current local gas supply, Australia is well positioned to support these expansions, but increasing concerns about Australia’s long term gas reserves, expected to run dry in the late 2040s, may put a stopper on major investment in gas-reliant markets.

Oil and gas exploration will be needed in Australia to secure the future of the market. Large gas fields are waiting to be tapped in the offshore Browse Basin, Western Australia’s Canning Basin and the Northern Territory’s McArthur Basin, all of which have significant untapped reserves.

Increasing availability of natural gas and LNG will compete with the demand for natural gas to influence fertiliser pricing. Natural gas demand is currently driven by the green energy transition, and increasing energy demands globally. Ammonia production represents the largest fraction of the GHG emissions in the nitrogen fertiliser production process, and use of coal-fired energy effectively doubles GHG emissions in the production process, though coal certainly remains cheaper.

Rising natural gas use, estimated to grow roughly 2.5%pa over the long term, combined with volatile prices, may drive countries in less-carbon-strict regions to return to use of coal and oil in order to supplement their energy needs.

Fertiliser production costs can be heavily influenced by the cost of natural gas, as demonstrated in January-May 2021 throughout the US, when urea ammonium nitrate (UAN28, a complex nitrogen fertiliser) costs jumped over US$100/ton in a 3 month period, over 50% up year-on-year due to the natural gas shortage. Nitrogen fertilisers consume natural gas as both a feedstock and an energy source.

Global giant Yara estimates 80% of the gas consumed is used as feedstock for the ammonia production process, and 20% as a heating and electricity source. Easy alternatives are currently limited to alternatives for the 20% energy segment, as industrial scale green hydrogen sources are far more restricted than natural gas.

Fertiliser production is energy intensive, requiring approximately 1.2% of the global primary energy, and 1.2% of total anthropogenic greenhouse gas (GHG) emissions. It is estimated that the Haber-Bosch process used to produce ammonia from natural gas is roughly 1.34 times the theoretical minimum energy – there just isn’t that much room to improve it further.
Nitrogen fertilisers see heavy use of natural gas in the production process to form ammonium nitrate and urea and have some common ground with potential energy storage processes as ‘blue’ ammonia.

Fertilisers Around the World

Feedstock price concerns are expected to moderate throughout 2022 as the spike in gas prices declines, but di-ammonium phosphate (DAP) prices are expected to remain high until the release of China’s export restrictions due to lack of supply. Urea and MOP affordability (fertiliser price vs crop price) has been improving since 2018, but DAP remains high and has seen a decrease in affordability in 2021.

Limitations in nitrogen and phosphate fertiliser markets have lifted muriate of potash (MOP) spot prices, creating a significant divergence between spot and contract prices. This divergence is being compounded by sanctions being imposed on Belarus in August 2021 by a number of developed nations including the UK, US, Canada, and its neighbours and trade partners the EU.

Three key sectors exist when approaching fertilisers; nitrogen, in the form of ammonia or urea compounds, phosphate and potassium, collectively known as NPK fertilisers. Nitrogen fertilisers make up the bulk of global fertiliser production at 57%, followed by phosphate fertilisers (24%) and then potassium or potash fertilisers (19%).

Largely, this is due to nitrogen fertiliser’s low retention rate, needing to be reseeded each year to support crop growth, unlike phosphates and potash which are only needed primarily for crop quality. It is important to note that fertiliser content is usually measured as weight of fertiliser or weight of nutrients (urea is 46% nitrogen by weight, for example).

Increasingly, fertilisers are needed to keep a balanced diet of essential nutrients supplied to crops. Fertiliser is crucial to feeding the global population, with the Food & Agriculture Organisation of the UN estimating that yields have improved by 150% between 1961 and 2007 to 3.35mt/ha. A 2009 study of the costs of the same level of agriculture without fertiliser in Australia alone would be a loss of A$12.7bn (from A$45.1bn total), plus an approximately AU$40bn on-flow cost. In 2021, the cost would be closer to AU$56bn.

Efficiency in fertiliser consumption has been falling over the last several decades in major consumers such as China and India, but significantly improving in developed nations’ primary focus cereals, such as wheat in the US and Europe and rice in Japan.

This has largely been attributed to best-practice management and education availability but raises concerns around the impact that a growing global population and an increasingly limited space to farm. Significant impacts have been seen recently with both China and Russia limiting the exports of fertilisers until June 2022 due to food concerns.

Fertilising Australian Soil

Australian fertiliser plants supply roughly half of Australia’s fertiliser needs, and exports phosphates, primarily from Incitec Pivot’s ammonium phosphate plant in North Queensland in the form of superphosphates. Australian production of urea is insufficient for its own needs at approximately 10% of the 2Mt requirement annually. Projects in Australia are currently focused on this shortfall, with the Leigh Creek Energy’s urea plant in South Australia and Strike Energy’s Project Haber urea plant near Geraldton.

Leigh Creek intends to use underground coal gasification, a coal-to-gas conversion process, to produce synthesis gas consisting of primarily methane and hydrogen to be refined into gas and ammonia, to produce an estimated 1Mtpa of fertiliser product. Salt Lake Potash, a newly forged Australian based fertiliser producer, has entered administration under accounting firm KPMG.

The company announced a need for funds in late July to continue operation of the Lake Way potassium sulphate (SOP) processing plant. The company was unable to secure the funds to adjust its production after the first 100kt of salts were produced and was expected to start exporting standard SOP in August 2021.

Australia is a limited player in the global fertiliser market – global production of fertiliser on a nutrient basis is roughly 100Mtpa of nitrogen fertilisers (of which Australia produces 1Mt), 17Mt of phosphorus fertilisers (0.4Mt) and 31Mt of potassium fertilisers (0.2Mt), for a total of just over 1% of the global market. Australia is similarly small in the global 200Mt fertiliser trade, at 2% of total imports and 0.5% total exports. As a result, Australia’s ability to influence fertiliser production is limited in the market itself.

Increasing focus is also being put on the future of blue and green ammonia throughout Australia, and the hydrogen market will increase the availability of ammonia in Australia. Fortescue Future Industries’ investments in hydrogen electrolysis hope to generate 15Mtpa of green hydrogen by 2030, growing to 50Mt by 2040 – a drastic increase in the availability of hydrogen for ammonia production in Australia.