Raw Input. Ammonia nourished by agriculture

Crude oil has been on a free fall. The widely tracked West Texas Intermediate (WTI) crude has lost almost 47 per cent in the last one year, and rules close to its May 2009 low of $47 a barrel.

Following suit, the price of natural gas futures contract (NG1), which is the most widely traded gas contract on the New York Mercantile Exchange, has also fallen 33 per cent to about $2.8 per million British thermal units (mmbtu) now. But despite the sharp fall in gas prices in the past year, the prices of chemicals which use gas as raw material have not declined much.

Ammonia is a classic example. The price of ammonia, a key chemical used in fertilisers, defied the downtrend in crude oil and natural gas. The Green Market Middle East Ammonia Index has risen 20 per cent over the year to January 2015.

Ammonia is a chemical manufactured using hydrocarbon sources such as natural gas, naphtha, fuel oil and coal. While ammonia has a variety of applications, it is the key nitrogen source used in fertilisers for agriculture. In many developed countries such as the US and Australia, ammonia is directly applied to improve the nitrogen content in the soil.

In addition to soil application, ammonia is used as a refrigerant gas, as fuel in rocket engines and alkaline cleanser in floor and window cleaners.

Ammonia forms the key ingredient for manufacturing a host of chemicals such as nitric acid, cyanide and other explosives such as trinitrotoluene, nitroglycerin and nitrocellulose. Though it has multiple end uses, much of the ammonia produced globally is used in agriculture — both for direct application on the field and as raw material for making fertilisers.

As a large producer of fertilisers, India accounts for almost a tenth of the global ammonia production.

The country has ammonia capacity of over 14 million tonnes and imports another two million tonnes. In India too, bulk of the ammonia produced goes into making fertilisers. Though domestic ammonia prices broadly track the international prices, currency and domestic demand too have a role to play.

Given that agriculture accounts for the bulk of ammonia’s end use, its demand and prices have shown significant linkages to agricultural output and price realisations on crops.

This is probably the reason for the widening disconnect between the prices of ammonia and its key input — gas.

Ammonia prices, which were closely tracking gas prices until early 2010, seem to have diverged from the trend observed in the price of their key raw material. For instance, in 2011, the price of gas fell by 32 per cent, from $4.4/mmbtu to about $3/mmbtu. But ammonia prices shot up by 41 per cent during this period, from $410 a tonne to $580 a tonne.

Historical data also supports the view that ammonia prices respond more to prices of agricultural commodities (which translate into better income for farmers and drive ammonia demand) rather than the price of its input (natural gas).

Consider the following trends. Between November 2008 and December 2011, gas prices almost halved, from nearly $7/mmbtu to $3.1 /mmbtu. But, the price of ammonia jumped threefold to $580 a tonne. Prices of agri commodities such as corn and wheat were on a firm wicket during this period. The price of C1 corn, the corn futures contract on the Chicago Board of Trade (CBOT), gained 71 per cent. The wheat W1 contract, the actively traded wheat future contract on CBOT, rose 13 per cent during the same period.

Likewise, even as gas price fell by almost 30 per cent between August 2014 and January 2015, following the weakness in crude oil globally (47 per cent decline), ammonia prices firmed up by 6 per cent. Corn and wheat futures have gained 13 and 4 per cent during this period.

Over the medium term, though, all the key drivers for ammonia seem to be headed down, suggesting a benign outlook for the volatile commodity. Both natural gas and oil prices are burdened by a global supply overhang. Agri-commodities, as a class, have been moderating globally on a supply glut.

Over 2014, the IMF Agricultural Raw Materials Index, a bellwether on agri-commodities, declined nearly 7 per cent. Unless these variables post a dramatic turnaround, ammonia may find it difficult to sustain its relentless gains.

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