Australian agriculture is starting to understand the long-term implications of the decision to export our vast reserves of natural, coal seam and shale gas as LNG, against the contrasting decision of the US to use its gas locally.
Both countries have similar gas reserves but the US is keeping its LNG local, using it to transform the nation (Global tremors for a US gas explosion, May 4).
Australian based Incitec Pivot is a major player in both the Australian and US fertiliser markets, which require large volumes of gas.
CEO James Fazzino says that exporting gas as LNG multiplies the value of gas about three or four times. Using it as a raw material for a global scale chemical industry adds 20 times the base value of the gas so the US is being much smarter.
In coming years, Incitec will be looking to erect a new ammonia plant. While no decision has been made, the availability of low cost gas in the US (plus the big US agriculture market) makes it likely that the next Incitec ammonia plant will go in the US rather than Australia.
Accordingly, the availability of low cost gas will give the US agricultural industry – a traditional Australian rival – an enormous advantage.
Through the acquisition of explosives maker Dyno Nobel in 2008, Incitec now has 14 manufacturing and distribution sites in the US, almost equal to its Australian footprint.
Ammonia is very energy intensive and it represents about 1 per cent of the world’s total energy demand. Most of that ammonia is used in fertilisers that increase crop yields. As such, ammonia producers need access to cheaper, cleaner energy sources. It’s not surprising therefore that China and India are already the world’s largest producers of ammonia.
What makes the US especially compelling for Incitec Pivot is the current combination of the shale gas technology development, an influx of resources companies and a mild winter, which have produced a once-in-a-generation slump in US natural gas prices.
This is providing the US with a competitive advantage in a number of industries lead by ammonia.
It wasn’t long ago that US gas prices were surging. In the lead-up to the global financial crisis, American natural gas prices were so high that the downstream ammonia costs almost doubled the price of fertiliser for farmers. Local ammonia production began to decline as cheaper overseas rivals in Trinidad and Tobago, Russia, the Ukraine and Canada, squeezed out less competitive US players.
If Australian gas becomes very expensive on the local market that what will happen in Australia.
Usually, exporting ammonia is expensive. It’s a very hazardous material – it’s used in explosives as well as fertilisers. Transportation costs are high because you need to refrigerate or pressurise ammonia to move it. So, these overseas competitors enjoyed an advantage over their US counterparts, because the US gas price was high enough to take care of their transportation costs.
But that situation has reversed and the US ammonia sector is being resurrected with cheap US gas.
The latest results from CF Industries, a Chicago-based fertiliser company, shows that even the heavens are smiling on ammonia producers.
Winter temperatures in the US were comparatively mild this year. Airport diversions and shutdowns from bad weather were lower, ski resorts reported big drops in tourist numbers thanks to the historically unconvincing snow cover and New York received only a handful of snow days after being heavily blanketed in 2010-11.
The result was Americans used their heaters less, gas storage became exhausted and prices dropped.
But what made this so advantageous for the ammonia producers is that US farmers were able to sow their crops earlier thanks to the milder climate, giving them time to plant more for the whole season. More planting means more fertiliser is required so US ammonia producers had lower input costs, as well as higher volume.
CF Industries watched its earnings rise 31 per cent in the first quarter. The US is a good place for Incitec Pivot to operate and the 2008 acquisition was a winner.