How the energy-intensive industry of fertilizers and ammonia could fuel a green future

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Eklavya Gupte:

Welcome to Energy Evolution, a Platts podcast brought to you by S&P Global Energy, where we delve deep into the pivotal moments shaping our energy future. I'm your host, Eklavya Gupte, and in this episode, we're exploring a fascinating intersection between the traditional heavy industry and the clean energy transition, fertilizers. Now, you might be wondering why we're discussing fertilizers on an energy podcast. Well, the answer lies in ammonia, the backbone of nitrogen fertilizer production, and increasingly a potential game-changer for clean energy storage and transport. This dual role makes fertilizers a perfect lens through which to examine how energy-intensive industries are navigating decarbonization, while potentially becoming enablers of the transition itself.

Now, the fertilizer sector has been through an extraordinary turbulence in recent years, from pandemic supply chain disruptions to the Russia-Ukraine war's energy price shocks, and now the emerging regulatory pressures from policies like Europe's Carbon Border Adjustment Mechanism. Now, these developments are reshaping not only how we produce food, but potentially how we store and transport renewables globally. And today I'm lucky to be joined by Matt Hoisch, a senior reporter on the Platts fertilizers and minerals pricing team who covers the fertilizer industry and is perfectly placed to give us a deep dive into this fascinating industry. Welcome, Matt.

Matt Hoisch:

Thanks, Eklavya. Good to be here.

Eklavya Gupte:

So to start off with, can you please set the scene for why the fertilizer industry is so important and interesting from an energy perspective?

Matt Hoisch:

Absolutely. I'll probably start off by saying maybe some listeners have a more antiquated, let's say, image of what fertilizers are. They might be imagining bird poop or cow dung, which would've been maybe an accurate representation of the industry a century or two ago, let's say. But as you mentioned in that introduction, fertilizers are one of the major energy-intensive industries globally. Now, a lot of that energy in the fertilizer space, as you mentioned, is going toward the production of ammonia, and this is where I'll do a brief detour maybe into some basic biology that some folks might remember from their schooling.

Plants need a couple of key nutrients to grow, and some of the major ones are phosphorus and potassium, as well as nitrogen. Now, phosphorus and potassium are mainly coming from mining operations, they're nutrients that can be gathered from the soil, so to speak. Nitrogen, it's a little bit different. It's actually abundantly available in the atmosphere around us, but not in a form that is assimilable by plants to help them grow. To alleviate that issue, chemists in the early 20th century developed a process that allows us to synthetically convert that nitrogen into, as you mentioned, ammonia, NH3, which is that vital form of nitrogen that allows us to then convert that into nitrogen fertilizers that plants can use to grow. Okay.

The interesting thing about that process to convert atmospheric nitrogen into ammonia is that a surprising share of the world's energy resources go toward it, and if you're not neck deep in the fertilizer industry like I am, you might be surprised to know that, according to the International Energy Agency, about 2% of global final energy consumption goes toward that ammonia production process. All around the world, plants are using this century-plus-old process and chemistry to convert nitrogen in the atmosphere into ammonia. And when we think about the energy sources going into that process, the lion's share, about 75% or so, is natural gas, and a lot of the rest of that is coming from coal-fired units in China. And the really interesting space that we're looking at looking ahead, that we'll talk about later in this conversation, I'm sure, is the question of, what would it mean to put more of that process into the renewables space?

Eklavya Gupte:

Thank you, some very interesting statistics there and shows the role it does play in emissions. And obviously, global energy markets have seen massive volatility amid the Israel-Iran tensions, has there been a similar impact in fertilizer markets?

Matt Hoisch:

That's the interesting thing here, because energy is such a major input in fertilizer production, what we do see in the fertilizer space is that when energy markets have their major ups or their major downs, there are ripples that come into the fertilizer market. So obviously, as you mentioned, recently, these tensions between Israel and Iran got a lot of international attention in oil and gas markets in particular because a massive share of the world's oil and gas exports flow through the Strait of Hormuz, this region by Iran that there was a lot of concern could be shut off as a result of this conflict. Fertilizers actually also do flow pretty substantially through that region, so there was some jitters over the potential for Strait closure to also impact fertilizer exports.

But also, we saw an impact from just the energy side of things in general, and I'll give two examples, one of which was urea, which is a major nitrogen fertilizer. We saw prices spike in some regions because of energy impacts. Algeria is a major producer of urea, a major producer, a major exporter. Our FOB Algeria assessment, Platts', jumped over 25% over the week of that conflict to just over $500 per ton FOB, first time that happened since early 2023, and a big reason for that was that another major urea producer, Egypt, got its gas supply cut off from Israel, which supplies a lot of natural gas to Egypt. As a result, it had to cut off urea production. And just in that example alone, we can see how intertwined the geopolitics of energy and fertilizer can be.

And one more example I'll give is over in the European context, we similarly saw a pretty massive spike in TTF, the European gas benchmark, over the course of that conflict. And similarly, we saw a pretty significant bullish outlook in the European fertilizer space over the period of that conflict. And that has since subsided a bit, as the conflict subsided, as TTF gas prices went down. But really, it's safe to say that as energy prices fluctuate, so too do fertilizer prices.

Eklavya Gupte:

Thank you, that shows how intertwined these markets are with various sectors, especially energy. And now, given your particular focus on the European market, can you talk about the close connection between fertilizers and energy and how that translates to the European context?

Matt Hoisch:

Right. So anyone that follows the energy space probably knows that the key with Europe is it has very high energy costs, and that's the theme of European industrial discussions over the last several years is, how do you operate heavy industry in Europe when energy costs comparatively are fairly prohibitive? And I'll give two figures that probably help illustrate this. I'll go back to urea, this major nitrogen fertilizer that uses gas as a major input. Energy, our analysts, put out a report a few months ago, and one of the figures in it was looking at the cost of urea production in the US versus in Northwest Europe on average in 2025, it's their projections. In the US, the analysts project that the average cost of urea production is around $150. In Northwest Europe, that same projection, $360. It's more than double, because Europe faces such a disadvantage when it comes to energy prices. Similarly, we see, when European energy prices spiked as a result of Russia's invasion of Ukraine, we also saw a spike in fertilizer prices.

Really, what I'm trying to say is that the politics of European fertilizers is pretty closely intertwined with the politics of energy. And one thing we've seen recently, from 2021 to '23, it's the most recent year with data available from Eurostat, European synthetic fertilizer production has actually declined about 25%. And the most interesting development that we've seen recently as partly a result of these higher energy costs is the EU is looking to more restrictive trade measures to protect the industry. So Europe, over the last few years, has really tried to wean itself off of Russian gas and LNG. It's been more successful in the gas space than in the LNG space. But one thing that the European fertilizer industry has argued is that as Europe brings in less Russian gas, we're just seeing a greater reliance on Europe bringing in Russian fertilizers, which they describe as gas in another form.

And one saga that I've been tracking as a reporter since the start of the year has been this gradual process for Europe to impose some pretty substantial tariffs on Russian fertilizers in an effort to, similarly as it has to gas, to wean the continent off of its reliance on Russian fertilizers. Those tariffs actually went into effect July 1st, and I won't go into the details because there's a lot to go through there, but the general picture is that they're set to escalate gradually over the next three years, until by 2028, they're meant to reach somewhere in the ballpark of between 315 to 430 euros, which is quite a lot when you consider the cost of urea. In France, recently, we assessed at Platts around 490 euros. You're looking at pretty mid to high double digit percentages on those tariffs. So it's going to be interesting to see, as Europe really tries to pull itself off of some of its energy dependencies, it's trying to play a similar game in the fertilizer space, and I think it's going to be a major question of how those tariffs reshape this global and European market.

Eklavya Gupte:

Thanks, Matt. And now, looking a little bit more long-term, obviously ammonia is a big hot topic in the green energy space, and we know that the fertilizer industry is going to play a big role in this.

Matt Hoisch:

Right. Well, fertilizers, like you mentioned earlier, Eklavya, it's fascinating, because it has maybe two ways to think about the energy transition. Like any energy-intensive industry, the fertilizer industry is focused on reducing its carbon emissions, and according to the IEA, ammonia production, it accounts for about 1.3% of global CO2 emissions. So when we're thinking about decarbonization, the fertilizer industry needs to be a part of that conversation. If we can't do that, we are going to continue to emit carbon into the atmosphere. So the fertilizer industry are looking at carbon capture and storage, renewable energy, biomethane, all these different ways to reduce carbon emissions from this energy-intensive process. But the other avenue that is fairly unique, I think, to the fertilizer industry is that the product that is so core to their business, ammonia, is also seen as this potential major player in a renewable energy future, particularly around areas like bunkering for ships, for instance, it's seen as a fuel that could really fuel a renewable energy future. So that's really put a lot of interest into the fertilizer space.

And at Platts, we have a large and I should say growing suite of ammonia price assessments that puts us in a very prime position to explore and examine how this market grows and develops over the coming years. We assess a benchmark CFR Northwest Europe ammonia price, we also have CFR India price, to name another consuming region, as well as many assessments in major producing regions, like the US Gulf or North Africa. So we're paying pretty close attention to see how this new and growing interest in ammonia reshapes the conventional, as well as the future renewable green ammonia market.

Eklavya Gupte:

Thanks. And obviously here, the challenge with ammonia is that it's only really useful from a energy transition perspective if it's low or zero-carbon, so what is the status of the low-carbon ammonia market?

Matt Hoisch:

Right, and that's the caveat. We have gray ammonia is what it's called, ammonia produced with natural gas that has all those carbon emissions, and in the energy transition space, you could have blue ammonia, that's ammonia plus carbon capture and storage, green ammonia made with renewable energy, there's even pink ammonia, which is made using nuclear energy. There really is a whole rainbow here. But there is a lot of interest in these low-carbon ammonia options.

I think the thing with this space though is that it's still fairly nascent. So there was another recent report from some of our analysts here at S&P Global Energy looking at low-carbon ammonia development, and their figures show that through 2030, the projects that have actually reached final investment decision really come out to around 6.8 million metric tons of low-carbon ammonia production FID through 2030, and that's about, ballpark, 4.2 million is blue, 2.6 million is green. But to put that into context, global ammonia production, currently capacity, it's around 250 million metric tons. So when you really put 6.8 million against 250 million, you can see that there is still a pretty hefty... The lion's share of this market is in the gray space. So there's a lot of expectation, but I think there's a lot of question around how we get there. The Americas is poised to be a large supplier of low-carbon ammonia, according to Energy analysts. Interestingly enough, in part, that's because of the abundant supply of cheaper natural gas, so low energy costs put them in a good spot to be able to supply low-carbon ammonia economically down the line.

I think the other big thing to keep an eye on though is going to be this question of demand in the low-carbon ammonia space. Again, the numbers are massive, we see Energy analysts forecasting global ammonia demand to grow to around 390 million metric tons by 2050, that's almost doubling on the demand side, and most of that is expected to come from low-carbon ammonia, so there's the potential for quite a lot of growth there. Currently though, what we're seeing is that these markets are still fairly illiquid, and it's still the case that if you want to build one of these green, blue, these low-carbon ammonia projects, that a lot of financial folks are still requiring projects to have a good deal of offtake agreements to guarantee that the supply is in fact going to be bought to be sold, that revenue will be generated. So we're yet to see the market come to the shape of the current gray ammonia market, which we look at on a daily basis and has pretty decent liquidity, the question's going to be, how and when does the low-carbon ammonia space get to that state?

Eklavya Gupte:

Thanks a lot. And now, from a policy perspective, obviously one of the things that is probably going to really change this market in the coming years is CBAM, or Europe's Carbon Border Adjustment Mechanism. So what is the expectation that this policy, how will it change the balance as far as the fertilizer industry in Europe, and also the output of green and blue ammonia?

Matt Hoisch:

Yeah. CBAM is one of the big bits of uncertainty here, and fertilizers, like you said, is one of the seven industries that essentially, if you're importing ammonia or fertilizers into Europe from overseas, you're going to have to start paying these escalating fees that are calculated based on the carbon intensity of the product brought in. And so, what that means is that ammonia with higher or lower carbon intensities, the carbon intensity becomes a more salient factor in how people are thinking about this.

I think, based on my reporting, there's still a lot of uncertainty, to be honest, around what CBAM is actually going to do to the market. I think it's interesting, because it really is going to add an incentive to decarbonize, it's going to add an incentive to have at least lower carbon ammonia or fertilizers, which will in theory allow importers or overseas producers to be more competitive. Again, I think the big thing to focus on here from, let's say, the fertilizer, the ammonia perspective, is going to be this question of demand creation.

When I talk to, let's say, fertilizer companies, the technology's there, they're able to make these green fertilizers, low-carbon ammonia, that can be an input into the green fertilizers, but the question is, who's going to buy them? And I talk to some folks, and the answer right now is it's maybe more boutique buyers, let's say, if you're a food company that wants to market some product as particularly low-carbon, you'll buy your low-carbon green fertilizers and then you can say that your potato chips are low-carbon. But at the moment, there's less appetite in more of a general market space for that. So it's going to be interesting to see if CBAM is able to play a role in catalyzing that more general demand creation.

The other CBAM bit that's going to be, at least in the near-term, a pretty interesting saga to follow is actually around the exports question. So particularly in the European fertilizer space, a lot of European producers actually rely on overseas consumers, and it's only around 16% of EU fertilizer production is actually exported. But some factories are really attuned to that overseas market, to the point that some of them export up to 60% of their production outside the trading block. But as you can imagine, what that means is, in a space where we have CBAM, which it's important to remember, is going hand-in-hand with the reduction of free EUAs, free allowances for carbon emissions to European companies, as those European companies also have to pay more and more for their carbon emissions, there's a concern that they might become less and less competitive to those overseas consumers who are an important source of demand for a lot of those European factories.

So currently, I know the EU is working through a potential mechanism for something like a rebate, where if you're producing in the EU and exporting, the hope is that there could be some kind of system that enables them to be more competitive for overseas consumers. But if you're someone like me, like yourself, that's been following CBAM closely, you know that nothing's over till it's over. So I think we're all going to be watching pretty closely to see how the EU crafts this policy over the coming months, and then especially next year, once the rubber really does hit the road and CBAM goes fully into effect.

Eklavya Gupte:

That's great. I think this is a good place to end things for now. Thank you, Matt, for joining us on this podcast and for a really quick primer on the fertilizer industry and how it's connected to pretty much every commodity, and especially our future energy systems.

Matt Hoisch:

Absolutely, Eklavya, my complete pleasure.

Eklavya Gupte:

All right, listeners, I hope you found this useful. For additional, timely coverage of the global fertilizer industry, make sure to check out the many pricing, analytics and news offerings from S&P Global Energy. I'd also like to take a moment to recognize the Energy Evolution podcast team, including my co-host, Taylor Kuykendall, Christopher Coats, Karen Willenbrecht, Dan Testa and Camilla Naschert, as well as our agency partner, The 199, and the Energy digital content team. Also, please don't forget to subscribe to Energy Evolution on your preferred platform to stay up to date with our future episodes. Thank you for tuning into Energy Evolution, and we'll see you next time.