Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
Energy Independence in Ukraine and the Volume-Over-Price Bears
Aug 16, 2013
The Former Soviet Union (FSU) has been a topic of conversation across news outlets for a few weeks now. A great deal of attention has been paid to the split of FSU potash joint venture BPC which some believe could pressure the price of potash 25% lower in the near-term. In the meantime, Ukraine has quietly been working to reduce its reliance on natural gas imports.
If we look at the BPC split as an indicator of how FSU companies and governments do business, increased energy independence in Ukraine based on domestic natural gas production holds the potential to support the current oversupply on global urea and may add to global ammonia stocks in the same way. Victory through oversupply is the philosophy driving potash production in the FSU, and it is a small leap to imagine Ukraine looking to capture marketshare by oversupplying ammonia in the same way.
Ukraine has found friends in its quest for natgas independence -- in truth, we mean independence from Russian natgas. ExxonMobil, Shell, and Chevron along with a host of smaller exploration outfits have set their attention on finding and acquiring shale gas within Ukraine's borders. Tyrannical natgas curtailments from Russia in 2006 and 2009 have Ukraine anxious to free themselves from future curtailments and high Russian prices.
FSU and the European Union --
The big three FSU nations -- Russia, Belarus and Ukraine -- all have designs on the benefits of full-on European Union membership, but of the three, Ukraine has made the most promising steps. However, jailed former Prime Minister Yulia Tymoshenko remains a symbol of the tyranny that lies just below the surface in Ukraine.
Tymoshenko was jailed by the current President of Ukraine for a natgas offtake agreement she made with Russian President Vladimir Putin. The current Ukrainian administration believes she overstepped her authority when she made the deal, and cites that as the main reason for her 7 year prison sentence. But many suspect current President Yanukovych simply wanted to detain the charismatic Tymoshenko until after the 2015 Ukrainian Presidential elections -- indeed the length of her sentence would have her released just in time to miss the elections. Despite her imprisonment, however, Ukraine's Fatherland United Opposition Party has already endorsed Tymoshenko as their singular nominee for President.
Meanwhile, pipeline reversals from Hungary, Poland, Slovakia and Romania have accounted for reductions in Ukraine's overall reliance on Russian natgas. During the period Jan.-June 2013, natural gas imports to Ukraine fell 35% compared to the same time last year.
What this means for us is that, while socially still a little sketchy, Ukraine -- among the largest producers of natgas-based ammonia and urea -- may help limit upside action for nitrogen here in the United States. Reports from Kiev are that natural gas prices are already favorable and that will keep N producers humming. Depending on how quickly Ukraine can lay hold of domestic shale gas, it is conceivable that anhydrous pricing in the long term could turn as bearish as Chinese urea.
Success through oversupply --
Anhydrous pricing has fallen very recently, and by the pound of N, remains the least expensive form of nitrogen. If Ukraine follows suit with the rest of the FSU, they will look to capture a greater share of global ammonia revenue via oversupply. The current urea oversupply is based on falling coal prices in China. A Ukraine with a dependable domestic natgas supply may follow Uralkali's lead based on China's 'cheap N from cheap feedstocks' oversupply model.
Competition would lie in North America where CF and others have decided to table select nitrogen projects, and Trinidad where long-term natgas supplies are questionable at best. Give it five years, and robust ammonia production in Ukraine may wind up taking the lead in world ammonia output and sendouts at prices designed to run the competition out of business. This is the FSU way.
This would open friendly trade avenues wide, and help Ukraine buddy-up with the European Union -- all the while, distancing itself from the rest of the FSU. I have said it before, but the E.U. will have to see Tymoshenko released from prison -- paramount among other things -- before allowing Kiev a spot at the table. As Ukraine emerges as 'communism-lite' compared to Belarus and Russia, strong natural gas production coupled with existing infrastructure would position Ukraine among world gas giants.
This, of course, is Friday blog speculation. But wouldn't it be nice if an FSU nation decided to drive the price of anhydrous down 25% -- as is the expected result of the BPC potash war. Look for FSU potash to predict how an ammonia oversupply might affect retail pricing in the United States. If Ukraine puts their natgas resources toward capturing global ammonia markets through the FSU volume-over-price strategy, American growers could enjoy the types of declines in anhydrous pricing we have observed in urea.
Then again, by the time $500.00/ton anhydrous arrives from Ukraine, nutrient reduction strategies and fertilizer explosions may have regulators choking off fall applications of anhydrous altogether, but that is a blog for another Friday.