Logistical chain = value chain
The logistical chain is also the value chain for the fertilizer industry. Explaining why the farmer is paying 2 to 4 times more for nitrogen at the farm gate than the cost of producing it is a lesson in business and global economy.The lowest production cost for one tonne of fixed nitrogen is stranded gas far away from the agricultural areas of the world. Typically Middle East and North Africa where the price used to be 75-150 USD/tonne N. However, at the same time the production cost in Europe was above 300 USD/tN for the same product. The gap reflected what was required to secure new investments in the low cost geographies.
At the same time the farmer paid more than 700 USD/tN in Europe and in the US. The main reason for this higher cost is a combination of cost of storage and cost of transport over land and final handling and storage.
In addition to these documented minimum costs, there is a risk element associated with the cyclicality of the business. Every stage in the value chain has to protect itself from a significant drop in price, and the accumulated cost of this reaches the end user. The farmer.
Today the global market price is more than 700 USD/tN and the farmers are paying more than 900 USD/tN.
Through the last five years, a paradigm shift is emerging. North America believe their internal gas price will remain low enough to secure investments in new ammonia urea plants. This is a logical response to a global trend: There is little cheap stranded gas available anymore.
US and Middle East gas is at the same price. Gas prices will be drawn towards the energy cost of oil which is five times higher.
Renewable energy will be the cheapest alternative for delivering electricity.