02/02/2022
Russia Bans Ammonium Nitrate Exports for Two Months
Yesterday, February 1, 2022, the Russian government announced the suspension of ammonium nitrate exports for a two-month period all in the name of domestic security of supply. It is stated that shipments will resume April 1, 2022. Russia had already set allocations for ammonium nitrate and other nitrogen products from December 1, 2021, through to May 31, 2022. The export allocation had been set at 744,000 metric tonnes (mt) or around 20% of normal annual export volumes. Russia exports nearly 3.9 million mt of ammonium nitrate each year, of which, 50% normally goes to Brazil’s agricultural purposes.
For Consumers: More expensive food and energy prices.
Russia is one of the largest exporters of ammonium nitrate for use in agricultural fertilizers. Nitrate based fertilizers are the cheapest and most effective way to put nutrients back into the soil and stimulate the growth of the plants. Without fertilizers, crop yields will be lower resulting in supply constraints which result in higher prices for consumers. The export ban of ammonium nitrate-based products by Russia directly effects the building blocks of food security globally and will be felt in consumers buying power and product selection at the grocery store.
Ammonium nitrate is a byproduct of natural gas or other hydrocarbon-based fuels. Russia has some of the largest and lowest cost natural gas reserves in the world. The conversion of gas to nitrogen-based products used in fertilizers and commercial products is a way for Russia to monetize its gas reserves. Russia then exports and trades these products around the world in dollar denominated trades. By making nitrogen in short supply, prices will rise as other suppliers struggle or are unable to fill the supply gap resulting in a new higher price benchmark.
Russian gas prices have long been contested because of their influence on energy prices in Europe. Energy prices make up a large component of most countries consumer price index (CPI). The recent disputes about gas supply from Russia to Europe, embattled pipeline projects and the Ukraine tensions, all mean higher energy prices for European consumers. The export ban and the tensions about gas prices need to be seen as one energy strategy by Russia. Both the tightening of nitrogen supply globally and the tensions in the east of Europe are driving up prices which will provide a higher financial return for Russia to the detriment of consumers globally.
For Industrial Users: Higher prices and security of supply
The other major user of Russian ammonium nitrate globally are industrial users. Specifically, companies that manufacture explosives for use in mining and quarrying. The output of the explosives is broken rock to produce copper, gold, coal, iron and industrial stone to name a few. These metals and aggregate stone are used to make goods that consumers buy, roads that we drive on, homes we live in and in the case of coal, provides the base load of the energy that heats or cools our homes. Explosives make up a relatively small portion of a mines total mining cost at around 3%, but the activity of breaking rock is critical to run a mine. A large and growing portion of explosives manufacturing relies on imported ammonium nitrate that is provided by Russia. The input cost for explosives like agricultural fertilizer has already more than doubled since 2020. This increase in costs was driven by upward movement in gas prices globally and supply coming offline.
Prices as noted above will be impacted by supply and demand, however the most concerning issue that faces all nitrogen users is availability at any cost. Mining markets like Latin America, West Africa and Central Africa are almost exclusively reliant on imported ammonium nitrate. The supply chain for the large mines in these markets requires up to a 90-day shipment time from origin to destination and a 12 to 18 month forecast to ensure security of supply. A two month ban on exports from Russia will mean a disruption in supply for these mines of between 4 and 6 months with some miners receiving only partial shipments or in some case no allocation at all. The result of the short supply will be production losses or in extreme cases mine closures. Even once the ban is lifted, the back log of ships and port access will result in months of disruption.
The low-cost nature of the Russian ammonium nitrate for use in explosives allowed for their products to be shipped by sea into markets far from the source. This created a reliance on long supply chains and prioritized the ability to manage the complexity of supply to secure contracts at the detriment to local producers. These low-cost inputs from Russia forced several regionally located domestic ammonium nitrate suppliers to shut production in favor of imports. This production will not easily be brought back online in the near term.
In the early 2000’s, a similar situation occurred by China put a ban on export of nitrogen-based products to Southeast Asia and Australia. The agricultural and mining companies were caught off guard by the stoppage because they had grown comfortable with the risk of the longer supply chains for improved economics. The aftermath of the China export ban was that many companies no longer accepted Chinese supply as security of supply for contracts. The ban resulted in some companies declaring force majeure, losing contracts, and closing their doors. The low-cost Chinese supply also pushed some Southeast Asian counties to impose import restrictions to protect precious domestic nitrogen supply and Australia to legislate anti-dumping rules for imported nitrogen products. The result has been higher pricing than before the Chinese imports but now more in-line with domestic costs of production which has reduced variability and increased security of supply. Are there lessons from this case study that should be applied to the current Russian nitrogen situation?
Hydrogen Dynamics: Do you need help finding nitrates? If so, maybe I can help you. I have 28 years in the ammonia and ammonium nitrate markets, and my team and I are frequently involved in industrial nitrogen trading globally.
I started Hydrogen Dynamics last year to get involved in the revolution around green ammonia and the push for a better world for my kids. The ban of nitrogen products from Russia is a call to action for me and team to get back to our roots, use our experience and to help our clients. If we can provide any support, please contact me.
Joe Keenan
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