The Evolution of Fertilizer

The urgency to reduce fertilizer use is growing. Government policies and carbon pricing platforms are working to speed up the transition.

The fertilizer industry is transitioning away from ‘grey’ to - potentially much more expensive - ‘blue’ and ‘green’ ammonia. This report provides an overview of the terminology, the inputs, market influences, and the substitutions taking place between legacy fertilizer manufacturers and new builds.

Thanks to Argus Media for the excellent information provided in today’s webinar on long-term cost and price modeling.

What’s the Difference?

Grey ammonia uses natural gas or coal as the primary energy source for the steam methane reformer (SMR) and synthesis loop that makes NH3. Removing SMR’s and replacing fertilizer’s primary energy source with renewables is the work of the industry in the decades ahead.

Green ammonia uses renewable energy like wind, hydro, solar or nuclear, to power electrolysers to create hydrogen and ammonia. Blue ammonia uses carbon capture and storage systems to reduce emissions.

Note also that:

• These are not official definitions;

• Green ammonia is more impactful than blue ammonia at reducing emissions;

• That will affect price spreads and the provision of carbon credits;

• All types of ammonia work the same on grain crops.

Huge Money for New Builds

Currently there are more than 100 green and blue ammonia projects underway around the world. Investors are chasing these opportunities mainly in countries that are offering construction subsidies and regulated carbon payments.

The U.S., via the Inflation Reduction Act (IRA) is currently the most supportive to blue and green ammonia plant construction. Government-supported projects are underway also in Europe, Australia, Morocco, Egypt, Chile, Oman, Saudi Arabia and others.  

One of the main drivers of green ammonia production costs is the type and the cost of the primary renewable energy source. Displacing natural gas and coal can generate carbon credits, but renewable energies come with higher costs and intermittency issues related to the inconsistency of sunlight, and the unpredictability of wind.

Some projects have consistent access to renewable energy on a power grid, but there aren’t many of those around yet. Otherwise, green ammonia projects include a combination of captive renewable energy, perhaps from multiple sources, and battery storage.

Marketing & Price Discovery

The economics of blue and green ammonia are more complex than the standard supply and demand factors that move grey ammonia prices up and down over time. Grey ammonia demand comes only from agriculture, and investor returns are driven by grain production alone.

Green ammonia can move into markets for carbon-free marine fuel, coal-firing, and other end uses. And on top of government subsidies to get projects started, green and blue ammonia production margins over time are influenced by carbon payments, policy goals, and compliance measures to enforce fast action to meet national and corporate commitments.

Author’s Note: The purpose of this research series is to lay out all the moving parts behind the future economic optimization model for agriculture, including:

• Old and new types of fertilizer,

• Voluntary and regulated carbon markets,

• Positive externalities from biodiversity, and

• Access to differentiated markets.  

A model doesn’t exist yet to measure and predict all of these new and old variables at once. Most people in the commercial agriculture industry are just starting to contemplate the potential individual effects on their businesses, and it remains very challenging to look from a high level at how all the new market influences and policies around the world might net out.

Ultimately, liquid and transparent markets for green and blue ammonia will be critical to supporting the fertilizer industry of the future, but these are a long ways off. Initially, sales will be made via offtake agreements and directly with governments and utilities according to private commercial contracts.

Once the initial long-term agreements expire, a spot cash market is expected to emerge. This is similar to how the market for liquid natural gas (LNG) evolved since the beginning of SMR-based ammonia production: it didn’t trade openly until the initial capital costs had been recovered and sales commitments were fulfilled.

Summary

While there’s still substantial uncertainty in the future of fertilizer economics, a few points of clarity have emerged. For example, it seems certain that green ammonia will trade at a premium to blue ammonia and that grey ammonia will encounter various new restrictions and/or taxes in the years ahead.

Whether carbon is valued at $30/t or $100/t makes a big difference in how quickly this will come to pass in the years ahead. However, other trends forcing the fertilizer industry to evolve are well-entrenched.

Investments have already reached the hundreds of millions, and new government programs launching all around the world will ensure these keep growing. Government policies can also be used to speed up the decommissioning of high-emitting legacy plants.