The Energy Report: How have the collapses in the prices of oil and natural gas affected the fertilizer sector?
John Chu: Natural gas is an important feedstock for nitrogen-based fertilizers—up to 50% of the production cost. This means higher margins. Fuel and lubrication-related costs account for 10–12% of farmers’ operating expenses. Lower fuel prices result in cost savings, which might be spent instead on fertilizers and other inputs. Lower gas prices should result in higher gasoline consumption, which in turn should result in greater ethanol demand and an increase in demand for the corn used to make ethanol.
TER: There were recent reports that Russia was planning export duties as high as 35% on fertilizers. What effect would this have on the industry?
JC: The rumors were unfounded. The Russian industry minister said that an export tax has no support and is not being discussed. In any event, we don’t think an export tariff would have much of an impact. We would expect to see the Russian players continue to export most of their fertilizers to international markets—90% of potash, in particular. The Russian government has, in the past, floated the idea of an export tariff as a means to get domestic fertilizer suppliers to offer a meaningful discount to local farmers. And that is exactly what has happened; Russian fertilizer producers have agreed to a 33% discount for Russian farmers.
TER: Have sanctions affected the Russian fertilizer space?
JC: No. And we don’t see them having an effect, especially on potash, because world supply is limited in terms of the different regions that can supply it.