5.3.3. Competiveness

Being a commodity with standardized specification¹⁰⁹ for quality, the customer value is only driven by price and availability, putting cost of production and the production plant’s availability into focus.

The cost of production for Urea is to a great part influenced by cost for ammonia production 110 and consequently the cost for the feedstock natural gas. Assuming that other consumables can be purchased to global market prices and assuming further that cost of capital, and marketing fee are comparable to the conditions of competitors, the only differentiation in the cost to market is to be made in plant efficiency, depreciation, transport cost and cost for natural gas.

Table 15: Calculating cost of production per ton Urea

Depreciation and economies of scale

The cost of depreciation per ton of product is depending on the plants production capacity and total investment cost and the depreciation scheme according to the accounting standard applied. In project finance the depreciation cost are only relevant for tax calculation and if included in the calculation of production cost depreciation covers the principal for debt and a form of equity repayment.

Economies of scale for the production of ammonia and urea apply only in form of reduced depreciation per ton of product; the plant efficiency is improved only marginal, as the process technology is not different¹¹¹.

Cost of natural gas and cost for transportation (shipping)

The cost for natural gas is depending on price and consumption. The price needs to consider the costs of exploration, production and transfer and as an additional influence might have the gas supplier’s consideration of opportunity cost (trading or consumption). Indications for a competitive gas price are the price levels potential competitors pay adjusted by the cost for transport to the target market.

Plant efficiency and gas consumption is comparable among new plants applying modern technologies. Whereas old plants typically face significant higher specific gas consumption, depreciation is minimal.

Benchmark for cost of production

Influenced largely by gas price and general price level the cost of production can be grouped by region.

Illustration 19: Regional urea cost structure from Nexant¹¹²

A competing region of urea production with comparable or slightly higher cost of transport is North America. The New York Mercantile Exchange (NYMEX) assesses the price for gas traded on the pipeline system in the US, also called Henry Hub price which can further serve as benchmark.

¹⁰⁹ Fertilizer Manual, UNIDO
¹¹⁰ Reference Document on best available techniques for the manufacture of large volume inorganic chemicals, ammonia, acids and fertilizers, European Commission, August 2007
¹¹¹ Various technical information from the leading technology providers for ammonia production (Uhde, Toyo, Casale, Haldor Topsoe, KBR)
¹¹² Nexant, Andrew Prince, Volatility in the Urea Market, GPCA Fertilizer Conference, September 2011