Overview
Continued escalation of demand for agricultural grains like corn and wheat continues in the North American marketplace, resulting in strong correlated demand in the market for chemical fertilizers like high-density Ammonium Nitrate (AN) and its derivatives, such as Ammonia, Urea, and UAN (urea ammonium nitrate). Low density AN has the added benefit of being used as an explosive with application in oil exploration, another very strong industry segment. Natural gas is one of the primary raw materials in AN, and continuing high costs and rising demand are concerns. However, natural gas pricing has not escalated as quickly as other fossil fuels, such as crude oil, and manufacturers have been successful implementing energy related market price increases.
Demand is projected to remain high for chemical fertilizers in the short run, but expansion projects in other parts of the globe are projected to temper pricing, demand, and profitability of domestic producers in the 3-5 year term. Continued stability in natural gas markets, despite prices that remain well above those seen as recently as early 2005, should help producers and distributors of nitrogen fertilizers enjoy another profitable year in 2008.
Industry Condition – Good
- Continued Strength in North American Market – The North American fertilizer continues to show strong earnings into 2008, following a strong 2007. Continued tightening of grain markets is driving demand of fertilizer, as more farmers plant grain to meet demands.
- Biofuels Boom Helping Drive Global Demand – Mandates for expanded biofuels production continue to place pressure on natural gas and fertilizer prices. Some governments are turning to coal derived synthesized gasses as a potential source of lower cost gas to fuel the nitrogen fertilizer process.
Key Industry Indicators
- Agricultural Production
Field grain crop acreage planted, particularly for corn, provides insight into demand for nitrogenous fertilizers.
Commodity Tracker
- Natural Gas Prices
- Natural Gas NYMEX Futures Prices
Natural gas is the primary raw material and heating fuel for nitrogenous fertilizer manufacturers. While production costs and plant returns are extremely sensitive to this input, producers have been successful in passing on much of their increased costs for gas to their customers. Gas prices have not returned to pre-Hurricane Katrina levels and are expected to remain relatively stable in the short term.
Factors Influencing Value & Marketability
- Age, condition, and layout of the processing plant
- Cost of and access to key raw materials
- Production efficiency & costs
- Labor costs and legacy expenses
- Condition and location of customer base
- Access to multiple modes of bulk transport
- Agricultural product demand
- Competition
Overview
Most components and derivatives of nitrogenous fertilizers are manufactured in specialized continuous chemical processing facilities. Continuous chemical processing operations are typically installation intensive manufacturing operations; this is true of the processes used to synthesize ammonia and nitric acid, the building blocks of most nitrogen fertilizers. These installations are very difficult to relocate and typically realize poor sales proceeds when dismantled for piecemeal disposition. The method of disposition that maximizes sales returns for these plants is to sell them to other users who would operate them in place as installed.
Given the preferred method of sale, companies should always consider the value of the assets under in place valuation premises. Income approach methodology can usually be successfully applied in these situations due to the fungible nature of fertilizer products. Performing a business valuation overlay provides results that illustrate the earning potential of these facilities. Prospective buyers will likely first look to such methodology when determining the contributory value of the underlying business assets, like machinery and real estate.
If a plant cannot be sold to remain in its current location, remarketing the asset becomes difficult as the secondary market for used equipment is very limited. The next best strategy is to attempt to find buyers interested in purchasing the entire plant or certain portions (or batteries) of the facility to be moved in their entirety and rebuilt in a new location. While such sales have occurred, they are very rare since efforts to properly reassemble these facilities have met with mixed results, making this a riskier course of action for the buyer. If such a buyer can be found, sellers could expect to realize a substantial premium over piecemeal equipment pricing.
Piecemeal dispositions of chemical processing facilities typically result in net proceeds that are a very small fraction of the new cost of the facility. Sometimes operators of other processing facilities will have the need for certain component parts with universal applications, like distillation towers, movable tanks, process reactors, heat exchangers, compressors, and centrifuges. These assets will sell for a premium over older or site specific equipment, which is typically salable for its scrap value, if it proves salable at all.
Dealers that buy processing plants typically structure their purgeantares price by estimating the value of component parts they expect to sell in the first three months plus the value of the components they expect to sell over six months.. Although some minimal value may be attributed to other assets in the plant, this value is minimal.
Used Equipment Values – Poor
- Supply of used equipment – Stable
- Demand for used equipment – Stable
Factors Influencing Value & Marketability
- Installation intensive nature of plant
- High cost of dismantlement
- Difficulty of reassembling and re-installing major process components
- Limited demand for equipment components
- Impact of chemical process on component materials (i.e. corrosion)
- Environmental considerations
Valuation Monitor
AccuVal routinely provides appraisal, consulting, and asset management services to the
Chemical industry and has an integrated understanding of the raw materials consumed by these operations and the supply & demand factors influencing the value and marketability of the products produced.
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Representative Clients Our Associates Have Served
Success Stories
CF Industries
El Dorado Nitrogen Company