There is the potential for the ammonia thirst (please don’t drink it) to surpass opportunities to build cost-effective capacity for the medium term. Consequently, the shortages we see today could extend and become more severe. Co-firing coal-based power facilities in Asia is one of the more obvious ways to start decarbonizing a predominantly coal-based power region. The experiments in Japan, if successful, will drive a step-change in demand for blue or green ammonia, and this should drive much more new capacity than we have seen announced to date. The power-based demand comes on top of expected growth in fertilizer-driven demand and a possible rise as a shipping fuel. The issue for investors is that green ammonia at scale is economically challenging, especially with the recent shortfalls in renewable power generating plans and what now looks like rising power costs for a while. Blue ammonia is much easier to think about at scale, but we are still hamstrung by expensive carbon capture costs and a lack of incentives – either in terms of tax breaks or taxes or in terms of a customer willing to pay more, to get most ideas and plans past the “wouldn’t it be nice” phase. In the meantime, as indicated above, installed ammonia capacity is making abnormal returns.
Source: OCI – 1Q22 Earnings Result Presentation, May 2022
The Braskem green polyethylene ambitions are commendable, but getting enough attractively-priced ethanol may be the challenge. The economics of ethanol production is more attractive in Brazil, but the challenge of moving that ethanol offshore to them make ethylene and polyethylene are that you are effectively shipping a heavy water molecule, only to discard it once you get to the ethylene and polyethylene unit. Making all of the new polymers in Brazil and shipping to other markets may make more sense, especially as there would be economies of scale benefits to having all in one place. This would, however, require a lot of sugar.
Source: Braskem – 1Q22 Results, May 2022
The FERC comment on a lack of planning is perhaps justified but also a little unfair. The US has built a lot of solar capacity where the sun shines and where land is cheap, and this is generally not where people live in large numbers or around industrial hubs. For years the renewable power industries have relied on subsidies to make an expensive process competitive and have not had the luxury of building where land values are high or where weather patterns would limit utilization. The installations are where they are because these were the places that stood the highest chance of making a return. The opportunity with some of these locations may be to move industrial consumption closer and we may see some US manufacturing capacity in the US close in favor of capacity closer to abundant renewable power. These dislocated locations may also prove to be compelling locations for some reshoring opportunities.
Source: National Renewable Energy Laboratory, NGI, May 2022
