Deep Dive: Europe's ammonia feedstock costs to remain high in 2025

Quantum Commodity Intelligence - Ammonia producers in gas importing regions — especially Europe — are likely to remain under pressure from high feedstock prices in 2025, in sharp contrast to those in the US and Middle East Gulf, which will continue to benefit from low production costs.

Amidst broad expectations of a tight gas market, ammonia feedstock costs face additional uncertainty amid a plethora of geopolitical risks, not least over the outcomes of ongoing crises in the Middle East and Ukraine.

The unpredictability of the new Trump administration strategy in its first weeks in power is further clouding the outlook, with Washington pushing to influence policy from Brussels to Tehran and already having initiated — at least at the time of writing — a burgeoning tariff war with Beijing.

As Part 1 of this deep dive, Quantum assesses the outlook for the gas market and how this will impact underlying grey ammonia production costs.

Part 2 of this insight, to be published soon, will look at recent, current and projected ammonia production costs in key regions around the world.

Macro-outlook for gas prices
Many industry observers expect that gas prices, in particular the LNG market and the TTF, will remain elevated this year.

"Global natural gas markets are set to remain tight in 2025," the IEA said in its most recent quarterly Gas Market Report, written and published before Trump took office.

The IEA added that while the loss of the remaining Russian pipeline gas flows via Ukraine at the end of 2024 "does not pose imminent supply risk for the European Union, it could add to near-term LNG market pressures."

The report noted that global gas demand grew by 2.8% in 2024, driven by "fast-growing" Asian markets, a rate of growth higher than the 2% averaged logged 2010-2020, and agency expects the growth trend to continue into 2025.

Not all observers are so bullish on Asian gas demand, however, and Wood Mackenzie said in its Global Gas and LNG 2025 outlook that high LNG prices will "limit LNG demand growth in Asia" this year.

Overall, global gas demand is broadly expected to grow, which is likely to buoy prices in import dependent regions like the EU.

Europe may also find itself competing with other importers of LNG in nearby markets during 2025. After the country's domestic LNG supplies fell to a 7-year low in September 2024, Reuters reported on 6 February, that Egypt has signed deals worth about $3 billion with Shell and TotalEnergies to secure 60 LNG cargoes to cover demand for 2025.

A major driver of higher gas pricing during 2024 and the early weeks of 2025 has been some stalling in LNG output expansion.

In its 2025 outlook, the IEA noted that LNG output growth lagged demand last year, keeping supply tight.

"Global LNG supply grew by 2.5% (or 13 bcm) in 2024 - well below its average growth rate of 8% between 2016 and 2020," the IEA report said, adding that "extreme weather events added to market strains."

As ever, the global gas market remains highly responsive to weather conditions, which adds volatility to ammonia feedstock prices.

The IEA report continued that "similar [tight market] dynamics are expected to persist in 2025 before the arrival of a wave of new LNG export capacity, led by the United States and Qatar, that is set to come online over the course of the second half of this decade."

Wood Mackenzie identified just 17 million mt of LNG capacity due to come online in 2025, as projects that are commissioned over the next few months will take time to reach full capacity.

Europe and Ukraine
US Gulf gas costs are — along with the Middle East Gulf — are among the lowest in the world, benefiting the country's ammonia producers, and helping the US to dominate key LNG markets, in particular, supply to the EU.

Despite this, the cost of imported LNG remains significantly higher than pre-Ukraine war pipeline flows from Russia, so even abundant US LNG will not be enough to make European ammonia producers competitive on the world stage, even without the financial impact of EU environmental policies.

There is considerable uncertainty over the Trump administration's approach to Ukraine, even amid some indications — albeit prone to rapid change — that the new US government might push quickly for a negotiated settlement with Moscow.

It seems unlikely that the European Union would be keen to see a return of Russian pipeline flows while President Putin is still in power, and Kyiv may also resist the resumption in transit via its territory.

There are some caveats to this scenario. Germany's economy continues to suffer from high energy prices, which are accelerating deindustrialisation and contributing to the country's increasingly fractured political landscape. With Germany poised to go to the polls soon, it is entirely plausible that parties seen as pro-Moscow — particularly Alternativ für Deutschland (AfD) and the Sahra Wagenknecht Alliance (BSW) — could gain increased influence over the country's energy and foreign policies.

This, combined with US pressure for a Ukraine-Russia deal, could conceivably lead to an eventual resumption of Russian gas flows to Western Europe.

However, any such development would still likely take time, ensuring European ammonia producers remain dependent upon relatively expensive seaborne feedstock supply for the time being.

There are also limited routes for Russian molecules to reach EU countries, although Hungary and Slovakia — both seen as somewhat sympathetic to Moscow — could conceivably seek to resume purchases, potentially with the goal of selling the gas on.

"With the TurkStream pipeline running close to full capacity and resumptions of transits via Ukraine and Poland politically difficult, even if a peace agreement were reached, any meaningful additional Russian imports would need the resumption of the Nord Stream pipeline," according to WoodMac.

EU policy also set to add additional costs to gas feedstock prices in the coming years with the planned introduction of methane emission regulations. The measurement, reporting and verification (MRV) of methane emissions from hydrocarbons, also includes imports — and hence LNG shipments — will not come into force until later this decade. The MRV is intended to incentivise the emerging low-carbon LNG sector, but will inevitably raise feedstock costs for European industry.

US supply and demand
Although President Trump is aggressively pushing US LNG as a key part of his foreign and economic agenda, this feedstock supply will likely remain relatively costly too.

The President's emphasis on raising US domestic energy production will take time to impact global LNG supply, given that the US already has an ample pipeline of export-orientated projects with relatively long lead times for development.

US exports are poised to rise in 2025, for instance from the Golden Pass facility, which may bring additional export capacity online around the middle of the year.

And the threat — which has been paused temporarily for now — of heavy US tariffs on Canada could also tighten the US gas market. Trump's proposed 25% tariffs on Canadian and Mexican goods included a caveat for energy, including natural gas, which would impose a lesser, but still significant 10% tariff.

Even at the lower rate, such a move would inevitably raise natural gas prices in the US and potentially dampen demand, and again demonstrate the considerable uncertainty injected into the commodity markets by the new administration in Washington.

That in turn would raise gas prices for US ammonia firms and means potentially significant upside risk for their feedstock costs.

Even before Trump returned to the White House, some observers were already predicting a rise in Henry Hub prices in 2025, especially relative to the record lows logged in 2024, which could squeeze US ammonia production margins.

In January, prior to the threat of Washington imposing tariffs, the EIA stated that "over the next two years, we expect that natural gas demand in the United States will generally grow by more than natural gas supply. In 2025, we forecast supply of natural gas, including both production and imports, will rise by 1.4 Bcf/d in 2025, while demand for natural gas, including domestic consumption and exports, rises by 3.2 Bcf/d".

Accordingly, the EIA sees annual Henry Hub spot prices averaging $3.10/mmBtu in 2025, rising "to almost $4/mmBtu in 2026." The federal agency projects that monthly Henry Hub spot prices will occupy a $2.50-3.90/mmBtu range in 2024 and between $3.50-4.40/mmBtu in 2025 "as LNG exports increase".

EIA acknowledges that slower ramp-ups at LNG export facilities, and weather conditions could of course impact those forecast price ranges. And even with firmer Henry Hub prices possible, production costs for US ammonia producers will most likely — as indicated by the EIA forecasts — remain significantly lower than their counterparts in Europe.

China tariffs
Beijing has retaliated against US plans to impose 10% tariffs on Chinese imports, with its own stated plans to add tariffs of 10-15% on US energy imports, including LNG.

China has rapidly emerged as one of the largest importers of liquefied gas in recent years, overtaking Japan in 2023 to become the world's single largest market. At the same time, the US became a critical LNG exporter, leapfrogging Qatar and Australia to the number one position that year.

Between January and November 2024, the US exported a total of 206,174mcf of LNG to China, or 5.2% of total US export volumes, the latest available EIA data shows.

Assuming the brinkmanship between the US and China plays out, these flows could be displaced to other markets. Since the other largest, and most consistent LNG consumers — Japan, South Korea, the EU and Taiwan — are all close US allies, it seems reasonable to assume they might benefit from additional US supply, potentially at discounted prices.

But, given the wide spread in gas feedstock prices between major gas producers such as the US, and LNG-dependent markets such as the EU, even the arrival of displaced US LNG is unlikely to be sufficient to substantially bolster EU ammonia producers' squeezed margins.

US policy and the LNG outlook
The Biden administration's pause on environmental permits for LNG projects — which was widely misrepresented as delaying projects which had already reached FID, or even as a threat to completely halt LNG exports — has already been rescinded by the first batch of executive orders signed by President Trump as he took up office.

But the Biden-era policy was only expected to impinge upon projected US LNG production later this decade, so there will be no near-term increase in LNG supply, or an attendant pressure on ammonia feedstock prices, because of Trump's action.

As Wood Mackenzie's Global Gas and LNG 2025 outlook notes, it will still take time for new approvals to be issued, and environmental approval might not be the last obstacle to clear before projects take a final investment decision (FID).

Investment outlays for LNG projects have been mounting. Noting the pressure from rising costs, WoodMac says that some [US LNG] projects are better placed than others and could still move to take FID in 2025. "However, the next wave of new US LNG investments might materialise only in 2026," the Edinburgh-based consultancy said in its 2025 outlook.

And US producers, mindful of the shale oil boom and bust earlier this century, are unlikely to prioritise output volume for fear of driving down natural gas prices too much. WoodMac says it expects "capital discipline...to enhance profitability and shareholder returns" among US gas producers. With more market concentration than ever before "conservative production strategies are likely, pointing towards higher prices from 2025 onwards," the consultancy predicts.

Tight European margins to persist
To sum up, even amid the current political uncertainty in the US and Germany, and with US/EU support for Ukraine at a critical juncture, underlying fundamentals suggest that European gas prices will remain elevated for the remainder of 2025, ensuring that the bloc's ammonia plants struggle to compete globally.

Implied production costs for western European ammonia — based on TTF prices — have been consistently high in recent years, even prior to the Russian invasion of Ukraine in February 2022. But since that date, natural gas costs have witnessed record price spikes.

Since February 2022, implied ammonia production costs have only briefly dipped below $300/ mt — in February 2024 — and averaged $423/ mt last year, Quantum Commodity Intelligence data shows.

This pricing pressure continues to push the EU's fertiliser producers towards the ammonia import market, or to outright reduce their output. And in the current period of geopolitical uncertainty, the economics for ammonia production in western Europe look unlikely to improve significantly any time soon.