Quantifying impacts of competition and demand on the risk for fertilizer plant locations

Abstract

Fertilizer is an essential commodity traded in international and domestic markets and spatial competition is important feature impacting interfirm rivalry. In the case of North American fertilizer, numerous plants have been announced to either expand or open new plants (nitrogen-based fertilizer plants), exerting competitive pressures on an industry with surplus capacity but highly competitive in terms of production costs and technology. Proposed new plants and expansions are being induced by changes in the composition of crops, changes in the price of natural gas which affects the cost of producing domestic anhydrous ammonia. Developments in the fertilizer industry have become more volatile in the post-COVID period, and concurrent with the escalation in fuel prices, the Ukraine invasion, related embargoes on Russian trade, the world's largest exporter, and operations of the Grain Corridor. The purpose of this study is to quantify risks for plant expansion (brownfield and greenfield) of nitrogen fertilizer plants in North America, given the spatial competition and the corresponding dynamic market boundaries. Specifically, we quantify risks associated with fertilizer plant expansions, identify the optimal locations of new plants, and characterize spatial competition as a result of new entrants. A model is specified that integrates Geographical Information Systems (GIS) data into a stochastic mixed-integer network spatial optimization model using Monte Carlo simulations to account for risk in the random variables. The results are reprocessed into GIS for interpretation. The impact of risk in these variables results in market boundaries that are random. Specifically, competition for these new plants has embedded risks for new entrants on the probability of production and market penetration.