Cost Pass-Through in Commodity Markets With Capacity Constraints and International Linkages

We examine how regional cost shocks are passed through into the prices of globally traded energy-intensive commodities. We find that the pass-through of local costs is influenced by production capacity in the short run. When capacity constraints become binding, the pass-through of cost shocks to the constrained region diminishes to zero. Our application to the market for ammonia, a commodity largely produced from natural gas, demonstrates the significance of capacity constraints and international market linkages for empirical pass-through models.