Fertilizer trends recap, September 23–27 (Part 9 of 10)
How China’s exports affect urea supply and demand
Goods prices are key drivers of revenues, which in turn are driven by supply and demand dynamics. Because operating output in China is lower than the rest of the world, and the government imposes heavy taxes from November to June, it doesn’t have much of an impact on global fertilizer prices. But when export volumes out of China rise, they may reflect falling urea prices as Chinese producers become cheaper. If prices fall enough, the country can become the marginal cost producer and negatively impact world prices.
China exports record amount of urea in August
The latest data from the Customs General Administration shows that China had exported 1.45 million tonnes of urea in August, rising from 1.32 million metric tonnes (or mt) in July. August’s export volume was the highest figure ever recorded for the particular month, which comes after July’s record volume as well.
Export volumes were higher than the past
Unlike previous years, when urea export volume practically fell to zero from February to May, China was still exporting ~200,000 mt of urea a month. The indicator fell in June, as producers likely waited to take advantage of the low export tax season. The elevated export level suggests Chinese producers were producing goods more cheaply, driven by lower coal prices, than European producers, which have historically been the marginal cost producer of nitrogenous fertilizer.
Export volume will likely hit a record
For this year, China’s urea export volume could hit one of the highest peaks in history—if coal prices stay low. Record monthly export volumes would likely reflect low wholesale urea prices around the world. This will also negatively affect other types of nitrogenous fertilizers, like ammonia, which are also used to make urea or other fertilizer compounds.
The indicator helps to illustrate global dynamics
While urea export data isn’t as timely as coal prices, which trade in exchange or wholesale urea prices, it nonetheless serves as confirmation. It may also help investors understand how China’s capacity expansion, which can have a significant impact on future urea prices, would affect the global trade dynamics of nitrogenous fertilizer.
Watch for how China may impact the fertilizer industry in the coming years
If China becomes a large influential player in the global fertilizer market, it can negatively affect stocks like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Terra Nitrogen Company LP (TNH), and, to a much lesser extent, Potash Corp. (POT). This trend would also negatively affect the Market Vector Agribusiness ETF (MOO).
Browse this series on Market Realist:
- Part 1 - Rain helped crop condition but is negative for fertilizer stocks
- Part 2 - Corn inventory set to cross 2010 high, supporting long-term price
- Part 3 - High fertilizer prices could hurt sales volume in the short term