Coal prices are rolling over and still key to nitrogen fertilizers

Market Realist

An investor's guide to nitrogen fertilizer companies in 2014 (Part 6 of 8)

(Continued from Part 5)

China

China played a critical role in 2013, driving nitrogen fertilizer prices down and negatively affecting the share prices of CVR Partners LP (UAN), Terra Nitrogen Company LP (TNH), CF Industries Holdings Inc. (CF), and Agrium Inc. (AGU). Producers in China will again be a key driver for global fertilizer producers this year.

Urea prices

Urea prices at the Black Sea, an international benchmark for global prices (the yellow line in the graph above), rose to ~$400 per metric tonne in mid-February, according to Freight Investor Service. Urea prices in China also recovered as domestic farmers returned to the market to prepare for this year’s plantation.

Recall that prices in China have historically been lower than the global market’s because the government exported urea to ensure adequate and affordable supply for domestic farmers. Of course, if China’s export policy changes, so will the premium that the global market commands over prices in China. And if global demand is tight, ex-China buyers would be willing to pay a higher premium (more on this later).

Export tax

Due to abundant supply and lower fertilizer prices, the government has set a lower export tax for 2014 during peak and off-peak seasons. Urea exports will be taxed at 15% of value plus a fee of $6.55 per ton. During the off-season, urea exports will only be charged a fee of $6.55 per ton. These taxes are substantially below the ~77% export tax we saw in 2013 during the peak season. China’s lower export tax should mean a less volatile year for urea prices. But it also means a lack of opportunity for higher profits for U.S. fertilizer producers.

Coal price

A key factor that will dictate how nitrogen fertilizer producers will perform is coal price. While anthracite prices in China (the black line above) rose during the fourth quarter along with global coal prices, they appear to be rolling over again.

Continue to Part 7

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