The reason why urea prices will likely end up lower this year

Market Realist

Why do nitrogen fertilizers continue to face pressure from China? (Part 3 of 3)

(Continued from Part 2)

Input prices

One of the key factors that affect China and global nitrogen fertilizer prices is input costs. The higher the input cost, the more costly it is to produce nitrogen fertilizers. And as our nitrogen business overview showed (see Why are China and coal important for nitrogen fertilizer stocks), the marginal producer’s cost of production (currently China) sets the floor for industry-wide prices for a commodity product such as nitrogen fertilizers.

Coal prices

Unlike the rest of the world, the majority of China’s nitrogen fertilizer production uses anthracite coal as a feed stock. Anthracite is the highest ranked coal used for industrial applications. While anthracite coal is used to generate electricity in China, which makes it a substitute of thermal or steam coal prices, the above chart shows a stronger relationship between anthracite prices in China and coking coal, a type of coal used in steel production.

Although anthracite doesn’t have coking characteristics, a small blend of anthracite is mixed with coking coal to lower the cost of production, according to RP Industrial. So, if coking coal prices fall, then there is a likelihood that urea prices may also fall, which would negatively affect Market Vectors Agribusiness ETF (MOO) and nitrogenous fertilizer producers such as CF Industries Holdings, Inc. (CF), Terra Nitrogen Company, L.P. (TNH), CVR Partners, LP (UAN), and Agrium Inc. (AGU).

Short-term bounce

Coking coal prices have rebounded recently, likely on the back of news and actions taken by the Chinese government to accelerate spending and support growth. On April 4, 2014, prime coking coal prices in China stood at $163 per metric tonne, up from $162 per metric tonne reported on March 28, 2014. Such rebound may be a short-term positive for fertilizer producers and alleviate downward pressure on urea prices, but many industry analysts aren’t quite optimistic. On top of China’s steel production and economic growth uncertainties this year, new capacity would continue to add downward pressure on coal prices. BHP Biliton, the world’s largest exporter of coking coal, also said recently that it doesn’t expect coal prices to lift up anytime soon.

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