Urea prices are rising, so why is Terra Nitrogen stock falling?

Market Realist

Why did Terra Nitrogen Company stock drop 10% more? (Part 2 of 9)

(Continued from Part 1)

Fertilizer prices

With any kind of business, revenue and expenses are generally what drive the fundamental value of share prices. For a nitrogenous fertilizer producer like TNH, prices of ammonia, urea, and UAN tend to affect earnings more than volume—especially for low-cost producers like those in North America.

Prices for nitrogenous fertilizer products sold off earlier this year due to abundant Chinese supply that was largely driven by lower coal prices, which is the primary feed stock used to make urea in the country. The government also imposes an export tax on fertilizer products in China in order to keep prices low for its domestic farmers. Before the low export tax started, urea was selling at around $400 per metric tonne.

Thereafter, prices started to roll down to $280 per metric tonne. Lower prices mean lower earnings, which negatively affected CF Industries (CF), Potash Corp. (POT), and Agrium Inc. (AGU) during the first half of the year.

Newcastle Thermal Coal

Urea prices rebound

Urea prices recently bottomed due to two primary reasons. First, higher coal prices made it more expensive to produce urea in China. Coal prices were due for a rebound as production cuts rolled in and global economic activity strengthened. Prices for Newcastle thermal coal bottomed near $75 per metric tonne and were last seen near $85 per metric tonne on December 23, 2013. Second, the end of the low export tax season tends to lift urea prices higher as Chinese farmers return to the market to buy for next year’s plantation.

Yet gains in coal prices are likely to be limited, as new production capacity is expected to come online, along with China’s objective of steering towards cleaner energy. Nonetheless, urea prices will likely stay above ~$300 per metric tonne. Green Market’s data showed that urea prices stood at $378 per mt (metric tonne) on December 9, 2013.

Continue to Part 3

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