U.S. Markets closed

Fertilizer producers can avoid higher natural gas prices for now

Xun Yao Chen

Why natural gas prices could hurt US fertilizer producers (Part 3 of 4)

(Continued from Part 2)

Narrowing global prices

When infrastructure develops and permits are acquired to export U.S. natural gas, demand and prices should narrow with global LNG prices. Today, the world’s largest LNG exporters are Qatar, Malaysia, and Indonesia. The three major LNG importers historically were Japan, South Korea, and the United Kingdom.

Current prices

LNG prices are more expensive in the East than in Europe due to higher demand for natural gas to supplement nuclear-generated electricity in Japan following the Fukushima incident, as well as weak economic activity in Europe. While the estimated price for LNG reaches $15.65 per MMbtu (million British thermal units) in the East in November 2013, they were just around $10.90 per MMBtu in Europe, according to Waterborne Energy Inc..

Facing weak economic conditions, European countries were successful in negotiating much cheaper natural gas prices from their major Russian supplier, Gazprom, relying less on LNG. Although several European countries had reconsidered nuclear power due to Fukushima, most utility companies had switched to coal over natural gas—likely due to its relative cheapness.

A link to oil prices

LNG prices, like natural gas prices in Europe, are linked to oil prices. The exact formula is slightly more complicated than just assigning a factor to oil prices, but for investors, it’s unnecessary to know this in much detail. Nonetheless, analysts expect that the global LNG market will move towards spot pricing because of increases in available global supply. Increased global LNG supply will also make it hard to justify a “security premium,” which is the premium buyers pay that ensures supply.

Morgan Stanley recently said that Australia will become a global gas superpower by the middle of this decade, according to the Telegraph. The country is expected to have a huge ramp-up in LNG output that could even transform the country’s economy, possibly overtaking Qatar to be the largest exporter of LNG as early as 2017. While the U.S. has a glut of natural gas, the investment bank said it will take about five to ten years before the export terminals and necessary infrastructure are ready to sell large amounts on the global market. This is hopeful for nitrogenous fertilizer producers like CF Industries (CF), Potash Corp. (POT), Terra Nitrogen Company LP (TNH), and Agrium Inc. (AGU).

Continue to Part 4

Browse this series on Market Realist: