U.S. Markets closed

Global urea capacity utilization should fall over the next 3 years

Xun Yao Chen

Will urea prices fall below 2013 lows, hurting stocks like Agrium? (Part 1 of 4)

Capacity utilization

Excluding China, the world’s urea capacity utilization is expected to remain quite flat over the next few years, according to Fertecon’s projections in 2013. This even accounts for new capacity planned and under construction in regions such as North America, where low natural gas prices have attracted companies such as CF Industries Holdings Inc. (CF) to invest.

Lower global utilization

But when we factor in China, Fertecon expects global urea capacity utilization to fall from roughly 77.5% in 2013 to just above 70% in 2016. Lower capacity utilization often translates into higher rivalry, as companies try to stay in the business to cover fixed costs.

While a competitive industry generally benefits consumers, it often erodes profitability for the industry, which would negatively impact fertilizer stocks such as CF Industries (CF), Terra Nitrogen (TNH), Agrium (AGU), and CVR Partners (UAN).

New capacity additions

Lower capacity utilization can be driven by lower consumption or new capacity additions. But since the industry is expected to increase nitrogen consumption by 1% each year as the world population and global economies grow, lower utilization is primarily driven by new capacity additions in China.

This series will focus on urea price developments in China and their implications for global nitrogen fertilizer producers.

Continue to Part 2

Browse this series on Market Realist: