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Investors may not need to fear Russia’s lower gas offer to Ukraine

Xun Yao Chen

Why could Ukraine's natural gas tension drive urea prices down? (Part 8 of 9)

(Continued from Part 7)

Gazprom can’t lose international business

Gazprom can’t lose its international market because doing so would mean higher natural gas prices at home. It costs Gazprom approximately $132 to produce or acquire and distribute 1 tcm (1000 cubic meters) of natural gas. But its domestic customers are only charged $80 per tcm. Losing international market means Russia will have to increase domestic natural gas prices significantly in order for Gazprom to break even. That’s not going to happen.

Russia may offer a 25% discount

On December 16, Viktor Medvedchuk (a Ukrainian ally of Russian President Vladimir Putin) said the country could get a discount of at least 25% ($100 to $140 per thousand cubic meters) on current natural gas prices. Gazprom rose on the news, as the market was expecting $150 before the news, according to Alexander Kornilov, analyst at Alfa Bank.

Nitrogenous fertilizers weren’t greatly affected

Nitrogenous fertilizer producers such as CF Industries Holdings Inc. (CF), Potash Corp. (POT), Terra Nitrogen Company LP (TNH), and Agrium Inc. (AGU) rose less than the broad market and the overall Market Vectors Agribusiness ETF (MOO). Could the impact of lower natural gas prices in Ukraine be limited? Possibly.

Marginal producer

Ukraine was a significant marginal producer throughout 2009 and 2010, which later switched to China towards the end of 2011. So we may infer that at least some Chinese producers were able to produce nitrogenous fertilizers at cheaper costs. Because China produces and exports more urea than Ukraine does (see above), it’s quite unlikely that Ukraine will be able to replace Chinese suppliers in the global market. While lower natural gas prices in Ukraine may put some pressure on urea prices and limit possible gains, China will likely remain the marginal producer. This means coal prices would likely remain a critical driver.

Continue to Part 9

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