Why a dim coal outlook is negative for global urea producers (Part 7 of 7)
While the outlook for global urea prices is neither positive nor negative, fertilizer producers in the United States will continue to benefit from cheap natural gas prices in North America. The nitrogen fertilizer business in the United States is essentially a spread between between domestic natural gas prices, which are primarily used to produce nitrogen fertilizers, and coal prices in China that set global natural gas prices.
Natural gas boom
Since the great energy boom that took place via the use of hydraulic fracking and horizontal drilling, natural gas prices in the United States have fallen substantially from pre-financial crisis levels. As natural gas prices fell, producers such as CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), Agrium Inc. (AGU), and (to a lesser extent) Potash Corp. (POT) benefited.
The worst winter led to higher prices
Natural gas prices have been volatile over the past few months as one of the worst winters in years hit United States. While natural gas prices at Henry Hub, a benchmark for the resource in the United States, stood around just $4.19 per MMBtu (million british thermal units), they’ve spiked to as high as $8.00 per MMbtu several times.
Without hedging activities, these companies would see substantially lower earnings for the first quarter. But because of hedging activities, companies have already locked in large percentages of their natural gas use for the quarter. As the chart above shows, when the Henry Hub spot price fell sharply during the winter of 2011–2012 due to a much warmer winter and supply surge, realized natural gas costs for TNH, CF, and POT didn’t fall as much. So unless the recent rise in natural gas prices is permanent, these companies’ future earnings, and consequently share prices, won’t be affected as much.
Prices to stay low
As the temperature rose, natural gas prices fell. On March 13, 2014, natural gas prices at Henry Hub traded at ~$4.39 per MMBtu. This figure is close to what we saw prior to the harsh winter, which suggests natural gas prices would likely stay low over the short to medium term.
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