An investor's guide to nitrogen fertilizer companies in 2014 (Part 7 of 8)
This winter has been pretty brutal. As a result, natural gas use and prices have soared. Natural gas prices traded at the New York Mercentile Exchange rose from below $4.00 per MMBtu (million British thermal units) during the fourth quarter to as high as $6.00 recently. But while natural gas prices have soared, coal prices have stagnated.
Gas, coal, and fertilizers
If natural gas prices are rising, utilities in the United States should be incentivized to use more coal and support coal prices. This, in turn, would support nitrogen fertilizer producers such as CF Industries (CF), Terra Nitrogen Company LP (TNH), CVR Partners LP (UAN), and Potash Corp. (POT). But that’s not what we’ve seen over the past few months. Rather than rising, the Market Vectors Coal ETF (KOL), which closely mimics coal prices around the world, has barely risen.
China: The big player
In 2012, China consumed more than three times as much coal as the United States, making up 50% of the world’s total consumption on a million tonnes of oil equivalent basis. With economic activity growing at 7%-plus, China remains a key driver of world coal prices.
Factors to consider
On the one hand, China needs to control its pollution level, which coal has played an important role in. But the industry is also an important source of revenue for local governments as well as unemployment.
Because of severe pollution issues, the government recently had utilities run low on coal-generated electricity to meet environmental standards. But considering that ~67% of China’s electricity is powered by coal, the country has only a few alternatives to switch to. In some instances, blackouts occurred, stirring complaints.
While further increases in domestic and seaborne supply, as well as the development of transportation infrastructure, could depress prices, investors should also keep in mind that several coal-to-chemical projects were approved in 2013. So, while all sounds like doom and gloom, coal may not be out of the game. China’s economic growth is another important variable to watch.
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