The scarcer the resource, the higher the price — such is the law of economics. On April 17th, a fertilizer plant in West Texas exploded, killing 17, injuring more than 150 people, and destroying/damaging more than 150 buildings near the facility. While the cause of the explosion is still under investigation, the fertilizer plant held 240 tons of ammonium nitrate and 50 tons of anhydrous ammonium, according to a filing with the US Environmental Protection Agency (EPA) in 2012.
Ammonia price unmoved by the West Texas explosion
Although the explosion was disastrous, the economic impact on the supply of fertilizer is minimal. Price for ammonia, a chemical compound of nitrogen and hydrogen used to create ammonium, in the mid corn belt region stood flat at $800 per short tons after the explosion went off at the West Texas fertilizer plant. There are two points that investors should note:
- The West Texas fertilizer plant was only a retail plant, in which fertilizers were mixed together into different concentrations before selling them to farmers. Because it was not an actual plant that produced ammonia, the effect on supply of ammonium nitrate and anhydrous ammonia is only temporary. Higher demand for ammonia will also be temporary.
- To produce a ton of amonium nitrate, 0.21 ton of ammonia is required. In 2012, the U.S. had an annual production of 9.47 million tons of ammonia in 2012, and the total world’s production was 137 million, according U.S. Geological Survey (USGS).1 West Texas’s inventory of 240 tons of ammonium nitrate and 50 tons of anhydrous ammonia is marginal.2
Fertilizer producers unlikely to benefit from explosion
Given the two points above, nitrogenous fertilizer producers, such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), and Potash Corp. (POT), will unlikely benefit from the West Texas disaster. Market Vectors Agribusiness ETF (MOO), which invests in every stage of the agriculture supply chain, and the Global X Fertilizers/Potash ETF (SOIL), which invests purely in fertilizers, will also be unlikely to benefit.
- http://minerals.usgs.gov/minerals/pubs/commodity/nitrogen/mcs-2012-nitro.pdf ↩
- Anhydrous ammonia is basically ammonia. To be specific, it is ammonia without water. The term anhydrous ammonia exists because ammonium hydroxide, ammonia with water, is often referred as ammonia. ↩
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