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Why Agrium Inc. suspending capacity addition will affect other producers (Part 3)

DemandEnlarge GraphContinued from Part 2

Demand projection

To figure out where future capacity utilization may be, we must first take a look at future demand. Nitrogenous fertilizers, unlike potash or phosphate fertilizers, must be applied by farmers every year, as the mineral is vital to plant growth. Potash and phosphate fertilizers, on the other hand, aren’t directly consumed by the plants themselves. Driven largely by increases in fertilizer applications in Asia and Latin America, where application rates are still low, nitrogen (which is used to covert into nitrogenous fertilizers) demand is expected to grow at an annual rate of 2.0%

World Fertilizer Utilization Expected CF Industries Mid 2012Enlarge Graph

Utilization rate expected to fall, but not excluding China

As global capacity is estimated to increase by 14% between 2013 and 2018, led by the United States and China, the utilization rate is expected to drop from 80% to 78%. Analysts expect the operating rate outside China to remain high and close to today’s levels of 84%. Because the Chinese government imposes an export tax on fertilizers that are shipped to customers outside the country, in order to make fertilizers less pricey for farmers, CF Industries Holdings Inc. (CF) points out that China’s export policy is more important than the actual capacity increase. If export policy can prevent Chinese producers from exporting much of their production, then pricing pressure on nitrogenous products will be limited, which would benefit nitrogenous fertilizer producers such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Potash Corp. (POT), and Terra Nitrogen Company LP (TNH). This would also benefit the Market Vectors Agribusiness ETF (MOO).

However, a lower export tax, or the complete disbandment of export tax, is a risk to global nitrogenous fertilizer producers. To learn more about the risk, continue on to the separate series Why Chinese producers are driving nitrogenous fertilizer prices down, which also covers why China’s current utilization rate is lower than the rest of the world’s.