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How China affects the global fertilizer market
China, the world’s largest producer of nitrogen (a chemical used to make nitrogenous fertilizers for growing plants) occupies roughly 40% of global production capacity. Although much of its output sells to domestic farmers—as an export tax of as much as 75% during the on-season restricts domestic firms from selling in the global market—its export policy can change from year to year. When fertilizer prices are low or when there’s excess production or inventory, higher Chinese exports could drive down global nitrogenous fertilizer prices.
China uses coal while other countries use natural gas
While China isn’t the most expensive producer of nitrogenous fertilizer, it is one of the more expensive producers, unlike the United States. This is because most of its available capacity, about 80%, uses coal as an input for producing nitrogen, while the rest of the world uses natural gas. So the total cash cost of producing nitrogenous fertilizer and delivering it to the U.S. Gulf (southeast boarder) is estimated at ~$320 per short ton (see the chart above). Investors should keep in mind, though, that these costs can change from time to time due to variances in raw-material prices.
Low coal prices make Chinese producers more competitive
With China slowly shifting away from using coal to generate electricity, and a surge in Indonesian and Australia coal production, coal prices have performed negatively throughout 2013. While newcastle prices (a benchmark for all other coal shipped from Australia) stood at $93.05 per metric tonne in February earlier this year, they fell to $77.1 per metric tonne as of the end of July—a further decline from the $77.75 last reported in June. Domestic coal price at Qinhuangdao has fallen from $115 per metric tonne to $108.23 per metric tonne over the same period as well.
© 2013 Market Realist, Inc.