Why China’s urea output likely rose, fertilizer stocks negative
The importance of supply
Supply is one of the factors that affect prices. When the supply of nitrogenous fertilizers such as urea increases more than demand, competition intensifies, which leads to lower selling prices. On the contrary, when supply reduces, competition becomes less intense—a positive effect on prices.
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Urea output remains higher since the start of the year
Urea output in China stood at 2.82 million metric tonnes in July. Although the indicator has fallen from a record high of 3.03 million metric tonnes in June, output remains higher than the beginning of the year. Lower coal prices (which fell from $90 per metric tonne to $72 based on McCloskey’s steam coal price in Newcastle, Australia) have made Chinese producers much more competitive in the global market.
New capacity additions drove utilization lower
Last month, we saw operating rate for urea collapse from ~87.5% in June to below 75% for July. The fall was driven by large increases in new capacity additions. Since then, operating rate has recovered to 76.1% in August, which likely suggests that output rose.
New capacity additions can be problematic, because according to CF Industries’ recent presentation, world’s capacity utilization is expected to fall due to new capacity in China in 2014 and 2015—see Why Agrium Inc. suspending capacity addition will affect other producers (Part 3). While China’s export tax can affect export amount, if China itself is having trouble with excess urea supply, then the government may reduce the tax or increase the low export tax season that typically falls from July to November to help domestic producers.
Heightened risk if coal prices remain low
Because the United States is still a net importer of nitrogenous fertilizer, proximity to U.S. farmers will continue to benefit nitrogenous fertilizer producers such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Rentech Inc. (RTK), and Terra Nitrogen Company LP (TNH). But as long as coal prices remain low, there’s heightened risk that the increased global supply will negatively impact sales, earnings, cash flow, and share prices. This will also negatively affect the VanEck Vectors Agribusiness ETF (MOO).
Continue to Why Chinese producers are driving nitrogenous fertilizer prices down (Part 1) to learn more about this ongoing theme.