Fertilizer trends recap, September 23–27

Part 8

Why China’s urea prices hit a new low, but momentum is falling

The impact of China’s urea prices

China’s urea prices can have a significant impact on global fertilizer prices. Although the production cost of urea is on the higher end, as urea production uses a large source of nitrogen extracted using coal instead of natural gas, coal prices can have a significant impact on the cost of production. When coal prices fall, they make Chinese producers much more competitive, allowing them to increase their output. Higher output will negatively affect global urea prices—especially when the export taxes lower during the off-season (July to October).

China Average Urea Price 2013-09-27Enlarge Graph

Urea prices in China hit new low

According to the China National Chemical Information Center, the average selling price of urea in China stood at 1,703.7 renminbi per mt (metric tonnes) at the end of September, reaching a new low since falling from March this year. Although domestic farmers and higher coal prices had supported urea prices until March, urea prices have since fallen due to increased supply from Australia and Indonesia, and slower economic activity in China has led to weak electricity consumption growth until recently. Lower urea will also negatively impact ammonia prices, as the commodity is used to create urea.

World Wholesale Urea Price 2013-09-27Enlarge Graph

Urea prices worldwide have been falling

That development has made 80% of Chinese producers that use coal to make fertilizers much more competitive in the global market. Domestic producers reacted by increasing their production. As urea prices in China have fallen, world urea prices are taking a hit, reaching as low as $336 per metric tonne at the end of August, according to Green Markets.

Impact on fertilizer producers

On a positive note, momentum appears to be slowing, likely because coal prices have stopped falling as economic growth in China has picked up, and the end of China’s low-export tax season (set to occur at the end of October) is approaching. This could have a medium-term positive impact on worldwide urea prices that are sitting at 2010′s average price. Higher urea prices will allow nitrogenous fertilizer producers such as CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), and Terra Nitrogen Company LP (TNH) to sell their products at higher prices, which will help with earnings and cash flow.

In the short-term, however, companies could still be cutting or missing estimates amid lower selling prices. Historically, sales price for these companies have lagged the markets’. Plus, if this expectation isn’t priced in or the price of coal doesn’t bounce up from here, share prices could be negatively impacted. This also applies to the Market Vectors Agribusiness ETF (MOO), and, to a much lesser extent, Potash Corp. (POT) as well.

The Realist Discussions