Why coal prices affect fertilizer producers
While most of the world uses natural gas as an input, 80% of China’s plants use coal to produce nitrogen-based fertilizers like urea and ammonia. As one of the costlier producers of the fertilizer used to support plant growth, fluctuations in coal prices can have a significant impact on global prices. The higher the coal price, the better it is for other fertilizer producers like CF Industries Holdings Inc. (CF), Agrium Inc. (AGU), Terra Nitrogen Company LP (TNH), and Potash Corp. (POT), which don’t use coal.
Coal prices showing signs of stabilization
The coal industry has been one of the worst performers in the global equity market this year. Companies like Peabody and Alpha Natural Resource have performed poorly in the wakes of increased supply from Australia and Indonesia and weak electricity consumption growth during the first half of the year in China.
Recently, we’ve seen some stabilization in commodity prices. Prices for thermal coal at Newcastle, Australia, a benchmark for world coal prices, have stood at $77.1 per mt (metric tonne) throughout July and August, but rose to $78.3 per mt at the end of September. While they rose to $79.1 per metric tonne on October 4, they were last seen at $78.65 per metric tonne on October 11, according to McClosky. Recent developments appear to be driven by improvements in economic activity in Europe and Asia, and lower supply increase.
Higher prices would be positive
If world economic activity does stabilize here, it should have a positive effect on global nitrogen-based fertilizer prices. Higher fertilizer prices will have a positive impact on the selling prices and revenues of manufacturers like CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), Agrium Inc. (AGU), and, to a much lesser extent, Potash Corp. (POT), holding everything else constant. This also applies to the Market Vectors Agribusiness ETF (MOO), if the market hasn’t priced in this potential move and analysts’ earnings estimates aren’t too optimistic.