Factors driving earnings down
Diluted earnings at CF Industries Holdings Inc. (CF) have fallen 33% for the third quarter of 2013 compared to the same quarter last year, largely due to lower selling prices, coupled with some weakness in demand.
Lower selling prices
Last year, CF Industries sold its ammonia, urea, and UAN at an average price of $686, $518, and $326 per metric tonne, respectively. This year, the average selling price for ammonia came down to $581 per metric tonne, while urea fell to $373 and UAN fell to $302 per metric tonne.
Note that these figures aren’t quoted by the companies, as they’ve been converted to the international standard of “metric tonne” rather than the U.S. “short ton.” On a percent basis, ammonia is down 15.27%, urea is down 28.08%, and UAN is down 10.17%.
Types of nitrogenous fertilizers
For those who don’t know, ammonia is the basis of all nitrogenous fertilizers. Combining ammonia with carbon dioxide, we get urea. To produce UAN, manufacturers must first create ammonium nitrate by combining concentrated nitric acid with ammonia. Ammonium nitrate is then combined with a liquid form of urea to get UAN. Thus the name urea-ammonium nitrate, or UAN.
Why prices fell
Prices of nitrogenous fertilizers were lower than the previous quarter and compared to the same quarter last year due to increases in global supply, as lower export tax season, lower coal prices, and possibly increased capacity in China made Chinese fertilizers more competitive. As supply increased and uncertainty of where prices would head mounted, dealers, distributors, and farmers purchased less.
International prices, however, did find support during the third quarter and recovered slightly as high-cost producers in Eastern Europe turned down production and higher-cost producers in China reduced producers in response to lower prices. While not mentioned in the call, we believe rebounding coal price was a major contributor to stabilizing prices.
Impact on share prices
So while historically negative, unless fertilizer prices continue to slip and break below the last support seen, CF Industries and other nitrogenous fertilizer producers like Agrium Inc. (AGU), Potash Corp. (POT), and Terra Nitrogen Company LP (TNH) should do just fine. This will benefit the Market Vectors Agribusiness ETF (MOO) as well.