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Why investors should follow Potash Corp.'s earnings call

Part 4
Why investors should follow Potash Corp.'s earnings call (Part 4 of 5)

Why Potash Corp. remains cautious about nitrogenous fertilizers

Managers are cautious

Although managers of Potash Corp. (POT) were slightly optimistic about the future of potash, they remain a bit cautious for nitrogenous fertilizers, which may be negative for the future outlook of CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), and Agrium Inc. (AGU). Exports of urea are expected to hit 9 million to 10 million metric tonnes this year, and China may change the high tax export window or possibly eliminate it.

Potash Corp's Nitrogenous Fertilizer Sales PriceEnlarge Graph

Enough domestic supply

For both urea and phosphate, China appears able to meet farmers’ demand via domestic production. A high tax export window, a period when taxes are raised on goods exported out of China, was historically used to keep adequate supplies of urea and phosphate available in China and keep prices low. But capacity expansion as well as low prices have reduced concerns of limited supply and high fertilizer prices.

Sales prices have fallen

In Potash Corp. (POT)’s 10-q quarter filings, selling prices for urea and ammonia fell more than 25% since the last quarter, as lower coal costs and increased capacity in China drove nitrogenous fertilizers lower worldwide. However, it’s important to note that many nitrogenous fertilizers in China are produced using coal. With air pollution a major problem, the government could turn its focus towards a cleaner environment, shutting down coal-based plants. This may be part of the solution to work toward greener cities.

Key drivers to follow

Regardless, investors should also note that coal use for electricity is also expected to fall as China relies on cleaner energy sources to produce electricity. So it’s probably best for investors to follow the prices of urea and coal, operating output, urea exports, and operating capacity in China, which we break down at MarketRealist.com. Higher coal prices will certainly increase costs in China and push fertilizer prices up. However, if domestic output does fall, it can positively affect the world supply of urea. Lower supply means higher prices.

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