Excluding China, the world’s urea capacity utilization is expected to remain quite flat over the next few years, according to Fertecon’s projections in 2013. This even accounts for new capacity planned and under construction in regions such as North America, where low natural gas prices have attracted companies such as CF Industries Holdings Inc. (CF) to invest.
Lower global utilization
But when we factor in China, Fertecon expects global urea capacity utilization to fall from roughly 77.5% in 2013 to just above 70% in 2016. Lower capacity utilization often translates into higher rivalry, as companies try to stay in the business to cover fixed costs.
While a competitive industry generally benefits consumers, it often erodes profitability for the industry, which would negatively impact fertilizer stocks such as CF Industries (CF), Terra Nitrogen (TNH), Agrium (AGU), and CVR Partners (UAN).
New capacity additions
Lower capacity utilization can be driven by lower consumption or new capacity additions. But since the industry is expected to increase nitrogen consumption by 1% each year as the world population and global economies grow, lower utilization is primarily driven by new capacity additions in China.
This series will focus on urea price developments in China and their implications for global nitrogen fertilizer producers.