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Why a dim coal outlook is negative for global urea producers

Part 3
Why a dim coal outlook is negative for global urea producers (Part 3 of 7)

Why China’s pollution may affect fertilizer stocks like AGU

Relying on less coal

Aside from China’s economic activity, the global coal market is also facing pressure from China’s ongoing push to use more renewable or alternative fuels as concerns of sustainability and pollution mount. If demand growth for coal further slows, coal prices could fall and bring down global urea prices.

China Total Energy ConsumptionEnlarge Graph

Total share of energy

In 2011, coal represented 69% of China’s energy consumption, with the rest made up by oil, hydroelectric power, natural gas, nuclear, and other renewables. While the government initially targeted coal as a share of total energy consumption to fall below 65% by 2017, it pushed the deadline earlier, to 2014.

This will negatively impact coal consumption growth—and prices, of course—which would negatively affect CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), CVR Partners LP (UAN), Agrium Inc. (AGU), and the Market Vectors Agribusiness ETF (MOO).

Slowing demand growth

Interestingly, coal accounted for 65.7% of China’s energy consumption in 2013, according to a 21st Century Herald newspaper reported on January 13, 2014. This implies that China’s coal demand has already grown at a slower pace compared to other energy sources over the past few years.

Demand for coal should continue to grow, because Western China has few alternative energy sources to rely on, coal remains the cheapest fuel, and coal-to-gas chemical plants are planned. Nonetheless, this growth could come in lower than previous years’ growth. According to China National Coal Association, China’s coal consumption grew 2.6% in 2013.

Due to gains from energy efficiency and greater emphasis on sustainability, the National Energy Administration projects consumption growth of just 1.6% in 2014. The International Energy Agency has a more optimistic view of a 2.6% annual growth rate until 2018.

Unknown upside

Overall demand growth for coal will likely slow over the next few years. But if the government restricts its use of low-ranking coal in an effort to reduce pollution, demand for higher-ranking coal could rise, pushing thermal and anthracite coal prices up. This would be positive for nitrogen fertilizer producers.

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