Fertilizer Update: Natural Gas Ends Its 5-Week Streak
Natural gas for fertilizer
Over the past couple of weeks, US natural gas prices have started trending higher, but they reversed this path in the week ended July 8. Natural gas is a key raw material that accounts for 75% of input costs for nitrogen fertilizers such as ammonia, which is then used to produce urea.
Natural gas prices significantly impact nitrogen fertilizer producers due to the abundant availability of natural gas.
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Price rise continued
During the week ended July 8, 2016, natural gas prices declined by an average of 1.8% to $2.80 per MMBtu (million British thermal units) from the previous week’s average of $2.86 per MMBtu.
Natural gas prices are based on spot prices for natural gas traded at Henry Hub, where gas prices hit a low of $1.49 per MMBtu in March 2016. Fertilizer producers may somewhat mitigate natural gas price fluctuations through futures contracts, but rising prices will put pressure on input costs.
Natural gas prices declined as the result of softening consumption, which fell by 8% for residential and commercial sectors due to moderate weather, according to the EIA (U.S. Energy Information Administration). Natural gas prices also affect ETFs such as the iShares Global Materials ETF (MXI), which invests about 4.5% of its portfolio in agricultural chemical companies, including Monsanto (MON).
Natural gas price forecast
Last week, the EIA maintained its forecast for average natural gas prices at Henry Hub at about $2.22 per MMBtu in 2016 and $2.96 per MMBtu in 2017.
In the next part of this series, we’ll take a look at coal prices. Coal is an alternative input material for nitrogen fertilizer production.