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How Did Fertilizer Stocks and Fertilizer Prices Move Last Week?

PART:
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Part 4
How Did Fertilizer Stocks and Fertilizer Prices Move Last Week? PART 4 OF 8

How the Fall in Henry Hub Natural Gas Affects Fertilizer Companies

Natural gas

For the week ending July 22, natural gas prices at Henry Hub continued the previous week’s declining streak. Natural gas is a key raw material that accounts for 75% of input costs for nitrogen fertilizers such as ammonia. Thus, natural gas prices affect nitrogen fertilizer producers such as CF Industries (CF) and Terra Nitrogen (TNH), which use natural gas as a feedstock.

How the Fall in Henry Hub Natural Gas Affects Fertilizer Companies

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Prices fall

During the week ending July 22, 2016, natural gas spot prices fell by an average of 0.23% to $2.7 per MMBtu (British thermal units in millions) from the previous week. The forward one-month (August) contracts have also declined slightly by 0.6% week-over-week. In contrast, natural gas prices at the NBP (National Balancing Point) in the UK rose by 2% to $4.6 per MMBtu week-over-week. Henry Hub in the US and NBP in the UK are the most heavily traded points for natural gas.

The fall in natural gas prices positively affects fertilizer producers such as CF Industries (CF), Agrium (AGU), Terra Nitrogen (TNH), and CVR Partners (UAN). According to CF Industries, a $1 change per MMBtu in natural gas can change the cost of production for ammonia and granular urea by $32 and $22 per ton. Fertilizer producers can mitigate natural gas price fluctuations through futures contracts, but such contracts can result in a loss if they move in an unfavorable direction. These losses lower gross margins. So, volatility in natural gas prices affects companies even with hedging.

Natural gas prices also affect ETFs such as the iShares Global Materials ETF (MXI). MXI invests about 4.5% of its portfolio in agricultural chemical companies, including Monsanto (MON).

Natural gas price forecast

Last week, the EIA maintained its 2016 forecast for average natural gas prices at Henry Hub at about $2.36. For 2017 it maintained its forecast of $2.95 per MMBtu.

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.

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