Continued from Part 2
Increased supply will drive exports to a record
Given the increased supply, Chinese firms have already begun exporting some of their urea, a type of nitrogenous fertilizer. While exports have historically remained close to zero during the busy season, export activity has remained above 200,000 metric tonnes a month this year. The fact that these domestic manufacturers are willing to sell some urea during the busy season signals excess supply. Once the off season begins, we can expect a surge in exports that could overtake last year’s record.
Global urea prices pressured
The possibility of another record round of exports from Chinese manufacturers has pressured global urea prices recently. Prices for urea in the United States and Europe remained close to $400 per metric tonne from 2011 to 2012, as high coal prices kept Chinese manufacturers at bay, making Eastern Europe and Former Soviet Union producers’ cost the floor for fertilizer prices (see Part 1). But given the possibility of a higher export volume this year, prices have fallen to ~$320 per metric tonne. In April, the world’s largest nitrogenous fertilizer manufacturer, Yara International ASA, cautioned a tough year for nitrogenous fertilizers because lower sales prices cut into margins and earnings.
Because China’s urea prices have historically declined during the off season, global urea prices will likely remain under pressure until the end of this year. This will also affect ammonia, another type of nitrogenous fertilizer that’s used to make urea, as ammonia demand will fall. While several coal mining firms are experiencing falling profitability, which will lead to some production cuts, China’s economic growth uncertainty will likely keep coal prices low in the short to medium term. Accordingly, China’s urea operating rate will remain elevated, making the country a potential price-setter of global nitrogenous fertilizer prices (see Part 1).
Although lower coal prices will also support the case for lower natural gas prices in the United States, as several utility companies have the option to switch back and forth between coal and natural gas electric generation, an increase in competition will pressure sales prices to a larger extent. This would continue to be negative for manufacturers in the United States, such as CF Industries Holdings Inc. (CF), Terra Nitrogen Company LP (TNH), Potash Corp. (POT), and Agrium Inc. (AGU). The VanEck Vectors AgriBusiness ETF (MOO) will also be negatively affected.