Supply and demand
Investors often hear analysts say supply and demand drive prices. It’s a pretty simple concept, but there’s a tad more complexity to it. In this series, we’ll cover how costs in the United States, China, and Europe influence nitrogenous fertilizer prices along with other factors.
Marginal producer’s cost
In a competitive market, the marginal producer’s cost generally sets the price floor for fertilizers like ammonia and urea, given a certain amount of demand. Nitrogenous fertilizers are commonly made using natural gas, while coal makes up a large part of fertilizer production in China. Because natural gas and coal prices differ from place to place, the cost of production differs around the world. Other costs, like labor, will affect production costs, but they are less important.
Let’s keep demand constant for a moment and picture multiple players in the industry. Since the industry is quite fragmented (no one holds a dominance in market share), competition is intense. This makes it hard for producers to coordinate prices with each other. Whatever business one company doesn’t take will be another company’s gain.
Incremental (marginal) supplier
The price customers are willing to pay, then, depends on the incremental supplier that’s willing and able to sell. This means if the price isn’t above the incremental supplier’s cost, the supplier will not provide. If the incremental supplier asks for a higher price than it costs the company, then the company could lose the business, and the company that incurs the next higher cost to produce such goods will receive the business. Through multiple transactions and price quotes, suppliers learn where the market price is.