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Falling Natural Gas Prices Could Be Good For Terra Nitrogen

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Terra Nitrogen’s raw material costs

Volatility in raw material pricing can have a material impact on a company’s profitability. Matters worsen if the company doesn’t have similar flexibility and has to accept the market price for its commodity-based product.

Natural gas is the primary input raw material used in the production of nitrogen fertilizers at Terra Nitrogen (TNH). Previously in this series, we learned that natural gas accounted for 63% of the company’s cost of goods sold.

Cost of goods sold per ton increased from $100 per ton for the nine months ended 2013, to $116 per ton in 2014—a 16% increase. The cost hike was primarily a result of climbing natural gas prices.

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The costs of realized natural gas prices increased in all three quarters of 2014 for TNH. In 3Q14, prices increased 13% to $4.06 per MMBtu (million British thermal unit), from $3.59 per MMBtu a year ago in 3Q13. In 2Q14, prices increased 3% to $3.87 per MMBtu, from $3.74 per MMBtu, and in 1Q14, natural gas prices increased 17% to $4.02 per MMBtu, from $3.43 per MMBtu.

Will falling natural gas prices turn things around?

Natural gas prices were higher for most of 2014 than they were in 2013. But toward the end of 2014, natural gas prices hit a low of $2.94 per MMBtu. This is a positive development for Terra Nitrogen and will benefit other nitrogen fertilizer companies as well, including CF Industries Holdings (CF), Potash Corporation (POT), and Agrium (AGU). These companies can also be found in the VanEck Vectors Agribusiness ETF (MOO).

Next up, we’ll look at how nitrogen selling prices have been driving revenues.

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