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PotashCorp Takes a Hit on Nitrogen Prices in 2Q15

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Nitrogen prices decline

Weakness in Potash Corporation’s (POT) nitrogen segment’s 2Q15 earnings stemmed primarily from lower prices across all three nitrogen fertilizer categories. Ammonia prices fell 16% to $460 per metric ton, urea prices fell 18% to $358, and nitrogen solution prices fell 10% to $218—each compared to respective prices in the corresponding quarter a year ago. 

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Increased supply

Nitrogen fertilizer has taken a hit as a result of increased market supply coming from China, North Africa, and the Middle East. China has added capacity, benefiting from lower energy prices for coal, which is the key raw material used to produce nitrogen fertilizers in China.

Outlook

PotashCorp’s nitrogen segment has been under pressure due to excess, low-cost supply from Chinese players. Nitrogen fertilizer prices have become depressed because of increased production in China. China is the largest producer of nitrogen fertilizers and its position is strengthened by lower coal prices.

But the declining price for natural gas, which is used as an input by CF Industries (CF), PotashCorp (POT), Terra Nitrogen (TNH), and Agrium (AGU), has encouraged companies to expand their nitrogen production as well. But this has led to excess capacity, which has further driven down nitrogen prices.

The VanEck Vectors Agribusiness ETF (MOO) invests 11.5% of its portfolio in CF, Mosaic (MOS), and AGU.

PotashCorp also has nitrogen operations in Trinidad. Natural gas prices in Trinidad have actually increased,  offsetting the US natural gas price decrease. The nitrogen segment’s gross margin for the quarter decreased to 40% from 46% a year ago.

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