Overall prices for nitrogen fertilizers fell during 2Q15, which impacted CF industries’s (CF) revenue, as we saw in the previous part of this series. UAN prices fell to $271 per short ton (1 short ton equals 2,000 pounds) from $299 in the corresponding quarter a year ago. Urea prices also fell to $352 per short ton from $396. Ammonia prices, however, increased to $565 per short ton from $544 over the same period. So, why have prices fallen?
Why did prices drop?
- Over the years, prices of nitrogenous fertilizers have fallen as a result of growing capacity globally.
- US producers have also added new nitrogen capacity over the past few years.
- UAN and granular urea prices fell as a result of oversupply, especially coming from China, where producers in the past have enjoyed subsidies. Lower coal prices also played a role.
- Subsidies increase production, and a relatively unchanged demand pushes prices downward.
- There is an anticipation that these subsidies will be rolled back and VAT (value-added tax) will be imposed, making it expensive for Chinese producers.
- This change is anticipated to set a floor for global urea prices, which CF expects to be around $260.
- However, coal-based Chinese producers benefit further from falling coal prices, which reduce their input costs.
- This can cause concern for prices in the future and may negatively impact CVR Partners (UAN), Terra Nitrogen (TNH), and VanEck Vectors Agribusiness (MOO), which currently holds 7.8% of its holdings in CF Industries and Mosaic (MOS).
- Another reason for the fall in prices was delayed purchasing due to unfavorably wet conditions in the eastern Corn Belt in the US.
- However, a decline in UAN and urea prices was offset by an increase in ammonia prices.
- According to the company, prices of ammonia increased because ammonia application was preferred to other forms of nitrogen fertilizers, and there was a tighter supply compared to a year ago in 2014.
- CF is one of the low-cost producers, which makes the company competitive and creates incentive to reap the benefits of a higher spread between its cost of production and that of marginal producers.
- This is demonstrated in the chart above, which shows CF at the extreme left of the cost curve.
Besides prices, shipments or volumes have also taken a hit during the quarter, impacting CF’s revenue. In the next part, we will explore why.