While most North American producers use natural gas to produce nitrogen fertilizers, CVR Partners (UAN) primarily uses coal as a hydrogen source to produce nitrogen-based fertilizers. Coal, or petroleum coke, is also widely used by nitrogen fertilizers producers, mainly urea, in China. So declining coal prices also create a negative situation for natural gas-based producers such as CF Industries (CF), Terra Nitrogen (TNH), and Potash Corporation (POT).
Pet coke price index
Prices of pet coke have been declining over the years, similarly to what we’ve seen in natural gas. The pet coke price index stood at $45.6 per ton as on February 24, down 20% from $57.5 per ton on the same day one year previously, in 2015.
Investors might thus consider the iShares US Basic Material ETF (IYM), which invests about 12% in agricultural chemical companies.
Why track coal?
In the graph above, you’ll see that the floor price for urea of about $225 per ton was set by urea producers on the far left of the cost curve. Naturally, since the market prices of urea are determined by marginal producers, a decline in their cost of production pushed the floor downward. Because of this price decline, North American manufacturers saw their margins squeezed. This is why it’s key to keep a track of coal prices.
In the next and final part of this series, we’ll look at urea prices in more detail.