Ammonia prices have moved sideways for eight straight weeks, which may put pressure on companies that sell ammonia like Terra Nitrogen (TNH) and CF Industries Holdings (CF). Let’s look at what could cause such a concern for investors.
For the week ended March 18, 2016, average prices for ammonia at the Tampa point remained unchanged at $310 per metric ton from the previous week. Ammonia prices appear to have hit the bottom with the previous week being the eighth consecutive week at the $310 per metric ton price point. Year-over-year, ammonia prices remain significantly depressed, down ~35% from $478 per metric ton during the corresponding week last year.
Ammonia prices are affected by lower natural gas costs. There are positives and negatives for falling ammonia prices. Because most of the ammonia is upgraded to other fertilizers, lower prices benefit companies that don’t sell it directly to the market. However, it is the opposite for companies such as CF Industries, which sells ammonia as a product. This is because prices for natural gas, a key input material for ammonia, have inched up.
Sideways movement of fertilizer prices together with rising input material cost prices pressure fertilizer companies such as CF, Mosaic (MOS), Intrepid Potash (IPI), and Israel Chemical’s (ICL) margins. You can invest in Mosaic through the SPDR S&P North American Natural Resources ETF (NANR), which invests about 1.6% of its portfolio in the stock.
Why focus on ammonia prices?
Ammonia is the primary nitrogen product used to upgrade other fertilizer products like urea, UAN (urea ammonium nitrate), and DAP/MAP (diammonium phosphate/mono ammonium phosphate). Therefore, prices of ammonia have a significant impact on prices of other fertilizers as well.
Because most of the global ammonia production is converted into urea, we’ll look at urea price trends in more detail in the next part of the series.