While most North American producers use natural gas to produce nitrogen fertilizers, CVR Partners (UAN) mainly 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 PotashCorp (POT).
Pet coke price index
For the week ended March 11, 2016, pet coke prices remained unchanged at $44.80 per ton, compared to the previous week. The prices of pet coke have been falling over the years—similar to what we saw in natural gas. The pet coke price of $44.80 per ton fell 12% from $51 per ton during the same week in 2015.
Coal prices, like natural gas prices, have hit a low point because of the low demand and excess supply imbalance. Moreover, the low natural gas prices are taking away coal’s demand.
According to the U.S. Energy Information Administration (or EIA), for the first time natural gas will be the largest fuel source for energy. Natural gas should pass coal in 2016, which may explain why coal prices are low.
Investors could consider the iShares US Basic Material ETF (IYM). IYM invests about 12% in agricultural chemical companies.
Importance of coal
According to CF Industry’s Spring 2016 Investor Presentation, the floor price for urea is about $225 per ton. It was set by the marginal urea producers on the far right of the 2016 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 had squeezed margins. This is why it’s important to keep track of coal prices.
For more updates on fertilizer companies, please visit Market Realist’s Agricultural Fertilizers page.