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NG Price Forecast’s Downward Revision Benefits Fertilizer Companies

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Natural gas prices for fertilizers

Natural gas is the key raw material for the production of nitrogen fertilizers such as ammonia. Due to the abundant availability of natural gas, the nitrogen fertilizer industry is fragmented among several producers.

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Prices rise

Natural gas prices for the week ended April 15, 2016, stood at $1.71 per MMBtu (British thermal units in millions), which declined from the previous week’s $1.98 per MMBtu.

However, natural gas prices remain above the low of $1.49 per MMBtu from five weeks ago. We’ve used the spot prices for natural gas traded at Henry Hub, where natural gas is heavily traded.

Previously, we saw that ammonia prices in the US market remained mostly unchanged for the week ended April 15. Rising natural gas prices and unchanged fertilizer prices put pressure on CF Industries (CF), PotashCorp (POT), Terra Nitrogen (TNH), and CVR Partners (UAN).

Rising natural gas prices also affect the iShares US Basic Materials ETF (IYM) because this ETF invests in some of the companies mentioned above. IYM invests about 48% in chemical companies.

Natural gas price forecast

For the week ended April 15, the EIA (U.S. Energy Information Administration) revised its forecast average prices for natural gas at Henry Hub to about $2.18 per MMBtu from $2.25 per MMBtu for 2016. This forecast comes on the back of higher natural gas inventories in 2016 compared to previous years. The EIA maintained its natural gas prices forecast in 2017 to $3.02 per MMBtu.

With large corn acreage expected in 2016, putting growers’ margins at risk, there could be price pressure on fertilizers as growers try to trim their production costs. In this scenario, rising natural gas prices from the current levels could hurt fertilizer companies.

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