Natural gas is the key raw material for nitrogen fertilizers like ammonia, which is then used to produce urea. PotashCorp estimates that natural gas accounts for 70%–85% of its ammonia production costs. Natural gas prices have a significant impact on nitrogen fertilizer producers due to the abundant availability of natural gas. The nitrogen fertilizer industry is fragmented among several producers.
In the week ended June 10, 2016, natural gas prices rose 3.5% to $2.5 per MMBtu (million British thermal units) from the previous week’s $2.2 per MMBtu. This may also explain why ammonia prices fell at different points last week. These figures are based on the spot prices for natural gas traded at Henry Hub, where gas prices hit a low of $1.49 per MMBtu seven weeks ago. However, fertilizer producers like CF Industries (CF), Agrium (AGU), Terra Nitrogen (TNH), and CVR Partners (UAN) may mitigate the natural gas price fluctuations through futures contracts.
Natural gas prices increased as a result of an increase in consumption resulting from warmer weather according to the EIA. Rising natural gas prices also affect the iShares US Basic Materials ETF (IYM), which invests in some of the above companies. IYM invests about 48% of its portfolio in chemical companies.
Natural gas price forecast
Last week, the EIA maintained its 2016 forecast for average natural gas prices at Henry Hub at about $2.22 per MMBtu, which was slashed from $2.25 per MMBtu in the previous week. The EIA also lowered its forecast for 2017 to $2.96 per MMBtu from the $3.02 per MMBtu forecasted a week ago.
Continue to the next part of this series for a look at coal prices. Coal is an alternative input material for nitrogen fertilizer production.