uploads///Coal Prices versus Natural Gas

Price Concerns Continue for Urea Producers


Jun. 23 2016, Updated 5:04 a.m. ET

Supply-side pressures

China uses coal as a hydrogen source for urea. The petroleum (or pet) coke index remained unchanged from the previous week. While most North American producers use natural gas to produce nitrogen fertilizers, CVR Partners (UAN) mainly uses coal as a hydrogen source.

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Pet coke price index

In the chart above, we see how coal prices have moved against natural gas prices. These commodities are two key hydrogen sources for nitrogen fertilizers. For the week ended June 17, the pet coke index remained unchanged at $40.1 per metric ton from the previous week.

Coal prices in China also remained unchanged at ~$79.8 per metric ton, and prime coking coal prices at Pingdingshan stood at ~$118 per metric ton, unchanged from the previous week. However, the Chinese yuan weakened 0.4% versus the US dollar during the same week.

The impact

We saw previously in this series that natural gas prices rose last week. In contrast, prices were flat for coal. These conditions create supply-side pressure on urea prices, which present a challenge for natural-gas-based fertilizer producers like CF Industries (CF), Terra Nitrogen (TNH), and Agrium (AGU). China is the largest exporter of urea.

Petroleum coke prices have been falling over the years, which is similar to what happened with natural gas. Petroleum coke’s price of $40 per ton last week was ~31% lower than the $58 per ton we saw during the same week in 2015. Similarly, coal prices in China have fallen by an average of 8% year-over-year, a gap that narrowed from 11% last week.

For broad-based exposure to this industry, investors can consider the iShares US Basic Materials ETF (IYM). IYM invests about 48% of its portfolio in chemical companies.

In the next article, we’ll discuss prices for phosphate fertilizers.


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