uploads///Coal versus Natural Gas Prices

Sideways Moves by Pet Coke and Coal Are Affecting Nitrogen Prices



Pet coke

While most North American producers use natural gas to produce nitrogen fertilizers, CVR Partners (UAN) mainly uses pet (petroleum) coke, a coal-like substance, as a hydrogen source. China also primarily uses coal as a hydrogen source. The pet coke index remained unchanged from the previous week during the week ended July 29, 2016.

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Pet coke price index

The commodities in the above chart are key hydrogen sources for nitrogen fertilizers. Their price movements affect profitability of fertilizer producers such as CF Industries (CF), Terra Nitrogen (TNH), CVR Partners (UAN) and Agrium (AGU). In the week ended July 29, 2016, the pet coke index remained unchanged at $37.80 per metric ton, compared to the previous week.

Anthracite coal prices in China were also flat week-over-week at $79.40[1. prices in RMB (renminbi) converted to US dollars] per metric ton. Similarly, prime coking coal prices at Pingdingshan stood at an average of $117 per metric ton, unchanged from the previous week. However, the Chinese yuan strengthened by 0.4% compared to the US dollar during the week.

Supply-side impact

Earlier, we saw that natural gas prices increased last week. In contrast, prices were flat for coal and pet coke. These conditions are negative for natural-gas-based fertilizer producers such as CF Industries (CF), Terra Nitrogen (TNH), and Agrium (AGU). Bear in mind that China is the largest exporter of urea.

Pet coke prices have been falling over the years, similar to what’s happened with natural gas. Last week, the price of pet coke was ~32% lower than $53.90 per ton that we saw during the same week in 2015. Similarly, coal prices in China have fallen an average of 7.2% year-over-year.

For broad-based exposure to this industry, investors can consider the iShares Global Materials (MXI). MXI invests 4.5% of its portfolio in agricultural chemical companies such as DuPont (DD).

In the next part of this series, we’ll look at phosphate fertilizer prices.


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