uploads///Coal versus Natural Gas Prices

Fertilizer Update: Coal Prices Rose in China Last Week

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Aug. 17 2016, Updated 8:04 a.m. ET

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 fell compared to the previous week during the week ended August 12, 2016.

China also primarily uses coal as a hydrogen source. The pet coke index remained unchanged from the previous week during the week ended August 12, 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 directly or indirectly affect the profitabilities of fertilizer producers such as CF Industries (CF), Terra Nitrogen (TNH), CVR Partners (UAN), and PotashCorp (POT).

In the week ended August 12, 2016, the pet coke index fell by 2.6% to $36.8 per metric ton, compared to the previous week.

Anthracite coal prices in China rose week-over-week at an average of $80.2 per metric ton. However, prime coking coal prices at Pingdingshan stood at an average of $117 per metric ton, unchanged from the previous week. Over this week, the Chinese yuan weakened by 0.05% compared to the US dollar. Because of this change, Chinese coal prices appear to have changed when converted to US dollars.

Supply-side impact

Earlier, we saw how natural gas prices moved last week. Anthracite prices rose in China. These conditions are negative for natural gas–based fertilizer producers such as CF Industries, Terra Nitrogen, and PotashCorp. 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 ~33% lower than $54.7 per ton, seen during the same week in 2015. Similarly, coal prices in China have fallen by an average of 6.7% 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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