Weak nitrogen prices
Nitrogen prices were substantially lower YoY (year-over-year) in 2Q17. The higher supply of nitrogen fertilizer was the key reason that producers experienced lower selling prices YoY, as the chart below shows.
According to CF Industries, the US experienced imports in excess of demand as producers unloaded their inventories in the US to meet liquidity needs. This pushed down the prices of nitrogen products in the US even further.
Lower prices negatively impacted producers’ margins for the nitrogen segment in 2Q17. This sentiment was echoed in PotashCorp’s (POT) earnings call, during which the management stated that weaker pricing caused the margins to contract YoY in 2017.
As we go deeper into 2H17, PotashCorp believes that nitrogen’s supply side will continue to undergo capacity rationalizations, but supply-side pressures will likely continue to weigh negatively on nitrogen producers.
How this ties to capacity
Producers don’t have much control over selling prices, but in a bid to protect margins, many have managed to lower their costs of production. On the back of the new low-cost production coming online, marginal producers with higher costs of production often shut down their facilities.
CF Industries is one of the low-cost producers based in North America (MXI), along with Terra Nitrogen (TNH), PotashCorp (POT), and Agrium (AGU). These North American producers have been pressured primarily from imports, as the US remains a net importer of nitrogen fertilizers.
During its 2Q17 earnings call, CF Industries suggested that the demand-supply imbalance will likely continue to realign. However, prices will likely remain under pressure for the rest of 2017 and into 2018.
Notably, PotashCorp (POT) expects market conditions for nitrogen to improve in 2018, but CF Industries expects industry recovery to begin after 2018.