Fertilizer Stocks Need To Go Lower

by: Chris Damas

I know many fertilizer stock traders are watching for signs of a bottom in the U.S. and international fertilizer stocks, as they have underperformed the stock indices all year. I say not yet. In fact, I say probably not until the end of the year, and at 10-15% lower prices.

The culprit continues to be excessive Chinese urea exports in the world market, now combined with a full blown currency crisis in India, the largest importer of the major three crop nutrients, potash, phosphate and nitrogen.

Over the past few trading days we have seen something of a rally in the nitrogen fertilizer names such as Agrium (NYSE:AGU), CF Industries Holdings (NYSE:CF) and Rentech Nitrogen (NYSE:RNF).

(Click to enlarge)

(Click to enlarge)

(Click to enlarge)

Even beleaguered Potash Corporation (NYSE:POT) showed an uptick today, on media reports the Belarusian's had detained Vladislav Baumgartner, the CEO of ex-potash cartel partner Uralkali (OTC:URALL). They can arrest the CEO but they can't arrest the drop in international potash prices, which seem to be going lower as buyers wait out the disruption caused by the Uralkali/Belaruskali divorce.

I failed to see how that arrest, denounced by the Russia First Deputy Prime Minister, would improve chances for a rapprochement between these two potash producers as I elaborated would not happen in this article.

(Click to enlarge)

According to this Bloomberg article, the Chilean potash producer Soquiem (NYSE:SQM) is already discounting the potash it is selling to Brazil, to $365-385/mt, a month after the failure of the BPC selling organization. SQM looks enticing at these prices, but more for its iodine and lithium production. It could be a buy once the potash price war dust settles.

(Click to enlarge)


(Click to enlarge)

(Click to enlarge)

(Click to enlarge)


Chinese anthracite coal prices (Yuan/mt) on August 26

Area Produced in Coal Type Coal Quality Price
Aug 19 Aug 26
Yangquan Yangquan AN slack 9-12 6-7 0.8-1.2 6500 580 580
Yangquan Yangquan Washed AN mid-lump 9-10 6-7 <1 7000 1000 1000
Yangquan Yangquan Washed AN smalls 9-10 6-7 <1 7000 880 880
Jincheng Gaoping Premium AN slack <11 8-10 0.5 7000 690 690
Jincheng Lingchuan AN slack 13 10-12 1.5 7000 620 620
Jincheng Jincheng AN slack 17 6-7 <0.5 5800-6000 580 580
Jincheng Jincheng AN mid-lump 14-18 7-9 0.5 6800 1020 1020
Jincheng Jincheng AN smalls 15-19 7-8 0.3 6300 960 960
Jincheng Yangcheng AN slack 18-22 7-10 0.6 5800 590 590
Jincheng Zezhou AN slack 14-19 7-10 0.3 6000 610 610
Jincheng Qinshui AN mid-lump 10-18 6-8 0.3 7000 1020 1020
Jincheng Qinshui AN smalls 10-18 6-8 0.3 7000 970 970
Jincheng Qinshui AN slack 12-18 7.3 0.3 6000 550 550
*Note: AN, anthracite; Aad, ash, air dry basis; Vad, volatile matter, air dry basis; St,ad, total sulphur, air dry basis; Qnet,ar, calorific value, net as received basis.

Source: China Coal Resource

These fertilizer stock rallies were precipitated by a rally in U.S. crop futures, mainly because last week's ProFarmer crop tour showed a highly variable albeit still large estimated 13.46 billion bushel crop versus the USDA estimate of 13.8 billion bushels. The estimate for soybeans was also lower the USDA, at 3.16 billion bushels versus 3.25 billion bushels and a surprising deterioration in crop quality, due to dry hot weather. Beans rallied strongly, which would impact potash and phosphate demand, versus corn, which is the largest nitrogen consuming crop.

U.S. Gulf Coast urea swap settlement prices (MT) on August 26, 2013

Month Open High Low Last Change Settle Estimated
Prior Day
Open Interest
AUG 13 - - - - UNCH 303.75 0 68
SEP 13 - - - - -2.50 288.75 0 38
OCT 13 - - - - UNCH 285.25 0 135
NOV 13 - - - - UNCH 280.00 0 35
DEC 13 - - - - UNCH 280.00 0 20
Total 0 296

Source: Chicago Mercantile Exchange

I need to see Chinese anthracite coal prices firm up, which would increase the cost of making urea for many domestic producers, and cause them to back off from flooding other urea markets with cheap product. Producers of urea in China also use natural gas, fuel oil, refinery residuum oil and steam coal but anthracite coal is the highest carbon with the lowest impurities and best suited for coal gasification ammonia and urea production.

For those who doubt the power of the Chinese urea machine, they should consider that Chinese ammonia production was 26 million tons in the first half of 2013, or about two times the whole U.S. annual consumption. Urea production capacity is estimated to hit 80 million tons by 2015.


2) I need to see India recover from its currency crisis and change its subsidy programme to increase urea prices and make imports more competitive with domestic production.

Unfortunately, the opposite appears to be happening. Chinese mid-lump anthracite coal, not the only, but the main feedstock for domestic urea production has declined from 1200 RMB/ton to 1050 RMB/ton or $171.56 USD, in the main Shanxi coal producing area of Jincheng. The recent uptick in Chinese PMI indicator to above 50 is encouraging, but not enough to help oversupply and deteriorating coal prices this year. The Shanxi and other coal dependent governments are taking measures to arrest the overproduction and lower coal prices, but this will take time.

The Indian rupee fell 15% recently, making imports more expensive. This is a chart of the USD in rupees - so you might consider this a proxy for how much Forex is costing Indian urea (and phosphate and potash) importers.

(Click to enlarge)

Indian urea prices have been subject of some debate recently, because the government doubled the natural gas price for producers to $8/mmBTU. This in itself would have curtailed much of India's urea production. However, the government also agreed to compensate urea producers and raised the price by 480 INR. The latter is only $7.50 USD. Uneven subsidies in India make urea prices very low compared to phosphate and potash. This continues to hurt phosphate producers such as The Mosaic Company (NYSE:MOS) and Russian producer PhosAgro, symbol PHOR on London.

(Click to enlarge)

(Click to enlarge)

PhosAgro reported first half 2013 results last Thursday, with EBITDA margins of 25%, but profit was off 56% year over year. It is a company to watch due to its low cost of phosphate rock and currency advantage. The Russian ruble weakness is helping this company as well as potash producer Uralkali, offset some of the damage of lower phosphate and potash prices impacting other producers.

We might see a "dead cat bounce" in the fertilizer stocks due to the chance the U.S. crops are going to underperform, either from dryness, or an early frost. The rally may last until the next USDA WASDE report is released at Noon on September 12. Nevertheless, the Food and Agriculture Organization of the United Nations' July outlook forecasted ample supplies of cereals and coarse grains with recovering stocks.

There is little chance for tightness in and sustained price hikes in international nutrients as long as these macro conditions continue to create oversupply, lack of producer discipline and demand remains tepid due to the currency crisis at a major buyer coupled with lower crop prices expected for 2014.

U.S. dealers and farmers will not step in and buy fall refill or Spring delivery fertilizers until they absolutely have to in the Spring. They will demand lower prices until they see these international forces abate. Therefore, U.S. fertilizer prices continue to languish.

(Click to enlarge)

We have only been recommending Agrium Inc. this year, due to the breadth of its offering both in nutrients but also geographically, and particularly due to the defensive nature of its retail operations.

Disclosure: I am long AGU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The information above was disseminated to clients and subscribers of The BCMI Report and/or The BCMI Flash anywhere from 12-48 hours before appearing on Seeking Alpha.