[Author Note: The author wishes to inform readers that the article below inaccurately stated that Rentech (RTK) is in the process of selling over half its position in 59% owned Rentech Nitrogen Partners (RNF). There is no secondary issue and the company was merely updating its shelf prospectus in its January 28, 2014 filing on EDGAR. The author wishes to apologize to the company for the error.]
If you are thinking about buying nitrogen fertilizer stocks, or already own them, you need to consider three recent developments positively affecting major North American nitrogen producers.
At least for a mini rally lasting past the earnings season. CVR, TNH, CF and AGU will all release year end results in February.
I have marveled at the price rally in nitrogen fertilizers urea and UAN solutions at the US Gulf of Mexico so far this winter. And fertilizer derivatives indicate prices will hold till March.
Farmers tend to sit on their hands when new crop corn prices are low and expectations are for more imported fertilizer coming soon.
Two months ago, dry urea was priced at $310/short ton at NOLA (New Orleans, LA).
Urea is now at $402.50, up 30%, according to Farm Futures magazine yesterday. March swaps indicated $387.50.
UAN-32% has rallied from $232.50 to $282.50, up 21.5%. March swaps indicated $283.25.
There are three reasons why urea and UAN prices have rallied.
Biggest global urea producer going into plant maintenance period
First, the largest urea plant complex in the world, Qafco in Qatar, is going to be down for 40 days in Q1 2014.
This was announced January 19, so the plant downtime either just started or hasn't started yet, and the news has not widely circulated in the investment community.
Since Qatar is one of the biggest urea exporters and particularly to the USGM, this is a reason why global urea has tightened and will be tight for a couple of months.
I am trying to confirm with Industries Qatar, the 75% owner of Qafco, the timing of the individual urea plant turnarounds.
Qafco consists of six major ammonia and urea plant phases totaling 5.6 million metric tons per year and Qafco 6, which was only urea, was recently commissioned.
Chinese New Year and slow boat from China
I wrote last year that the new, lower 15% Chinese urea export tax will bring oversupply to the world
True, but not just yet. It's Chinese New Year starting next week. Many facilities will experience downtime as their workers go on holiday.
And it truly is a slow boat to the Gulf of Mexico and I don't think it will arrive there until late Spring, after US farmers have booked their nitrogen fertilizer orders.
Yara International (OTCPK:YARIY), the biggest ammonia producer in the world, figures the price of Chinese urea FOB port would be $360/metric ton after the export tax.
That is $397/short ton, about where urea is now at the Gulf, and should provide a floor on prices.
That means urea prices may not sink back to below $300 as it did last September even though extra supply will be available later in the year.
(Note Yara is a 25% owner of the Qafco).
You have to figure that the plants that produce and export ammonia and urea are being disrupted by the protesters.
I am happy for the protesters and I figure Putin/Yanukovich won't do anything rough on the eve of the Sochi Olympics. Watch out after the Games are over though.
If the port of Odessa experiences disruptions, you could see some Russian export product disrupted as well.
Offsetting this bullish factor for US producers is that the Ukrainian currency (hryvnia) has been declining with the pummeling in emerging market currencies, improving the cost position of the Ukrainian producers, assuming they can get the product on to the ships.
I did not mention anhydrous ammonia, which actually dropped in price to $415/mt for February deliveries at Tampa, down from $450 in January.
I had been warning of a glut of ammonia in the GOM for some time. Trinidadian ammonia is coming back on line after their own maintenance period has ended.
You want to get exposure to urea and UAN but avoid big ammonia producers.
The best plays benefiting from N derivative prices would be CVR Partners, Terra Nitrogen, Agrium and lastly CF Industries.
Similarly, I would avoid LSB Industries (LXU), which also makes nitrogen fertilizers. LSB has yet to restart their Pryor, Oklahoma plant, their biggest producer of UAN solutions.
A note regarding the impact of higher natural gas prices on these nitrogen producers. Although the front month natural gas futures contract is spiking in price due to cold weather demand (closed at $5.38), the summer months are more subdued at $4.44-46. So average natural gas prices for the year (the 12-month strip) have increased by about a $1/mcf (or million Btu). Most analysts, including myself, feel shale gas will put a limit on any big increase in prices.
A $1 increase per thousand cubic feet of natural gas equates to a $33-35 increase in feedstock cost per short ton of ammonia produced, and a $13-14 increase in cost per short ton of UAN-32 solution. These cost increases are not great compared to fluctuations in fertilizer prices.
In addition, CVR Partners does not use natural gas as an input for ammonia production. Terra Nitrogen went into the winter quarter well hedged on natural gas, and probably will declare a derivative gain.
We'll get some color on the global fertilizer market on the Potash Corp. (POT) Q4 and year-end 2013 earnings conference call tomorrow at 1pm.
Although Potash Corp. is a big UAN producer, the potash business is much more important to the bottom line. Potash Corp.'s nitrogen business is weighted towards industrial ammonia, which as I said, is in an oversupply situation at the USGC, partly due to Potash Corp.'s own ammonia operations at Point Lisas in Trinidad.