Markets Favor Nitrogen

September 19, 2012 10:25 AM

The growing world will need to utilize every inch of soil it can to feed the estimated 9 billion people that experts expect to populate the Earth in 2050. This is great news for the fertilizer industry, in particular for nitrogen producers like Terra Nitrogen (TNH) and her parent company, CF Industries (CF).

Nitrogen based fertilizer producers have enjoyed low natural gas prices, and the resulting high returns have investors looking closely at inputs, nitrogen producers in particular, as a stable market with lots of long-term upside potential. These types of fertilizer producers have a distinct advantage given the nature of present day natural gas prices. U.S. natural gas working storage capacity has nearly been met and with ample supply on hand coupled with new, less expensive extraction techniques, nitrogen-based fertilizer producers are poised to profit from soft natural gas and increased nitrogen demand.

Producers of phosphates, which are mined, are not so lucky. Leading nitrogen producer, CF Industries is currently showing a twelve month basis multiple of 8.2 where competitors like Mosaic (MOS) and PotashCorp (POT), who mine nutria, struggle to break below a multiple of 13.8. This means that operating costs are lower for CF and Terra Nitrogen than for other fertilizer producers, driving profits upward.

With lots of demand growth potential and inexpensive natural gas in rich supply, investment in nitrogen-based stock is very attractive to the investor.

CF Industries (CF) is trading 3.03 higher today, ending the day at 222.84; Terra Nitrogen (TNH) ended the day today down 1.55 to 220.45, both on light volume. October Natural gas (NGV12.NYM) prices traded mostly sideways today, opening at 2.77, closing the day at 2.78.


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