Nitrogen Rally Likely Short-Lived

September 26, 2017 01:15 PM

(Bloomberg) -- Is it finally time to get excited about nitrogen fertilizer?

Since the end of June, prices for the world’s most commonly used crop nutrient have soared 60 percent in the U.S. -- rebounding from the lowest levels in more than a decade. There have been similar moves in Brazil, India and the Middle East as some major consumers unexpectedly boost purchases.

But the rallies are defying a lingering global surplus that some analysts say will probably send prices back where they were earlier this year. Production capacity in the U.S. is still expanding. And with grain prices weak because of a bumper harvest, farmers may reduce spending as their incomes decline. Shares of CF Industries Holdings Inc., the largest U.S. producer, dropped the most in two months Tuesday amid concern that prices may have peaked.

“Oversupply is coming on like a tidal wave,” said Ken Zuckerberg, senior inputs analyst for Rabobank in New York. “Farmers have been and continue to be under extreme financial pressure. The near-term optimism seems unsustainable."

The fertilizer markets have been in the grip of a classic commodities slump for several years, with unspectacular demand growth combining with excess supply. The situation in nitrogen, the most widely used of all crop nutrients, is particularly acute. Unlike potash and phosphate fertilizers, which are mined, nitrogen fertilizer is synthesized from the air using natural gas. Farmers sometimes apply it to crops in a solid, granular form, or inject it in liquid form directly into the soil.

The U.S. fracking boom of the past decade spurred a wave of plans for new nitrogen-fertilizer factories to take advantage of the cheaper supply of gas. Those projects continue to open, even though market conditions have changed. Total North American capacity to produce ammonia -- a chemical used to make nitrogen fertilizer -- is set to grow 30 percent to 26 million metric tons a year by 2020, according to Bloomberg Intelligence analyst Jason Miner.

Market ‘Blip’

While the market is still oversupplied, U.S. spot prices for urea, a tradable, commoditized form of nitrogen fertilizer, have climbed to an 18-month high, according to Green Markets data. That “blip” is due to India putting out a tender for more urea than the market had anticipated, said Christopher Perrella, another analyst at Bloomberg Intelligence. Hurricanes Harvey and Irma also caused disruption to U.S. shipments, making it more difficult for companies like CF to export, he said. A CF spokesman declined to comment on the company’s exports.

The benchmark contract price for ammonia for October at the port of Tampa, Florida, rose to $245 a ton, up $30 month-on-month, which will benefit CF and Yara, BMO analyst Joel Jackson said Tuesday in a note.

Producers are sounding bullish. Nitrogen fertilizer may see firmer prices through the rest of the year, CF’s Chief Financial Officer Dennis Kelleher told an industry conference earlier in September. Supply and demand fundamentals may improve after 2017, Potash Corp. of Saskatchewan Inc. said in a report this month. Buyers haven’t built up inventories and customers in the Americas still need to cover some of their needs, according to Agrium Inc.

“The demand outlook in some of those markets looks pretty good,” said Jason Newton, Agrium’s head of market research.

Still, other observers beg to differ. Fertilizer stocks could retreat as the rally in urea prices slows, Cowen & Co. analyst Charles Neivert said Tuesday in a note.

Agrium dropped as much as 1 percent to $106.97 in New York while CF fell 4.4 percent to $34.34. Yara International ASA, the world’s largest publicly traded producer of nitrogen fertilizer, closed 0.8 percent lower at 361.50 kroner in Oslo.

Nitrogen-fertilizer prices are likely to remain volatile between now and the Northern Hemisphere spring, when a lot of urea is applied to crops, Newton said. Prices may retreat once the India tender is resolved, with plenty of urea capacity in the long-term, according to Bloomberg Intelligence’s Perrella.

Koch Nitrogen Co., part of the business empire of the billionaire brothers David and Charles Koch, is in the midst of a $1.3 billion expansion at its Enid, Oklahoma, plant to increase urea and ammonia production by more than 1 million tons a year. Dutch producer OCI NV opened a plant in southeast Iowa in April that’s expected to make as much as 2 million tons of nitrogen annually. Agrium is ramping up production at a new urea plant in Texas.

“There’s still plenty of product and still plenty coming on,” Cowen’s Neivert, who holds a market-perform rating on CF, said in an interview. “For a more permanent turnaround, you’ve got to start getting a situation where typical demand growth exceeds your supply gains.”

©2017 Bloomberg L.P.

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