Earnings of CF and Nutrien will be boosted by the Nitrogen Surge; Mosaic is facing headwinds

The nitrogen-based fertilizer industry is expected to report higher quarterly earnings due to the surge in prices caused by Middle East gas disruptions. However, this benefit may not be fully apparent until future quarters.

Analysts expect nitrogen producers, such as CF Industries, Nutrien and Mosaic, who make fertilizers derived 'from natural gas, such as urea, urea ammonium nitrate and urea, to perform better than fertilizer peers 'with a greater exposure to phosphate and potash.

Prices have risen due to a tighter global supply of nitrogen linked to disruptions in natural gas flows. Mosaic is less vulnerable to this rally because its portfolio has been diversified.

LSEG data shows that CF Industries and Nutrien will post a combined net profit of $619 million in the first quarter. This is up from $388 millions a year ago.

The U.S. and Israel war against Iran has disrupted 'Middle Eastern gas flows', driving up the price of nitrogen. The region, which produces very little nitrogen, is a major supplier of natural gases used as feedstock in Europe and Asia for fertilizer production. This has led to a tightening of global supplies.

This has given North American producers an advantage, as they can now rely on a'relatively stable gas supply and lower prices. The conflict in the Gulf is limiting exports, and North American fertilizer firms could benefit from a tightening of global nitrogen supplies.

Urea barge rates in New Orleans are up by more than 46%, according to Josh Linville. He is vice president of fertilizer for financial services firm StoneX.

According to StoneX, urea prices in the first quarter averaged $490 per short-ton, up from $375 about a year ago. Linville said, "We have never seen anything quite like this." He cited large global nitrogen losses which are driving up prices while U.S. producer's input costs remain stable.

U.S. buyers arbitrage urea imports in New Orleans by redirecting some shipments abroad to profit from higher global prices and tightening domestic supplies.

Barge prices are the actual spot prices of fertilizer sold on barges along major distribution hubs.

Nitrogen fertilizers are typically applied in the form of urea, or urea and ammonium nitrate, during the spring planting window. This tends to cause a sudden but limited increase in demand.

RBC Capital Markets' Andrew Wong said that the nitrogen pure?plays would benefit the most from higher prices. However, valuations have already priced in the cash windfall. He added that the earnings impact is likely to be greater from the second quarter.

Nutrien, CF and Mosaic will report their results on Wednesday.

Outside Nitrogen Rally

Mosaic faces a mixed future, as it does not produce nitrogen.

Although phosphate prices are on the rise, margins will remain under pressure due to increased sulphur costs and ammonia costs.

Potash prices, on the other hand, are still relatively low and remain amongst the most affordable segments of fertilizers.

Prices that rise too quickly and at too high a rate will raise affordability concerns, which could negatively impact volumes. Edlain Rodriguez of Mizuho said that farmers could reduce their phosphate applications rates. These headwinds are a reflection of Mosaic’s recent share movement.

(source: Reuters)