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CF Industries Holdings, Inc. (CF), Agrium Inc. (USA) (AGU): Natural Gas Is a Bigger Troublemaker for This Company Than You Think

Investors in the fertilizer industry have something serious to think about. One of the leading nutrient producers, Agrium Inc. (USA) (NYSE:AGU), is hanging up on two expansion projects — It has suspended development work on a greenfield project in the U.S. Midwest area, while dropping plans to expand an existing plant in Alberta.

Agrium Inc. (USA) (NYSE:AGU)

They weren’t just any plans. The projects would have added more than 30% to Agrium Inc. (USA) (NYSE:AGU)’s annual nitrogen production capacity, which currently stands at 5.5 million tonnes. Nitrogen is Agrium’s primary product and, as the most widely applied nutrient, has tremendous growth potential, particularly in the U.S. More than 50% of the nitrogen consumed in the U.S. last year was comprised of offshore imports. According to Agrium’s recent investor presentation, 12 to 14 new nitrogen plants will be needed if the U.S. were to become self-sufficient. So why did Agrium back off its plans despite the opportunities? The answers might surprise you.

Problem of too many
One reason why Agrium Inc. (USA) (NYSE:AGU) put the projects on hold is similar capacity expansion plans by rivals. That might sound as if Agrium is giving in to peer pressure; yet, its concerns may be justified.

Some months back, closest competitor, CF Industries Holdings, Inc. (NYSE:CF) announced plans to pump a massive $3.8 billion through 2016 on new nitrogen units in Louisiana and Iowa that will increase its nitrogen volumes by one-third from the current level. What’s important to note is the location of these projects – the Midwest region. That’s also where Agrium’s greenfield project is based.

The Midwest is one of the most important markets for nutrient producers because of the strategic location of the Corn and Wheat Belts. A majority of CF’s production and distribution facilities, including North America’s largest nitrogen plant, are located in the Midwest. That means that CF Industries Holdings, Inc. (NYSE:CF) already has a solid foothold in the region, and thus, better chances to capture an even bigger market through expansion than anyone else.

Agrium Inc. (USA) (NYSE:AGU)’s real concern is that CF Industries Holdings, Inc. (NYSE:CF) is just one of the many companies rushing to the Midwest belt. To name a few, Egypt’s Orascom Construction Industries is betting $1.4 billion on a greenfield nitrogen facility in Iowa, while agricultural cooperative CHS is building a nitrogen plant costing more than $1 billion in North Dakota.

Even Mosaic Co (NYSE:MOS), which is primarily a potash and phosphate player, is planning to triple its key nitrogen compound, ammonia capacity in Louisiana. Though Mosaic Co (NYSE:MOS) currently consumes ammonia as input, I won’t be surprised if it starts selling the nutrient commercially. Mosaic knows the business well, as it operated a nitrogen plant in Saskatchewan, Canada until some years back when it decided to exit the business to concentrate on other nutrients.

Who knows, one of these companies might even turn out to be Agrium Inc. (USA) (NYSE:AGU)’s ally, because, according to Reuters, Agrium now wants to partner with someone to share the costs of the greenfield project. At the same time, it wants to secure input supply before proceeding with the plant. In other words, natural gas is the second factor that influenced Agrium’s decision to hold up the project.

The trouble fuel
Natural gas is the key input for nitrogen. As gas prices plummeted last year, the number of fertilizer companies announcing capacity expansions surged. Agrium Inc. (USA) (NYSE:AGU) was one of them.

At current levels of around $4 per MMBtu, the U.S. gas cost is still among the lowest in the world, which is good news for Agrium. But, it is also the most volatile, as evidenced by the graph below.

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