The fertilizer trade as it relates to the Iran war and the Strait of Hormuz is really three trades pointed in different directions
The fertilizer trade as it relates to the Iran war and the Strait of Hormuz is really three trades pointed in different directions. What ties them together is China.
The Iran war brought us a slew of macro investing narratives - one being fertilizer supply bottlenecks, which means higher food prices. Investors understood these themes; some traded in and out of oil stocks, others invested in fertilizer companies.
For some of those companies, the Strait of Hormuz fiasco has been a stock boost. For others with China as part of their supply chain, investment has been a bust.
China is a price setter for fertilizer inputs like sulfur coming out of the Gulf. It is currently restricting some key fertilizer exports. Every ton China withholds is a ton removed from the market, driving up prices.
Investors in those names face similar uncertainty: farmers complaining to the Trump administration about input costs; the Iran war; and China driving price volatility.
CF Industries $(CF)$ investors have done well this year. They sell the product whose price exploded because of disruptions to the Strait of Hormuz, and the stock is up 57% year to date. Mosaic $(MOS)$, for example, has not fared as well since the Iran war started; its share price is down around 18% since March 1.
This is where the China factor comes in.
Yuntianhua Group (CN:600096), a Chinese state-owned enterprise (SOE) that is the fourth-largest phosphate-fertilizer company in the world, is a major phosphate producer. Phosphate fertilizer is a top fertilizer, like nitrogen and potash, as anyone who has ever fertilized their lawn is aware. Yuntianhua needs sulfur, which is sourced from the Gulf and the U.S.
For the agriculture market, sulfur has been the one commodity that might have been hurt the most by the war. Sulfur costs have risen nearly 1,100%, from around $100 per metric ton to more than $1,200 per metric ton - making that price spike, driven in part by China, one of the most severe on record.
Stephen Moore, who has served as an economic advisor to President Trump, blamed Iran and China for high prices, not CF or Nutrien $(NTR)$. Nutrien is also a potash producer; its stock is down around 5.5% in the last six months. (Disclosure: I own shares in Brazil Potash (GRO).)
The White House is aware of rising fertilizer costs, though China is never mentioned. This could be because Trump has a meeting with Xi Jinping on Sept. 24 in Washington, and China has pricing leverage with other commodities, namely rare-earth minerals.
Trump removed antidumping duties on Moroccan fertilizer producers for eight months, but some prices keep rising.
China is mostly mentioned in agribusiness over concerns about farmland ownership or import commitments on soybeans and beef. But this could change.
Agriculture Secretary Brooke Rollins said during the rollout of USDA's National Farm Security Action Plan that the government wanted to crack down on "agricultural assets" by foreign adversaries. Smithfield Foods (SFD) and Syngenta are Chinese companies.
"We are looking at every available option," Rollins said. "You'll likely see an executive order."
It is not a far stretch to see how China could use their pricing power to pressure the U.S. politically, especially given how important China seems to be to American farm states.
So Hormuz blocks commodity exports, Yuntianhua buys fertilizer inputs at a premium, then Beijing reduces global supply by restricting phosphate exports - and fertilizer prices go up. This means China is also a source of rising food prices. Yuntianhua may be the one Chinese company that connects Washington's worries about China's role in agriculture with the Hormuz fertilizer squeeze.
The U.S. exports around 2 million metric tons of sulfur every year, and China is the No. 1 buyer. Domestic farmers buy about 70% of local production, but they are being outbid by China. At the same time, China has banned exports of its own fertilizer.
American farmers are left at the mercy of Beijing, suggesting the USDA or U.S. Trade Representative could, in theory, consider restrictions on Chinese SOEs from buying sulfur.
Meanwhile, U.S. fertilizer companies are competing with China's bottomless checkbook, impacting investor upside.
If China removes export restrictions, which could happen before Xi and Trump meet, fertilizer producers like Mosaic and Nutrien could see conditions improve.
If the Strait of Hormuz remains impaired and China continues restricting phosphate exports, nitrogen producers with secure, low-cost inputs should remain better positioned than phosphate producers dependent on imported sulfur. If China releases more fertilizer or Gulf sulfur shipments normalize, that trade could reverse quickly.
The Iran War-affected fertilizer trade, then, is really three trades pointed in different directions, and which one pays off depends on where the disruption breaks. A prolonged Hormuz blockade keeps the pressure on nitrogen; a normalization scenario reopens room for the phosphate names; and diversified potash exposure sits somewhere in the middle.
What ties all three together is China. Beijing controls both the demand side of Gulf sulfur and the supply side of global phosphate exports, and either lever can move faster than the strait reopening. Any read on this space that leaves China out is only reading half the trade.
Kenneth Rapoza is an analyst for the Coalition for a Prosperous America, which represents U.S. producers and workers. He is a former journalist who has reported from Brazil and covered the BRIC economies.
-Kenneth Rapoza
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