Nutrien Ltd (NTR, Financial) is a leading fertilizer company headquartered in Saskatoon, Canada. The operating segments of the company are divided into Nutrien Ag Solutions (Retail), Potash, Nitrogen, Phosphate and Corporate and Others, through which it offers potash, nitrogen, phosphate and sulfate products as well as services such as financial solutions.
The company’s crop nutrients, crop protection products, seeds and merchandise are offered via 2,000 retail locations in the United States, Canada, South America and Australia. Nutrien has an employee base of 23,500 and has nine nitrogen production faculties in North America and Trinidad.
Nutrien's stock has gained more than 29% this year, in complete contrast to the S&P 500 Index, which has dipped close to 15% since the beginning of the year. This outperformance of the benchmark came on the back of favorable macroeconomic and geopolitical developments facing Nutrien and other fertilizer manufacturers in the world, and in my opinion, it seems reasonable to assume that Nutrien will continue to thrive in the foreseeable future. Here's why.
Rising fertilizer prices
The rise in nitrogen prices traces back farther than Russia's war on Ukraine to the emergence of the Covid-19 pandemic, which caused supply constraints, but several other factors, including European policies to move away from fossil fuels in an (as yet futile) attempt to gain energy independece from Russia, have aided the demand for nitrogen in the last few years.
The Russian invasion of Ukraine further intensified the fertilizer inflation problems by contracting the fertilizer supply as well as the food supply. A few of the important components used in the production of fertilizers such as potash, phosphate and nitrogen are produced majorly in both Russia and Belarus, and a considerable portion in Ukraine as well. In 2019, Russia, Belarus and Ukraine accounted for 37%, 17% and 14% of global potassium, nitrogen and phosphorous exports, respectively.
While Russia has ceased its own supply of crop nutrients to opposing countries, exports from Belarus were sanctioned by western countries, and Ukraine is a war zone so it's not producing much of anything. Fertilizer prices were already rising when this happened, and it would be reasonable to assume that prices will continue to climb higher amid the expected contraction of the global fertilizer supply. This shortage of imported fertilizers and rising prices allows North American fertilizer manufacturers to increase their prices dramatically and thus report good numbers in 2022 and beyond.
Russia and Belarus are global leaders in the production of natural gas as well, which aids the production of nitrogen fertilizers such as Urea, Ammonia and liquid nitrogen. The prices of urea skyrocketed 157% year-over-year to $907.89 by the end of the first quarter due to import restrictions. The shortage of natural gas will lead to a rise in the cost of production in the fertilizer industry.
In the case of Nutrien, the effect of rising natural gas prices was reflected in the higher cost of production of nitrogen products reported for the first quarter of this year, but the good news is that the company is well-positioned to benefit from the restrictions imposed on global fertilizer production giants. If Nutrien makes the most of this opportunity, the company will be able to build long-lasting business relationships with key clients, which would ensure steady earnings growth in the long run.
Strategies to drive growth
In April 2020, Nutrien acquired Tec Agro, a leading agricultural retailer and soybean seed producer in Brazil, and this has enabled the company to mark its presence in the growing agricultural market in Brazil and to increase sales of crop protection products in the Latin American region. Agrosoema Comercial Agricola was also acquired by Nutrien in early 2020 to strengthen its position in the Brazilian agricultural retail space. Altogether, the company has completed 14 retail acquisitions in the last couple of years to expand its end markets.
In July 2021, the company entered into a partnership with EXMAR, an independent shipping group operating in the international gas and oil industry, to develop and build a low-carbon, ammonia-fueled vessel. The companies jointly expect deep decarbonization of the maritime industry to be achieved before 2030, which would position Nutrien as a leading player in this sustainability-oriented business sector.
The rise in Ebitda across all business segments except corporate and others in 2021 compared to the previous year is a direct result of Nutrien’s focus on keeping operating costs low while tapping new growth opportunities. This strategy will be key to profitably scale in the next decade to establish long-lasting competitive advantages.
A highly concentrated industry
Over time, the competition in the fertilizer industry has forced consolidation efforts, which is evident from the fact that the North American fertilizer market is now controlled by just a few companies. The four major nitrogen fertilizer producers of North America include C.F. Industries Holding Inc. (CF, Financial), Koch Industries, Iowa Fertilizer Company and Nutrien.
While C.F. Industries manufactures and sells hydrogen and nitrogen products for clean energy, fertilizer, emissions reduction and other industrial applications, Nutrien focuses on the retail segment as well, which enables the company to enjoy a diversified stream of revenue. Nutrien sold 6 million tons of nitrogen fertilizer compared to 6.5 million tons for C.F. Industries in 2021. Operating in an oligopolistic market will help Nutrien enjoy economic profits in the long run, which is why the company looks cheaply valued at a forward price-earnings ratio of just 6.5.
Takeaway
The solid demand for fertilizers, especially potash, supported by decreasing fertilizer exports in the global agriculture markets, is helping Nutrien and other leading fertilizer manufacturers around the world. The company produces a wide range of fertilizers compared to its peers who are specializing in a few segments of this market. Nutrien is also focused on expanding its global presence and improving sales through digital channels. Rising natural gas prices will remain a threat to the company’s profitability, but Nutrien seems to be very attractively priced in my view because of its scale advantages and the favorable industry outlook.
