China’s recent decision to extend a 35 percent temporary tax and a 75 percent special tax on the export of fertilizer including urea and diammonium phosphate (DAP) until next June in order to help control inflation and to guarantee fertilizer production and supply to domestic farmers will likely “create potential supply shortages in both nutrient groups that should cause nitrogen and phosphate prices to go higher, benefitting global nitrogen and phosphate producers,” according to a research note from Barclays Capital.  China was responsible for roughly 14% of the global supply of urea in Q12010.

Urea is formulated by a reaction between liquid anhydrous ammonia–a form of nitrogen–and carbon dioxide at high temperature and pressure.  And in a write-up on Saudi Arabian Fertilizer Company (SAFCO), TAIB Securities, a brokerage, reiterated that producers in the Middle East are at a particular cost advantage in terms of production given their relatively cheaper access to raw material like natural gas (ranging from S$0.70 /MMBTU to US$1.5/MMBTU per one estimate, versus $4.5 and rising, for instance, on the New York Mercantile Exchange).  In addition to SAFCO, Arab Potash and Qatar Industries are regional players that, as one analyst notes, are not only attractive given their dividend yields but also may trade at a discount to global producers.  Finally, producers in Pakistan (namely the country’s two dominant firms, Fauji Fertilizer and Engro) both expect strong final quarters due in part to peak demand (stabilized by post-flood recovery and state-run farming subsidies) augmented by yet another supply shortage in the run-up to Rabi season that producers say is a direct result of the government’s gas curtailment policy in which gas has been diverted to power plants.   That shortage will be met through imports, though for Engro in particular the gas shedding policy may curtail projected earnings related to the opening of its new plant.  Yet Karachi’s JS Global Capital kept the firm as a ‘buy’ recently, concluding that “although the fertilizer industry was hit hard in August with depressing urea offtake (down 8%YoY in 8M2010) due to the floods, we expect the numbers to improve in the coming months.”