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The same shipping bottleneck in the Strait of Hormuz that is roiling oil markets is causing “immediate volatility” in liquid fertilizer prices, according to Jefferies analyst Laurence Alexander. He suspects that although fertilizer stocks have rallied this month, two producers may have further upside. Iran has vowed to not let ships pass through the Strait of Hormuz The crucial waterway links the Persian Gulf and the Gulf of Oman and is an important passageway for not only oil but also fertilizer — which can be made from the byproducts of the oil refining process or extracted from methane natural gas. Since late February, U.S. Gulf NOLA urea-ammonium nitrate’s price has jumped 21%, according to Jefferies. The firm expects LSB Industries and Nutrien may benefit from the price spikes. “With the Strait of Hormuz closed and Middle East producers halting production, global fertilizer markets have tightened with prices rising sharply,” Alexander wrote in a research note Thursday. “While North American producers, like Nutrien and LSB Industries, are geographically insulated from fighting, the conflict has forced domestic spot prices higher as the spring planting season begins.” Nutrien upgraded to buy Jefferies upgraded Nutrien to a buy and raised its price target to $96 from $74, suggesting 21% upside from Wednesday’s close. The firm also lifted its price target on LSB Industries, taking it to $15 from $11, or about 11% above Wednesday’s close. However, it has maintained a hold rating on the stock. Nutrien shares are up 19% over the past month. LSB Industries’ stock has surged 57% during the same period. The Strait of Hormuz handles roughly 27% of global ammonia and 35% of global urea flows, according to Morgan Stanley. Even if the Strait reopens, it could take a while for fertilizer trade to normalize. In early March, QatarEnergy halted production of liquefied natural gas, the main raw material used to produce nitrogen-based fertilizers such as ammonia and urea. “Logistical, and production challenges have so far translated into (temporarily) inflationary prices, with incremental increases (and potential demand destruction) largely a function of the duration of the event,” Morgan Stanley analyst Lisa De Neve said in a note dated March 4. Those headwinds also coincide with the beginning of the all-important spring planting season, a key time for fertilizer purchases, according to Morgan Stanley. “We also note we’re currently moving into peak demand Northern Hemisphere Agricultural Season, against the backdrop of already tight nitrogen/phosphate/potash markets, so a logistical impact could result in a (near-term) inflationary impact on fertilizers prices as well,” De Neve said, in a research noted dated March 2.
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