CF Industries Holdings, Inc. (CF) Earnings Call Transcript & Summary

So good morning, it's Laurence Alexander with the Jefferies Chemicals team. Welcome to the second day of the Jefferies Industrials Conference. It's my pleasure to introduce CF Industries. Joining us today, we have Chris Bohn, who is their CFO; and Bert Frost, who is the Senior Vice President of Sales, Market Development and CF Supply Chain. Without any further ado, if I can just pass over to you to just quickly introduce CF, then we can get started.

Yes. Thank you. Just for some of you who may not know CF as well as others, we're the world's largest nitrogen producer. We produce about 10.5 million tons of gross ammonia a year, effectively converting natural gas into ammonia, and then using that to upgrade into products, primarily fertilizer, which is about 80% of our book and about the other 20% being industrial-based. We sit at the low end of the cost curve. Primarily 7 of our 9 plants are located in North America, where we have low natural gas costs relative to the rest of the world. So there's an implied spread that we're able to achieve as we compete globally with other products. And then recently, over the last 2 years, we've made the announcement of moving into clean energy. It's really based on how our asset base is structured using ammonia as a carrier for hydrogen and also just hydrogen directly moving into some green and blue ammonia projects based on lower carbon strategy the company has participating in the clean energy strategy.

Okay. And so there's an unusual number of moving parts this year. So maybe let's start with the European side of the equation. How do you see the nitrogen supply-demand balance being affected by the EU natural gas restrictions this year and next? And so let's start with that.

Well, there's a significant number of moving parts taking place in the world of nitrogen. And the European issue, which is a gas spread and a cost spread, where, today, European gas traded at TTF is running in the high 50s to low 60s per MMBtu. And what that means on a cost basis for a producer in that region is ammonia, $2,000. Well, for a low-cost producer, as Chris mentioned, that we are in North America at today's almost $8 gas, it's significantly lower, as in the range of probably $250 to $300, for us to produce that ton of ammonia. So what is taking place today is a number of those European producers are shutting down, and they're having to import ammonia to run their upgrades, to make their industrial products to nitric acid or sell it as ammonia, and then the finished products for fertilizer, ammonium nitrate or calcium ammonium nitrate. And this dynamic is something that hasn't taken place to this degree. Part of it is a reflection of what's happened in Russia and Ukraine, with limited products coming from those -- that market into Europe. And the other issue is the restricted gas because of Nord Stream 1. And so as this plays out over the year, with different gas limitations globally, you're seeing a very tight nitrogen market, specifically today, ammonia, but in the future, the finished products. And that's why pricing is at the level that it is, or one of the reasons why it is, and that eventually then leads to some of the food issues that the world is talking about because of the limited availability of fertilizer to various parts of the world. We're going to have some food shortages, possibly, later this year and into next year.

And can you give us a sense for how much of the global capacity is shut? And when they decide to restart, how finicky is the restart process? What's the likelihood of unplanned outages?

Why don't you take the restart process?

Yes. So the restart process, when you have an ammonia plant and you shut it down cold, you have to make certain that you have all the condensation out of it, you have it under nitrogen purge, and that costs a lot of money to do. So it's making certain that the plant is shut down properly. Because as Bert mentioned, some of these energy delta has been going on for over a year, where you've seen anywhere from $30 to really $100 per MMBtu gas. So it's about properly shutting down the unit. But then when you think the start-up decision to start a plant back up, you have to have start-up fuel, and you're usually burning several million dollars' worth of fuel just to get the plant in order to start back up. So that decision, you have to feel very comfortable and confident that you're going to see pricing that's going to be at a level that's above what your cash cost is. And given some of the prices that we've seen in Europe, some of this production that's off-line and the cost of bringing it back online, it's probably going to defer it or delay it longer than maybe what was anticipated initially.

When you look at the plants that have announced shutdowns, BASF, Fertiberia, Yara, OCI and others, it's substantial. And so you have to run these plants at a minimum rate for just operating systems. Some of these plants will operate to make CO2 and some finished products. So we don't see the full shutdown of European assets, but it could be 10 million tons. In a world of 180 million tons of consumption of ammonia and a globally traded ton of about 17 million to 20 million tons, adding 10 million additional tons of demand tightens up the market, as we have said, and that's one of the constraints. And then it's the logistical flow of how the vessels globally are moving and where they're coming from and going to that is also an interesting dynamic.

Yes, I think that's an important point Bert brings up there, that even the production that's online in Europe and even in some parts of Asia, it's not running at its full operating level. But there's a certain level, call it, 75%, 80%, if you go below that, you have to shut it down. So there's different decisions, with cycling of some of the plants and such that is occurring as well. So you're not -- even the plants that are operating are probably operating at curtailed rates rather than at full production.

And when you add in the constraints, so that is one that we've talked about, lack of supply, but continued demand. When you go to the supply side of the equation and we layer in what is not coming out of Russia and Ukraine and also what is not coming out of China, which, historically, has exported urea in the range of 4 million to 6 million tons, that has represented 10% of the global urea trade. And so you have lack of supply from regions that in the past have supplied a significant amount of tonnage and now an additional position that needs to be filled in a first world country that consumes these products on almost a daily basis.

And so can you talk about the elasticity of demand, if there is any, and the impact on yields if farmers start thrifting kind of their nitrogen application?

So that also depends on what region of the world you're talking about in the consumption level and the sophistication and the equipment available to apply these products. So you have, obviously, first world and industrialized agricultural economies such in North America, Europe, Brazil, Argentina. And what we have seen is there have been some de minimis cutbacks in certain areas. I think part of that was related in North America, to the strange planting season we had that was late, delayed, cold and rainy, and that impacted some level of acreage that was planted. We will see here shortly, as Argentina and Brazil entered their planting season starting this month and what happens with that, but we're expecting, because of the pricing and the devalued currencies, full planting. But when you look at some of the third-world countries that are producing food for consumption within their borders, there are a number of places that we have seen decreased imports or inability to procure the ton. And that's going to again be a rollout of food availability longer term. There is an impact. Nitrogen is the one nutrient, as you're planting and growing your crop, that you really cannot -- it's not substitutable and it's not replaceable. And without it, yields drop up to 50%. If you're familiar with what happened in Sri Lanka, with the governmental decision to not import fertilizer and to go organic, you had an absolute uprising and a collapse of the government and the President having to leave the country really driven by fertilizer. And so what we are or where we are in this development in the world is these things are playing out in real time, and real decisions are being made on how they're going to procure nutrients for -- to grow the crops that are needed to feed the people.

So when you look at the price signals from the crop prices and also this dynamic of some regional impacts on lower yields, what's your baseline for acreage growth of over, say, the next 3, 5 years? I mean, what's the compensation even if it comes with a lag?

I'll do the North American market for -- really, the U.S. market first because we generally have very good data that comes from various sources, not only the government but the private groups. And when you look at planting, we had expected corn to be in the 92 million, 93 million acres, and again, because of some of the issues I already articulated with, the planting season and the prevent plant acres that came in place, the government sources as well as our own, are predicting around 89 million acres. But you have a corn-soybean shift and a lot of that is just your rotational changes year in, year out. And so we're expecting that to take place continually in the United States. But to be in the low 90s for the 2023 crop to be planted -- that will be planted in April and May and then harvested in October -- September, October, November of next year. When you look at what's going on in Brazil, you're seeing continued growth of their second crop corn, and that's advantageous for agronomic reasons as well as now economic reasons. And so we see that continuing to grow, and Brazil's exports of corn to continue to grow. Argentina is in a very tough spot economically and where their currency is. And their ability to procure nutrients, I think, will be challenged, but I think they'll meet those challenges. And so where you look at corn today at around $6, we would probably be -- we are structurally positive corn to increase in value based on the needs of the world and based on the stocks-to-use ratios of where they are, which that will support the nutrient consumption over the next couple of years.

And so you alluded to the U.S. energy [ change ], but obviously, one aspect of that has also been the pivot into hydrogen production. And so can we talk about this, first, with respect to the U.S. IRA bill? It's -- the tax hasn't fully finalized, so we can spitball a little bit. But how do you see sort of the incentive structure shifting for green and blue ammonia projects?

Yes. So maybe just to set it in context, we have 3 projects we announced that are related to low-carbon ammonia, so the blue and the green, the first of which is at our Donaldsonville facility. It's a 20,000-ton ammonia plant that will produce green ammonia. And if you think about it, it's 20,000 tons annually that we'll produce at a plant that does about 4.2 million tons annually. So it's a pretty small green plant that we're bringing in, installing electrolyzers really to get the technological know-how that as we expand that in future years to produce more green hydrogen that then we would put into the back end of the ammonia loop to produce green ammonia. More importantly, probably, and that project itself is about $100 million. We have another project which is for blue ammonia, and this one is a little bit more substantial and will be on a tighter time frame where we're looking at the end of 2024. So if you think of the ammonia process, it's a little different than other chemical companies. We're already removing and capturing the CO2. So unlike some of the other chemical companies that would have to put in CO2 strippers and such, that capital is already -- resides at our plants. As a result of that, we produce -- we strip quite a bit of a pure CO2 stream, where we have net CO2 that we don't use to upgrade into other products at Donaldsonville of about 1.5 million to 2 million tons. What we're doing with that is we're going to do dehydration and compression and then transport that and sequester it in long-term sequestration. And that's really where the IRA comes into impact there. It used to be that you would get $50 for each ton of CO2 you sequestered. That's moved up to $85 per ton sequestered. So the projects that we had, had limited capital because all we had to do was put in the dehydration and compression piece of it because we had the CO2 removal, unlike other companies. So it's just expanded what our return on that particular project will be. And that one, as I said, is probably going to be towards the end of 2024. And then based on what we're seeing with incremental demand growth of ammonia used as a fuel throughout the world, starting primarily in Asia, is a co-combustion with coal to lower the GHG emissions of those electricity plants. We've partnered with Mitsui to evaluate a greenfield blue ammonia plant somewhere in the Gulf Coast. We'll have an FID on that next year. And so that's another way that we're looking at expanding and also taking advantage of the IRA and the benefits that we anticipate from that. Additionally, on the hydrogen side, there is a hydrogen tax credit that gets a little bit more difficult, and there's more that we have to go through on that. But as you mentioned, effectively, our green ammonia is really green hydrogen that we're putting into the back end of the loop. So there's potential for some opportunities there as well.

And can you flesh out on -- so for the mobility application, what you're seeing as the current level of demand, to the extent that it's been validated, and then where you see demand going over the next 5 and 10 years?

Yes. So I would take you beyond the mobility and just go to the overall markets, end markets themselves. As Bert mentioned, we already have a very tight ammonia market today. And now, over the next several years, you're going to be adding incremental ammonia demand to that, that is going to be low carbon. And where we're seeing probably the biggest growth push begin to come is really in that co-combustion with coal plants in Asia. Additionally, we've been working with a lot of the vessel engine manufacturers to look at ammonia as burning as a fuel because it would be a zero-carbon fuel from a Scope 1 for the Maersk and the others in the world, if they were to put in ammonia engines into their vessels. So that's something a little bit longer term we're looking at. And then additionally, if you look at really clean hydrogen to transport hydrogen globally, it's very difficult and very costly to do. The ability to transport ammonia, which, if you think of ammonia, it's NH3, so you would transport the ammonia, recrack it, take the clean hydrogen and use that for your utilities. That's also an area that's gaining some steam. However, the disassociation on a commercial level is still being adapted for that.

Are you yet seeing any discussions around decarbonized ammonia streams fetching a premium in the marketplace?