EUR 850.00 For Business Accounts Only

Morningstar | CF's Nitrogen Production Benefits From Low-Cost U.S. Natural Gas

CF Industries is the largest nitrogen fertilizer producer in North America, with production based in both the United States and Canada. CF's plants, which benefit from low-cost North American natural gas, are connected to its main customers in the U.S. Corn Belt by an extensive distribution network of pipelines, rail, and barge, giving the company a transportation cost advantage over foreign competition without pipeline access. As one of the largest nitrogen fertilizer producers in North America, CF's sales and profits are largely tied to U.S. corn planted acreage. Nitrogen fertilizers are key to achieving higher yields in corn, as the crop, unlike soybeans, does not produce its own nitrogen. That said, corn planted acres and prices have since declined in recent years, weighing on CF's profits. CF recently completed capacity expansions to its Donaldsonville, Louisiana, and Port Neal, Iowa, nitrogen plants. The increased nitrogen production volumes going forward should give the company the capacity to meet the minimum volumes of its fertilizer contracts, while still retaining additional capacity to produce higher-margin industrial products. Donaldsonville’s seaborne location also allows CF to export more fertilizer products and take advantage of nitrogen demand in South America, a region that imports nearly all of its nitrogen fertilizers. On the cost side, natural gas is the main feedstock used in nitrogen fertilizer production, accounting for nearly 50% of production costs. Declines in North American gas costs over the past several years have made CF and other North American producers more competitive compared with overseas rivals, which rely on higher-cost natural gas or coal-based feedstock. Urea is the general benchmark for all nitrogen fertilizers. Urea prices generally fall in line with marginal cost producers in China using coal as feedstock. Urea imports from China pose a constant threat to prices, and North American supply has expanded over the past several years with the startup of multiple nitrogen expansion projects. Both factors are likely to cap nitrogen price gains.