In its recent shareholders meeting and teleconference with analysts, CF Industries Holdings Inc. touted high points, including higher ammonia prices due to its distribution system for direct application in the Corn Belt, its close relationship with big customers, and its recent investment in Keytrade AG. By comparison, it says its recent foray into the potash market has been an “expensive lesson.”
CF told analysts it would continue in the potash business at least until it sells the product it has, saying it bought some 164,000 st and still has most of that to sell. Prodded as for how much it is offering those tons, CF said its average price information will be included in its second-quarter financial information.
“It’s been an expensive lesson for us, frankly,” said Stephen Wilson, CF president, chairman, and CEO, referring to potash. “We think the concept is a solid concept and that being able to provide our domestic customers with all three nutrients through our dry product warehouses makes sense from a strategic standpoint, but we will be much more careful in the future on the execution side, should we choose to do so. The execution obviously depends on being able to sell the product for more than the price you acquired it at, and that will be our focus should we do this again.”
CF did a $24.3 million write-down on potash inventories during the first quarter ending March 31 (GM April 27, p. 13), and a $26.7 million write-down in the fourth quarter 2008 (GM Feb. 16, p. 1). This would equate to approximately $51 million in write-downs on potash inventories; assuming the company has 164,000 st, that would be about $311 per ton of write-downs.
Wilson said CF has obtained higher ammonia prices than competitors, such as Terra Industries Inc., for various reasons, including its commitment to selling to the direct application business due to CF’s broad distribution system. Sales from Medicine Hat, Alberta, also add to higher average ammonia prices. Wilson added that through March, CF began experiencing promising levels of ammonia movement, and through April 22, year-to-date ammonia shipments were almost 70 percent ahead of last year’s admittedly weak levels.
Wilson said the company’s close contact with domestic customers is one reason it is bullish about exceeding the USDA’s 85 million planted acres for corn. “We have long term relationships with several very large customers and so we know what their demand patterns are likely to be and we adjust our customer mix accordingly, and that’s all what drives our production planning. In other words, we are producing for expected demand. That’s what drives us.” Two of CF’s large customers, CHS Inc. and Growmark Inc., have seats on its board of directors.
Wilson expects nitrogen demand for the fertilizer year to be off in the middle single digits. He believes a strong spring season will hold the phosphate decline to 20 percent for the fertilizer year.
Wilson was able to tout the company’s relationship with Keytrade and the impact it had upon the company’s doubling of DAP exports during the first quarter. He said because of CF’s size and Keytrade’s extensive network of contacts it was able to identify pockets of demand and move quantities that for CF were significant and perhaps for PhosChem not so much, making CF a key player in some of those markets. “In terms of realizations that we get, we’re absolutely comfortable with the prices at which our products move, and I think they compare quite favorably to others in the industry.” He noted that in addition to making sales into Brazil, India, and Vietnam in the first quarter, a sale into Ivory Coast was made in April.
Wilson reiterated that CF’s export prices were quite good, and that the company did not “buy market share” with lower prices.
Earlier at the CF shareholders meeting, Wilson said the company sees exciting opportunities in its nitrogen business thanks to what appears to be a new global paradigm for natural gas. He said CF has authorized a $79 million project to reduce gas consumption at all four of the Donaldsonville, La., anhydrous ammonia plants by an additional .35-.4 mmBtu per ton of ammonia, and increase capacity by 50,000 st/y by 2010.
Wilson said CF completed a $25 million-plus project in 2008 to two of its four ammonia plants at Donaldsonville, La., reducing energy consumption by .5 mmBtu of natural gas per ton of ammonia and increasing annual capacity by 21,000 st. To put that in perspective, he said the two plants use nearly 40 million mmBtu of gas each year. He said CF also made incremental changes to reduce gas use at its urea plants and modestly increase UAN capacity.
Wilson said the company is also making investments in its Florida phosphate business. He noted that increasing sulfuric acid capacity has been approved for 2009. When completed later this year, he believes upgrades will have increased phosphate production capacity from 2 million st in 2007 to more than 2.15 million st. He also noted that in 2008, the company acquired a third mining dragline for its Hardee County rock mine.
Overall, to capitalize on its internal opportunities in nitrogen, phosphate, and distribution, CF said capital spending in 2009 will be between $200-$300 million, up from 2008’s $140 million.