Citing a 20 percent annual growth rate for diesel exhaust fluid (DEF), OCI NV, Amsterdam, is investing to expand product storage capacity at its Wever, Iowa, nitrogen complex. “DEF is our highest margin product by far, and our intent is to grow that production platform,” OCI CEO Nassef Sawiris told analysts on Aug. 31. He added that every time the company shifts its product from urea and UAN to DEF, its margins expand.
“We have also introduced almost 300 railcars to be able to access more destinations for DEF,” he said, adding that OCI is seeing new uses for DEF in construction equipment and agriculture. “So it’s not just trucks and private diesel passenger cars. So, on the Iowa side, there is a lot of work being done on the DEF front.”
OCI earlier noted that its recent joint marketing agreement with Dakota Gasification would have benefits in both the fertilizer and DEF markets, saying as to the latter that buyers would prefer to buy from a marketer that could source product from two different plants rather than just one, in case one plant was offline and not able to supply product (GM May 25, p. 1).
Sawiris told analysts that OCI recently won a contract with a major truck stop that had been buying imported DEF from Poland, which was essentially shipping 50 percent water across the ocean. “So that is not efficient, because DEF is sold with a lot of water, so logistics in DEF are key.” He said OCI is now the largest DEF producer in the Midwest, and this gives it access to the Chicago hub and all the Midwest traffic. U.S. DEF imports were off 15 percent for the year ending June 30, 2018, to 155,356 st from the prior year 181,798 st, according to the U.S. Department of Commerce.
OCI is also growing its offshore DEF presence, planning to add DEF capacity during a turnaround at its OCI Nitrogen plant in 2019. It has also begun experimental shipments for DEF produced at its Egyptian nitrogen plants to Southern Europe.
Sawiris said the company is happy with how the Wever plant is performing, saying that on an average day it is producing about 115 percent of the nameplate capacity of urea, which goes downstream to DEF, granular urea, and UAN. “We are also seeing a higher nameplate performance on ammonia – around 110 percent, with a lot of room to improve…”
In the nitrogen market, Sawiris continued to reiterate the company’s plan not to participate in fill programs, and added that this would be true for the recent marketing joint venture with Dakota Gasification. He said the company continues to sell month-to-month, and that neither it nor Dakota Gas participated in the fill program.
OCI said the levels of fertilizer within the industry storage system are extremely low.
OCI said the Midwest premium for nitrogen is on the right trajectory and is expanding. Sawiris believes that going forward there will be less urea available at New Orleans. He said long-dated trader contracts with the Arab Gulf don’t make sense anymore, and that those producers can achieve better netbacks by sending their product to Asia and East Africa.
U.S. urea imports were off 27 percent during the fertilizer year ending June 30, 2018, to 5.17 million st from the prior year 7.05 million st.
He also noted that there are no new nitrogen plants coming in the Midwest – or at least no one has dug a hole for one to be built. “Yes, you have an attractive gas price,” said Sawiris, “but the entry ticket is painful in terms of Capex, in terms of project finance availability, and in terms of access to labor.”
OCI said the only nitrogen product with a price mismatch is ammonia, which should be trading at higher levels in order to justify continued production and an arbitrage with urea. OCI noted its own second-quarter turnaround at its OCI Nitrogen plant in The Netherlands, and that it did not shed a lot of tears at the time due to the high cost of gas. Like other European nitrogen producers, it said it bought ammonia cargoes, adding that other producers have been curtailing production in favor of imports.
Internationally, OCI expects Chinese urea exports to stay at structurally lower levels going forward, saying the country has exported only 800,000 mt year-to-date. It cited higher production costs for marginal producers in China and Europe due to higher coal and natural gas prices. In addition, OCI said exports from Iran, one of the largest urea exporters, are at risk of significant curtailments due to U.S. sanctions. It said as of now, Iran is fully exporting, but this situation could change – and if it did, could have a significant impact.
OCI shares rose as much as 5.3 percent on Aug. 4, its highest level in three years, according to Bloomberg, after Berenberg analyst Rikin Patel raised his price target for the company “owing to increased assumptions for nitrogen fertilizer pricing in 2018 and beyond, along with a slight increase in our volumes estimates.” This came after the company posted a second-quarter loss on Aug. 31, while noting increased volumes and improved price trajectory for the second-half (GM Aug. 31, p. 27). Patel noted that OCI trades at a 30 percent discount to CF Industries Holdings Inc., Deerfield, Ill., even though it has a similar position on the cost curve with CF. The analyst sees little reason for a price disparity to exist.