All Posts from August 12, 2015

CHS buys into CF, axes N.D. plans – Alert

CF Industries Holdings Inc. and CHS Inc. announced today that they have agreed to enter into a strategic venture. CHS, the nation’s leading farmer-owned cooperative, will make an equity investment in a wholly-owned CF subsidiary and also enter into a supply agreement. Under the supply agreement, CHS will be entitled to purchase annually up to a total of 1.7 million tons of UAN and urea at market prices. CHS will purchase a minority equity interest in CF Industries Nitrogen LLC for $2.8 billion and be entitled to semi-annual profit distributions from CF Nitrogen.

"Entering nitrogen fertilizer manufacturing through the purchase of a minority ownership in CF Nitrogen is the single largest investment in CHS history," said Carl Casale, CHS president and CEO. "This positions CHS and our owners for long-term dependable fertilizer supply, supply chain efficiency and economic value. In addition, the ability to source product from CF Nitrogen production facilities under our supply agreement benefits our owners and customers through strategically positioned access to essential fertilizer products."

Once the capacity expansion projects are completed at Donaldsonville and Port Neal, CF will have total production of 18.9 million product tons, not including the new capacity from the business combination with OCI NV. Of that total 18.9 million tons, CHS will have the right to purchase up to 1.7 million tons, or about 8.9 percent of CF Industries’ total production capacity. CHS, a major CF customer and industry leader, is making a $2.8 billion investment for approximately 8.9 percent of CF’s total system capacity.

CF Nitrogen will sell annually to CHS up to 1.1 million tons of granular urea and 580,000 tons of UAN, at market prices. The 1.7 million tons available under the supply agreement have an average gross margin that reflects the average gross margin across the entire CF system.

CHS’s semi-annual profit distributions from CF Nitrogen will be based generally on the volume of granular urea and UAN purchased by CHS pursuant to the supply agreement.

The transaction is expected to close Feb. 1, 2016, or earlier by mutual consent, subject to satisfaction of certain conditions.

Casale also announced today that the company has made a separate decision against moving forward with construction of a proposed fertilizer plant at Spiritwood, N.D.

"Our long-term goal has always been to add value for CHS owners through investment in the nitrogen fertilizer manufacturing space. To that end, we’ve continued to look at a variety of options, including the Spiritwood project," he said. "Ultimately, we determined that the construction cost, water supply challenges, overall risk profile and time required for the Spiritwood project had changed significantly since it was first considered. As a result, we concluded we couldn’t achieve the level of returns needed to justify the increased costs and risks.

"We deeply appreciate the tremendous support and assistance from the Jamestown and Spiritwood communities, North Dakota’s governor, elected officials and state agencies and organizations like the North Dakota Farmers Union; and other government leaders who have supported us through our due diligence process."

Casale noted that CHS has been a committed North Dakota business and neighbor since its 1931 founding and looks forward to a bright future that includes other investments in the state.

Yuan devaluation signals heightened risks; VAT could offset – Alert

This week China announced that it would set the official value of the Yuan (CNY) lower and it has now declined ~2.8% vs. US Dollars (USD). On the surface this would lower the position of urea and phosphate producers on the global cost curve structure. Fertilizer is traded in USD so it is obvious to say that increasing exports boosts producer cash positions. However, the reintroduction of a 13 percent Chinese VAT tax on September 1st is a headwind to higher export levels as well as producer costs which adds turbulence into evaluating the impact.

For example; current urea prices in China are $270-$275 mt and the VAT would generally add ~$3.50-$5.50/mt in cost; implying that the cost structure would likely stay close to the same for the producer after the devaluation and VAT implication. Potash prices could face headwinds as imports are also subject to the VAT raising costs to farmers. The devaluation adds headwinds into benchmark price negotiations which are widely watched by the market. The real concern then is how producers (both urea and phosphate) and importers (potash) will behave going forward. The move to devalue signals heightened macro-concerns with China and the potential for more devaluations going forward. So while the VAT tax might off-set some downward pressure (nitrogen/phosphate) it still signals heightened risk and uncertainty to these markets.

SQM shipments not impacted by storm – Alert

Sociedad Química y Minera de Chile SA said Aug. 11 that it believes scheduled shipments will not be impacted by a disruption in rail service due to recent storms. SQM said it performed an inspection of the railway line that runs between Coya Sur and Tocopilla, following the storms that affected the area over the weekend. Preliminary findings indicate that some areas have been damaged, which is why the train is not currently operating. SQM said detailed studies will be carried out to determine the next steps. SQM operations in María Elena, the Salar de Atacama, and the Salar del Carmen were temporarily suspended as a preventative measure, for safety purposes due to the weekend storm. These facilities are currently operating normally. There was no damage to the Port of Tocopilla, though operations were initially suspended until improved weather conditions enable operations to be carried out safely. SQM said it provided support to its workers and their families who have been affected by the storms. It also offered to help local authorities with clean-up and reconstruction efforts, especially in the city of Tocopilla.