All Posts from November 3, 2023

Major AN Buyers Exchange Lawsuits with CF

Two major industrial-grade ammonium nitrate (IGAN) buyers – Singapore-based Orica International PTE Ltd. and Nelson Brothers LLC, Birmingham, Ala., (ONB) – on Oct. 21 filed a lawsuit as joint plaintiffs against CF Industries Holdings Inc. regarding contractual disputes under AN purchase agreements for the supply of ammonium nitrate and related products, which date back to 2014 (GM Feb. 17, 2014).

The case was filed in the Circuit Court of the Nineteenth Judicial Circuit in Lake County, Ill. CF filed a separate lawsuit regarding the contract dispute on Oct. 22 in the US District Court for the Northern District of Illinois.

In a statement to the Australian Stock Exchange on Nov. 1, Orica said there remains no impact to its product supply in North America during litigation, and its contractual arrangements with customers in the region will continue to be met. It said the lawsuits do not impact Orica’s 2023 results, which will be released on Nov. 9.

Under the 2014 contract, CF committed to supply 700,000-800,000 st of IGAN and ammonium nitrate solution (ANS) on an annual basis for a period of at least 10 years beginning Jan. 1, 2017. The contract was later renewed and now runs through Dec. 31, 2031.

CF became the companies’ primary supplier of IGAN and ANS for the US and Canada markets. Product pricing under the related agreements was tied to the cost of natural gas, providing CF a defined margin.

The volumes specified required CF to increase ANS loading capacity and IGAN production capacity at its Yazoo City Nitrogen Complex in Mississippi. The plant reconfiguration began in 2014 at an estimated total cost of $65 million. At the time, CF said the agreements accounted for 70% of the annual AN capacity at the Yazoo City facility.

In its lawsuit, Orica said it also committed to investing substantial expertise and funding into the Yazoo City upgrade, providing technology and other proprietary information. ONB also said it promised to compensate CF for any under-recovery of its capital investment in the facility and to buy, with several significant exceptions, the AN expected for its North American Commercial Explosives business.

ONB said in exchange, CF promised to sell ONB a guaranteed minimum quantity of AN, at a fixed price subject to annual adjustments, for each year the agreement was in effect. ONB said CF also promised, with certain defined exceptions, not to sell Yazoo City AN to anyone in the commercial explosives industry except ONB to ensure that ONB received the quantities to run its business. ONB said the agreement acknowledged that ONB would be commercially dependent on CF for AN.

ONB said that while the parties worked cooperatively for several years, CF has recently threatened to withhold AN unless ONB complies with arbitrary restrictions that appear nowhere in the agreements. It added that CF maintains that ONB’s failure to comply with these restrictions constitutes a breach of the contract. As a result, ONB said CF purported to issue a formal notice of breach, declared that ONB cannot cure the alleged breaches, and initiated the agreement’s pre-litigation alternative dispute resolution process.

ONB said CF’s manufactured breach appears to be motivated by a desire to terminate the agreement so it can sell AN on the open market well before the 2031 contract expiration. ONB is asking the Court to enforce the agreements and is seeking a declaration that CF cannot unilaterally terminate the agreements or withhold ONB’s AN supply based on CF’s false breach allegations.

Much of the dispute appears to have happened between 2021-2023. CF said it exercised it rights to audit and a high-level scheme was uncovered in which ONB attempted to “game the system” by lying in the AN nominations in order to drive up their profits and avoid contractual liquidated damages. CF said ONB must only take its actual needs.

As an example, CF said ONB in 2023 told CF that it needed their maximum capacity. CF said by making this request, ONB blocked CF from selling any excess tons into the explosives market. CF said ONB had learned that CF was going to sell a large quantity of AN to a large customer. CF said ONB stole those sales for itself. CF says ONB must only take its actual needs.

CF also said that while ONB is expected to buy only from CF, it believes it is continuing to buy significant volumes from other parties. “Each and every one of those promises were broken in spades over the past few years,” said CF.

ONB said the auditor selected by CF was supposed to be “independent” under the contract but was not because it had done work for CF before. ONB said that on May 3, 2023, CF put ONB on notice of an event of default under the contract, largely based on the auditor’s report.

CF argued that ONB was buying AN over their actual needs in order to resell to third parties. ONB maintains these transactions are, and have always been, understood as part of ONB’s Commercial Explosives business. It said it has routinely sold unrefined AN from Yazoo City to its customers with CF’s knowledge, consent, and assistance.

As for the issue of buying from others, ONB said it has been forced to do so because of CF. It said that in late 2021, CF took down its Yazoo City plant from September through November with almost no notice to ONB. The buyers argued that a planned turnaround requires extensive planning and CF was required to give at least 150 days’ notice before the contract year during which the outage would occur.

This downtime occurred at the same time that Orica was having a planned AN outage at its Carseland, Alba., plant. As a result, ONB said that it faced a shrunken AN market and inventory shortage, and was required to buy AN from third parties in late 2021 and throughout 2022.