CEO commentary, Q1 2015. Discuss: Will the US be a nitrogen exporter?

If you want to know whether – or when – the US will become a nitrogen exporter, read what the fertilizer company CEOs say during the latest round of quarterly earnings calls.

These guys should have formed pretty solid opinions by now about how the capacity expansions will affect long-term supply and demand, and how they’re going to gain/keep market share and competitive advantage. But it can be a challenge to infer what those opinions might be.

I’ve summarized the pertinent parts of the debate here, with quotes from Agrium, CF Industries, KBR, LSB Industries, OCI, Potash Corp, and Yara.

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OCI leads with the old party line: no big capacity expansion in North America (yet):

“Today, there is limited new announced nitrogen fertilizer capacity expected in the United States” [please note: I disagree] “as new capacity has become increasingly time consuming and capital intensive … compared to when we began work in 2012. Factors affecting this include limited availability of skilled labour, few EPC contractors with industrial greenfield experience, and difficulty in attaining project financing, while the timeline for the development of a nitrogen fertilizer plant can take as long as seven years to complete. Accordingly, we believe the United States will remain a net importer of nitrogen fertilizer for the medium term.”
OCI NV’s 2014 Annual Report (PDF), 04/29/2015

Three points about OCI’s comment:
– this argument is now stale: CF, Agrium, Potash Corp, etc, all used to say similar things, none do any more. The only valid purpose of this comment is to remind readers of OCI’s first mover advantage.
– I seriously question the currency of OCI’s comment about limited availability of skilled labor, following the 2014 oil price decline and the resulting industry-wide layoffs.
– I’d agree that, given the expansion projects in the pipeline, we can no longer claim the US will remain a net importer of nitrogen in the long-term. If you want to stick your head in the sand, the best you can claim is that nothing will happen in the “medium term,” but deny capacity expansions beyond then and you’ll just look foolish.

CF Industries’ Tony Will was more precise. If I make a couple assumptions, he’s telling us that new nitrogen capacity in the US will displace the majority of imports by the end of 2016:

“We don’t see in the near term there being a dramatic change in the way that we go to market and the way that we do business … Even after all of the capacity projects that are in flight come on stream, [and] the most notable of those are our two projects, North America will continue to import about 20% of our total nitrogen requirements. So really, what we’re doing is, for the most part, kicking out the majority of imported products.”
CF Industries Q1 2015 Earnings Call transcript at SeekingAlpha, 05/07/2015

When Will refers to “all of the capacity projects that are in flight,” I assume he means the plants under construction … which is to say he’s making no predictions beyond 2016.

The projects we’re talking about are new plants in Donaldsonville, Port Neal, Wever, Waggaman, El Dorado, Enid, Greeneville, and Rock Springs; maybe also debottlenecks at Borger, Brandon, Lima, and Pryor. I estimate these add up to well over 4 million metric tons of ammonia capacity coming online in the next 18 months.

For reference: USGS Mineral Yearbook 2015 [PDF] estimates 2014 imports at ~6.3 million metric tons of ammonia (5.16 million metric tons of nitrogen) or 36% of the US market. According to those USGS numbers, for North America to reduce import reliance from 36% down to “about 20%,” we’d need 3.5 million metric tons of new domestic ammonia capacity, assuming no increase in market size. So, Tony Will’s 20% number isn’t too far off, plus or minus a half million tons.

(Note: 36% down to 20% isn’t, however, a “majority” of imports, but I think his 20% number is too high …)

Why will domestic ammonia displace imports?

LSB Industries’ Barry Golsen provides the most succinct explanation: Domestic nitrogen is now cheaper to deliver than imported nitrogen.

“North American nitrogen fertilizer producers, including our chemical business, currently have the lowest delivered cost to North America relative to foreign producers. Therefore, we believe that if there is less demand for nitrogen fertilizers in the upcoming season, it will affect importers before it affects domestic producers.” (he’s talking about reduced demand in 2015, but his comment applies equally to increased supply in 2016)
LSB Industries Q1 2015 Earnings Call transcript at SeekingAlpha, 05/08/2015

Agrium’s Chuck Magro adds that displacing imports will have profound effects for global traders (though he daren’t look beyond 2016):

“On new capacities, specifically in nitrogen, this has been well-known. It’s well-documented. The US is still in that import market. So, it’s going to change global trade dynamics, but we don’t think that what’s coming up [to] be produced in the second half of the year and then moving into 2016 is going to impact even North American premiums that we see because of logistics differentials. We think it’s business-as-usual with pushing out some imports potentially.”
Agrium Q1 2015 Earnings Call transcript at SeekingAlpha, 05/06/2015

“Logistics differentials” is big-word-speak for the costs of storage and transport and trading.

In summary: in the medium term – 2016 – the US remains a net nitrogen importer.

Yes, net nitrogen importer, but what about each different product? Will the US start exporting some products soon? The general implication – implicit or explicit – is that first the US will export UAN, and then urea. This is where the analysis becomes more nuanced.

Tony Will explains the dual benefits of upgrading ammonia: first, more urea and UAN means better profit margins and, second, less ammonia on the market means higher ammonia prices:

“Our profitability per nutrient ton is better on the upgraded products than it is on ammonia. So to the extent that we can upgrade ammonia into urea and then further upgrade it into UAN, every time we upgrade ammonia, we get more margin for those same molecules of nitrogen …
So in some ways, us continuing to run our upgraded plants as hard as we can has a double benefit. The first one is we get more margin on the products that we’re upgrading to. And the second one is it means that you don’t get sloppy in terms of the total amount of ammonia that’s out there … it’s a tighter ammonia market. And the prices then are that much higher on ammonia as well. So it’s kind of the gift that keeps on giving.

“I think right now, between the various UAN capacity additions coming online in the US with Wever and then D’ville, that takes up most of what the US imports in the way of UAN. There’s still a little bit of headroom there. But we can dial that up and dial it down as needed.”

By “dial that up and dial it down,” Will means that, if there’s too much UAN flooding the US, CF Industries can swing output from UAN to urea or ammonia, depending on which product will give the best profit margin at any given time.

Potash Corp’s Jochen Tilk and his team make a similar point, but their “focus on the high netbacks” isn’t just a question of product “portfolios” – UAN versus urea v. ammonia – but also of market “portfolios” – fertilizer v. industrial sales, and domestic v. export sales:

Stephen Dowdle – President, PCS Sales
“We do expect that there will be some new capacity that certainly will impact our customer mix. We have two portfolios if you will; we have a Deepwater portfolio [ie, exportable] with our ammonia, and of course we have our domestic nitrogen production. And probably both will be impacted …”

Jochen Tilk – President & CEO
“… The other components certainly that we focus on is how we make sure from a reliability perspective, from a cost perspective, and from a flexibility perspective that we can respond to the markets and really focus on the high netbacks …”

David Delaney – EVP & COO
“The great advantage we have in Potash Corp is our location advantage: we have three US sites (Lima, OH, Augusta, GA, Giesmar, LA), all geographically suited well for a very good industrial base. We get a growing DEF business [at] Lima also coming to Augusta and Giesmar. Our nitric acid business in Giesmar is stable to grow in with potential further growth.

“So it gets down to the product mix, customer mix, and the flexibility that we have, we see that only getting better as we go forward.”
Potash Corp Q1 2015 Earnings Call transcript, 05/01/2015

These shifting dynamics within the domestic US market will be fascinating, with expanding supply but relatively stagnant demand. Will the expanding DEF market create enough demand? How much does it matter that the US fleet of coal-fired power plants are closing down? How will domestic companies handle the increased competitiveness? Answer: distribution, penetration.

Tony Will (CF Industries): “We also have the largest, most [extensive] distribution asset base in North America. We intend to continue to leverage that to full effect.”

Stephen Dowdle (Potash Corp): We are looking at that and planning for that, and are very confident that we will be able to have a good distribution plan in place as we move into the future …

David Delaney (Potash Corp): We’ve got a very good broad diverse base of customers … we’re very confident that we’ll place [product with] existing customers or in the spot market and feel confident that will happen.

Chuck Magro (Agrium): As the world’s largest direct-to-grower agricultural retail distributor, we have excellent visibility into farmers’ thinking and actions …

Providing a different perspective, global trader Yara confidently predicts that although the US will continue to import ammonia, it will start exporting both UAN and urea (“oversupplied”). They give no timescale for this. The transcript is almost unintelligible; I’ve edited for clarity:

Anders Lerstad – Acting Head of IR
“You could say that it’s not the lower gas cost, probably, what goes on the prices, than it’s more Chinese export. And, for instance, on Belle Plaine [Yara’s cancelled brownfield] … it’s keeping up [with] the construction activity there. So I think [we] quite early realised with the Belle Plaine project that this was starting to become more expensive than what you originally thought. And I think all the players have realized that over the last year …

“I don’t think that is motivating, to go … more into US, quite [the] contrary … [the] hypothesis that [the] US will become oversupplied on the urea and UAN is growing in evidence … So, that’s also why we continue to keep out of urea project in US …

“But I’m very happy for the ammonia project in Freeport because [I] foresee that [the] US will continue to be [an] ammonia importer, although [they] may be oversupplied on urea and [UAN], and you actually capture the gas advantage in US … and also Freeport [has] a lower construction cost and is less exposed to cost inflation due to increased petrochemical activity in US than, you say, more protected or less available areas, less flexible, maybe, labour markets in the Midwest or … Canada.”
Yara Q1 2015 Earnings Call transcript at SeekingAlpha, 04/24/2015

KBR’s Stuart Bradie has a privileged insight into the likelihood that additional new grassroots plants will get built in the US beyond 2016, and he clearly sees that the US will no longer need to import any nitrogen. His point is, why stop there? Why not turn Yara’s pessimism on its head and turn lemons into lemonade? Why stop at just satisfying domestic demand? Why not “capture the gas advantage” and build an export industry? Note that, as both technology provider and construction company, this outcome would be doubly good for KBR’s bottom line:

“I think the drivers around ammonia, interestingly enough, if you look at the stats around importation of ammonia in the US, I think the facilities that are planned to be built at the moment will actually just satisfy the demand domestically. And if you think about ammonia and its use in food production and fertilizers going forward, the opportunity to utilize cheap gas to become an export product from the US hasn’t even been thought about … well, I am sure it’s been thought about but we’re not at that terms of capacity yet.”
KBR Q1 2015 Earnings Call transcript at SeekingAlpha, 04/29/2015

CF Industries provided the simplest graphic to illustrate the attractiveness of this argument, with their updated industry cost curve for urea. North America is now the lowest cost producer of urea in the world.
Click image to enlarge. CF Industries Earnings Call presentation, page 9
Click image to enlarge. CF Industries Q1 2015 Earnings Call presentation [PDF]

Gas prices are volatile, so make your own projections about how long this will hold (12 months ago, urea cost less to produce in Algeria, the Middle East, Egypt, Trinidad & Tobago, and “Latin America” – see page 8 of this PDF).

Does this mean that US-produced nitrogen will be competitive on the global export market? CF Industries’ Tony Will again:

“Now we will periodically do an export cargo here or there, but North America will continue to be an import-driven marketplace for the foreseeable future …”

Yes, you told us already – but the foreseeable future ends in 2016, so now tell us about your new long-term assets, because that’s where we get insights into your long-term strategy, out to 2020, 2025, 2040 …

“One of the things we did at D’ville is to build a pretty big acid plant, 1,500 tons a day. That gives us an opportunity to really grow into that acid plant as the market continues, on a global basis, to develop and use more UAN. And we are seeing signs of global growth in demand and acceptance of that product in Latin America and other places as well. So we expect UAN to be kind of a product that continues to get traction on the global stage.

“But we also put in the capacity to be able to granulate 100% of the new urea plant and basically turn the acid plant off if we wanted to. So we’ve got terrific product flexibility in terms of configuration of mix coming out of D’ville going forward. And our belief at the beginning was we won’t be running the acid plant full out from a UAN perspective, and we’ll be able to dial it up and down as the market requires.

“We are also evaluating other uses for that acid plant, whether it be industrial sales of nitric acid to other people and so forth so we can get full asset utilization out of that investment. But I think it’s a critical piece overall in terms of our network because it gives us a lot of flexibility to be able to go urea, go UAN and move the product into the interior and/or export it as market conditions warrant.”

Okay – so, UAN exports?

Christopher Bohn (CF Industries, Senior VP Supply Chain): “We believe in UAN. It’s got a, we believe, a pretty positive future not only for this year but in the future years, just because it’s such a great product and its versatility agronomically. And so we believe that the retail as well as the farmers segment, will continue to be attracted to that because of the advantages it offers to the farmer. And they’re willing to pay more for it.”

And the award for best analyst question of the earnings season goes to:

P.J. Juvekar (CitiGroup): “You guys make a lot of money by making these in-market decisions about when to sell ammonia, urea, UAN and what to sell, the basis difference and all that stuff. That expertise allows you to make more money than you would otherwise make. How do you make those decisions? Is that institutionalized, the process, or is that just Bert making all the calls?”

Tony Will (CF Industries): “That’s why Bert gets the big money. No. So, Bert and his team … I’ll turn it over to him …”

Bert Frost (Senior VP Sales, Distribution & Market Development): “We have a process that’s been developed over the years where it’s a quantitative view of the market. And the market is an international market …

“… It starts with supply and demand. And then you work your way through from distribution to the international markets to storage assets and distribution capabilities, with different modes and freight options and arbitrages that are available.

“And then you have to bring in the whole customer dynamic of psychology and … risk and reward, as well as timing with what they’re thinking, acres.

“And then the last one is probably our production options on. We have many different products or legs of the stool that our company stands on with urea, ammonia, UAN, ammonium nitrate, DEF.

“And so when you look at the production mixes, that gives us a lot of optionality and we’re building even more advantages into the company with these new production plants. And so when you put that all out before you and you have those types of choices, it allows us to be successful. And we enjoy the position that we have …

“Some of our industry colleagues have focused on gaining distribution in different markets in Brazil or India or different places. I’d say at this point, we’re not looking at that, but we have great relationships out in the world and we’ll continue to move our products.”



  1. Glen N Buckley says:

    I totally disagree with you. Particularly the comments on urea. The U.S. is not oversupplied. We import roughly 70 percent of our total urea requirements. No doubt new capacity will reduce imports, but it will not result in the U.S. becoming a net exporter. I agree with UAN. The U.S. will be oversupplied and will become a net exporter. But again, not a major exporter. With respect to ammonia, there’s no way we will become a net exports. The vast majority of the new announced capacity is upgraded with very little “marketable” ammonia.
    Also, in your analysis, I’m not sure you’re factoring in the capex for new greenfield construction. Even under a more bullish scenario for product pricing, the ROI on these new plants barely makes it into the double digit range. Given the high risk and volatility in this market, investors are going to require at least a 15% return.
    The other implied assumption you’re making is that U.S. natural gas cost will remain at close to current levels. That all depend on U.S. energy policy (or lack of it) which is highly uncertain.
    In reading you’re write-up, I think you’re taking a lot of them out of context and/or reading something into them that is not there.

    • Trevor Brown says:

      Hi Glen,

      Thanks for weighing in – I have a great deal of respect for your opinions, which I know to be based on decades of experience and knowledge (

      What time frame are you looking at?

      If the spread between US and international feedstock costs remains this wide in the long-term, would net nitrogen exports not make economic sense? Or is that simply too big an “if”?

      I see the long-term supply/demand balance resting on a sequence of key assumptions, on which I think we disagree:
      – projects’ and investors’ expectations of the future levels of natural gas prices.
      – the number of potential new plants / restarts that will actually move forward.
      – the extent to which the market for “marketable” ammonia will shrink as a result of today’s buyers becoming tomorrow’s producers.

      I’ve not intended to quote any of the comments above out of context, but I am looking at their words, and making my interpretations, through the very specific lens of the US import/export balance. I’m looking for ways in which I think management shows its hand. I don’t think I’ve misrepresented, but I welcome all input to the discussion.

      With best wishes,

  2. Timothy J. Mccreary says:

    Typical executive level goobledy-gook. Parse out the sentences; little of real value, great amounts of waffling, almost incoherent responses. No one wants to give away the store, to reveal any kind of competitive weakness nor particular strength.

    Two points stand out after weeding thru the morass: owners are moving to increase flexibility at the plants; and companies will move product.

    I do concur with your insight that comments about skilled labor, EPC companies, etc. are bogus.

    I think there’s more benefit from polling the engineering firms; some of the traditional infrastructure firms are being supplanted by 2nd tier firms who are hungrier.

    But as with power generation some time back, fuel/natural gas prices haven’t been exactly stable (as opposed to coal) and major commitments in fuel/resource switching can bite back. Its small wonder the companies hedge on outlook.

  3. Reasonable gas prices in US have shifted the demand curve upward for the fertilizer plants. A number of plants are in pipeline for financial closure, however, increased CAPEX numbers have significantly lowered the returns of project investments. Ammonia Urea Complex of 1.3 MTPY capacity has capex of around 1.1 Billion USD which has increased to 1.8 Billion USD these days. For a gas availability of 3 $ / mmBTU, the returns on investment hardly touch 9%. I have a feeling that it would be a great achievement if even 40% of the projects in pipeline are materialized.

    Going for a mix of Urea and UAN complex, the CAPEX numbers go even higher with insignificant effect of IRR. Under these conditions, a project based on relocation of stressed / shutdown plants can look more attractive.

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