EuroChem’s CEO confirmed in the Russian press yesterday that the company still intends to build its massive greenfield nitrogen plant in Louisiana. EuroChem expects to make its decision “within the next two years,” with the timing dependent on “market conditions.”
“Don’t write off this issue. We have a plot of land, we carried out a feasibility study, the matter concerns nothing but the market conditions. We will certainly build it, but when — it will be an internal solution. We have a plan to build three or four plants. First we are building in Russia, and within the next two years will decide upon [the rest].”
EuroChem CEO Dmitry Strezhnev, Russian Construction: EuroChem to decide on plant construction in USA within two years, 03/14/2017
Nitrogen prices
The primary market condition that will define the timing of EuroChem’s investment decision is, presumably, the pace of recovery in the prices of ammonia and its derivatives, which fell off a cliff in 2015.
Also echoing many other companies, EuroChem has some short-term opportunistic optimism regarding the benefits of producers with well-placed, integrated distribution chains:
Further capacity expansion across all three primary nutrients, as well as the ability of Chinese producers to ramp up idled capacity into any significant price rallies, are likely to keep average prices from appreciating by more than 10% year-on-year. Nevertheless, Q1 [2017] promises to be a solid quarter with many elements of the global distribution chain caught off-guard by the recent fertilizer price strength, as a consequence of hand-to-mouth procurement tactics …
Short-term volatility in certain import markets, such as North America, could materialize on the back of logistics disruptions and supply shortfalls.
EuroChem Q4 2016 Results, 02/08/2017
The volatility that EuroChem is talking about specifically refers to an increase in prices. The downside will also present itself.
I have no special insight into how, or when, the pricing dynamics in the ammonia market will shift. However, as I mentioned in my February 2017 update on EuroChem, EuroChem’s new air permit application describes the construction of not just a production plant but also a global distribution hub. The Edgard plant would have significant storage and loading infrastructure, for imported fertilizer and other “ag products,” with annual throughput in excess of two million tons per year. This would only increase EuroChem’s ability to capitalize on short-term opportunities, with import and export flexibility, which makes the investment more attractive in a volatile market.
Other market conditions will also, however, affect EuroChem’s investment decision.
Exchange rates
First is the dollar:ruble exchange rate, on which I can provide no forecasts. The ruble crashed a couple years ago when Russia was hit with international sanctions, while the dollar grew in strength. This was no catastrophe for EuroChem because it was earning in dollars but spending in rubles, investing significant sums in three major projects in Russia (an ammonia plant in Kingsiepp and two potash mines in Volgograd and Perm).
Even now that the ruble is appreciating again, EuroChem noted in its latest earnings report that “the strength of the US dollar remained beneficial to EuroChem’s cost base.” As the outlook for the dollar appears to grow less bullish, spending in the US may grow relatively more attractive. Taken by themselves, the currency dynamics seem to be moving in favor of the Louisiana investment.
It’s difficult to have confidence in smooth US-Russian relations over the next few years but, whatever happens between those two nations politically, EuroChem is relatively immune because it is, after all, a Swiss company now.
Tax uncertainty
Only a couple months ago, at the end of December 2016, EuroChem was celebrating the US Department of Commerce’s decision to rescind the antidumping duties that had been assessed against Russian nitrogen imports since the 1980s (64.93% for urea and 253.98% for ammonium nitrate).
This action reduced risks for EuroChem, even though it didn’t have any direct impact on the company’s bottom line. Although (or because) EuroChem “has been actively lobbying for the removal of these antidumping duties by the U.S. authorities since the early 2000s,” the company had secured for itself “an individual 0% duty on deliveries of urea in 2008 and a preferential 0% duty on ammonium nitrate in 2014.”
However, just when EuroChem succeeds in getting the import duties removed, it comes up against President Trump agitating for a Border Adjustment Tax. Domestic nitrogen producers are also busy lobbying on tax issues – for example, CF Industries is explicit about what it sees as the benefits of the Border Adjustment Tax.
We are actively participating in the debate on tax reform. While discussions are still in early stages and many of the details are yet to be worked out, the house tax reform framework looks very promising. A reduction in the corporate tax rate levels the competitive playing field with the rest of the world and generates earnings and cash flow that drops straight to our bottom-line.
Further, the border adjustment tax is a concept that mirrors barriers we confront today. We face import taxes and tariffs for our products into Europe, China, and other geographies while foreign producers, who sell into the U.S. market, face no such import tax or tariff. This concept would also help to level the competitive global playing field. Further, it could also provide a benefit to our company, given both our significant manufacturing presence in the United States and our capability to export. We believe the house framework for tax reform would be good for America, good for CF Industries, its employees, and its shareholders.
CF Industries CEO Anthony Will, Q4 2016 earnings call transcript, 02/16/2017
As far as I can tell, the Border Adjustment Tax would be negative for EuroChem’s existing business – but it would also be a strong argument in favor of EuroChem investing in domestic (US) production at its Louisiana site.
Pipeline of capex projects, leading to EuroChem’s IPO
EuroChem’s ability to finance the Louisiana plant will depend on the successful completion of its existing expansion projects. The Kingisepp plant, dubbed “EuroChem NorthWest,” is due to start production in 2018, and the first of the two potash projects is expected to begin production in the second half of 2017.
Beyond these projects, EuroChem announced big plans in 2015 for Tecnimont to deliver five nitrogen expansions. In Russia, Tecnimont is already building the Kingisepp plant, but there’s a possible urea plant to be added at Kingisepp, and a brownfield ammonia-urea brownfield at EuroChem’s site in Nevinnomyssk; in Kazakhstan there’s an ammonia-urea greenfield; and then there’s the Louisiana plant.
As the video below explains, “Eurochem NorthWest is the first of a potential five new ammonia plants to be built by EuroChem over the next 10 years. These new projects will provide EuroChem with an additional five million tons of ammonia and eight million tons of mineral fertilizers per year.”
It strikes me that, given how bullish EuroChem appears, its biggest decision may not be whether to invest, but in what order to invest.
Back in 2013, when EuroChem launched these development plans, its intent was to hold an IPO “within 5 years,” which would be next year. To facilitate this transition from a Russian company, 92%-owned by a friendly oligarch, to a global company, with 25% of its shares traded on the London Stock Exchange, EuroChem relocated to Switzerland and has been assiduously reporting its results in accordance with the IFRS and publishing reports on sustainability and social responsibility.
For context, EuroChem’s latest results put it on a par with CF Industries, with 2016 revenues of $4,375 million (CF: $3,685 million) and EBITDA of $1,099 million (CF: $395 million). CF currently has a market cap of roughly $6.5 billion, so you could imagine an IPO generating fairly significant cash for EuroChem – or its owner, Andrey Melnichenko.
In any case, I would imagine that a major exposure to US shale gas economics, through investing in its Louisiana project, would make the prospect of purchasing EuroChem shares more attractive.
All of which is to say that the drivers for EuroChem’s Louisiana investment look good to me, with one major caveat: global supply and demand pricing dynamics, over which EuroChem has, at best, opportunistic advantages but no long-term solution.
Full details on EuroChem’s proposed investment are in my Research Note for Edgard, LA.