Q2 2022 CF Industries Holdings Inc Earnings Call
Good day, ladies and gentlemen, and welcome to CF industries, Twenty-twenty to first half and second quarter financial results.
My name is Gary I will be your coordinator for today.
At this time all participants are in a listen only mode. We will facilitate a question and answer session towards the end of the presentation.
Pose a question at any time, please press star one on your Touchtone telephone keypad.
Now, let's turn the presentation to the over to the host for today, Mr. Martin Jurassic with CF Investor Relations. Sir. Please proceed.
Good morning, and thanks for joining the CF Industries earnings Conference call with me today are Tony will CEO , Chris Bohn, CFO and Bert Frost Senior Vice President of sales market development and supply chain CF industries reported its results for the first half of 2022 yesterday afternoon. On this call will review the results discuss our outlook and then host a question and.
Answer session.
Payments made on this call and in the presentation on our website are not historical facts.
That are not used to where facts are forward looking statements. These statements are not guarantees of future performance and involve risks uncertainties and assumptions that are difficult to predict therefore actual outcomes and results may differ materially from what is expressed or implied in any statements.
More detailed information about factors that may affect our performance may be found in our filings with the SEC, which are available on our website also you'll find reconciliations between GAAP and non-GAAP measures in the press release and presentation posted on our website.
Now, let me introduce Tony will our president and CEO .
Thanks, Martin and good morning, everyone.
Yesterday afternoon, we posted our financial results for the first half of 2022 in which we generated adjusted EBITDA of $3 $6 billion.
On a trailing 12 month basis, we generated adjusted EBITDA of $5 3 billion net cash from operations of $4 4 billion and free cash flow of $3 $6 billion, all of which are new company Records.
To put this into context, our previous full year adjusted EBITDA record was $3 $3 billion, which was set back in 2012, we exceeded this mark through just the first six months of this year.
This all time record free cash flow.
Coupled with our lowest share count ever and the benefits to our shareholders are shown on slides 14, 15, and 16 of our materials.
Our performance was made possible by the outstanding execution of the CF industries' team against the backdrop of wide energy spreads between North America and high cost production in Europe and Asia looks.
Looking ahead in the near term, we expect global nitrogen demand to be underpinned by the ongoing need to replenish global grain stocks.
Longer term, we anticipate meaningfully meaningful new demand to develop from low carbon ammonia in clean energy applications beginning in the next couple of years.
Over this period, we believe the global LNG market well.
We remain structurally tight as European and Asian economies compete for scarce LNG cargoes, keeping natural gas prices high in these regions, which should support continued wide energy spreads favoring north American producers.
Given this outlook, we expect to generate substantial free cash flow for an extended period.
This will enable us to return significant capital to shareholders. While we also make disciplined investments to grow our low carbon ammonia production footprint.
Our blue ammonia projected Donaldson, Bill and our partnership with Mitsui position us to supply a substantial volume of low carbon ammonia beginning in 2025, just as significant demand emerges.
Taken together, our growth initiatives and shareholder return programs position us well to create meaningful shareholder value in the years to come.
With that let me turn it over to Bert who'll discuss global nitrogen market conditions in more detail. Thanks Tony.
First after the second quarter of 2022 saw a continued positive operating environment for CF industries.
Strong global demand and high natural gas prices in Europe , and Asia pushed global nitrogen prices to all time highs as a result, we achieved record average selling prices for all segments, even as poor weather affected the north American planting and application season.
As we look ahead to the second half of the year. We believe the environment will remain favorable for our company European and Asian producers are facing extremely high natural gas costs, creating supply uncertainty at the time of resilient agricultural led demand.
Last week prices at the Dutch T T F natural gas hub exceeded $60 per M. N V to you.
This would put ammonia production costs were efficient plants in Europe above $2000 per metric ton.
At current product prices. This production is not sustainable which is why we have seen several producers in Europe , including D. A S. S. Yarra OCI and 50 video curtail ammonia output.
Producers with the option to import ammonia may be able to run upgrades profitably for those who cannot the European off season is likely to be very difficult and we could see further curtailments and increased nitrogen imports into Europe .
At the same time government actions continue to play a role in limiting limiting global supply.
Since October of last year, and Chinese government policy has materially restricted urea exports, we do expect a seasonal increase in Chinese export volume in the second half of the year, but appears total exports in 2022 will be well below last below the level of last several years.
In contrast, the supply of fertilizer from Russia outside of ammonia has returned to near normal levels as trade flows have adapted over the last several months.
This environment together with typical seasonal demand led by India, and Brazil has created substantial demand outside of North America for all nitrogen products.
We evaluate these opportunities on a daily basis.
For the past several weeks the value of all major nitrogen products has been substantially at parity on a nutrient basis.
This allows us to use our manufacturing system flexibility to optimize our product mix and weak global demand in the form a location that maximizes margins.
As a result, we have built our largest export book ever across all our products.
Given the demand outside of North America, we offered a limited UA and fill program. This year, we launched it at a price point about 40% higher than last year and completed the program quickly between fill and our export book and our fall ammonia position, we are well positioned for the months ahead.
In the coming months, we expect the highest margin opportunities to shift rapidly between regions, where product is most needed with resilient demand and constrained supply the global nitrogen market is likely to be short fertilizer. It needs if product prices do not incentivize greater production in high cost regions.
Let me turn the call over to Chris Thanks, Bert for the first half of 2022. The company reported net earnings attributable to common stockholders of $2 billion or $9 78 per diluted share.
EBITDA was $3 5 billion and adjusted EBITDA was $3 $6 billion base.
Based on our long term outlook, we expect to generate substantial free cash flow over an extended period of time.
This will enable us to pursue our capital allocation priorities of investing in growth and returning capital to shareholders.
We continue to make progress on the clean energy initiatives at the heart of our growth platform.
We recently signed a joint development agreement with Mitsui that provides the framework for that the next steps in our exploration of new Blue ammonia capacity in the United States. This includes the feed study that we expect to begin in the second half of 2022, once we finalize the site and technology provider for the proposed plan.
Yes.
Additionally, our green and blue ammonia projects or Donaldson Bill are advancing the site, where our 20 megawatt electrolyze or it will be located is visible signs of progress, though the bulk of the construction will occur in 2023.
Detailed engineering is underway for the dehydration and compression facilities necessary for the transportation and permanent sequestration of carbon dioxide, we expect to complete this project by the end of 2024.
On an annual basis expenditures for these clean energy initiatives represent only a modest outlay of capital compared to our expected free cash flow generation.
We do expect to hold a higher level of cash on our balance sheet in the coming years as we intend to fund the Donaldson build projects and our portion of the proposed Mitsui joint venture project from cash on hand.
Given our outlook, we believe we will have ample flexibility to pursue additional growth opportunities that meet our investment criteria.
We also plan on returning substantial capital to shareholders over this period.
Through the first six months of the year, we are well positioned to exceed our goal of returning more than $1 billion in capital on an annual basis.
Starting with our quarterly dividend, which the board increased by 33% in April demonstrating its confidence in our outlook and recognizing the work we've done to reduce fixed costs.
We also continue to execute our current one and a half billion dollars share repurchase program, which we view as both a return on and return of capital through the first six months, we have repurchased six 6 million shares for $590 million as you can see in our level of repurchase activity in the second quarter.
We stepped in opportunistically to repurchase shares as their stock price fell despite positive industry fundamentals moving forward, we expect to maintain this approach with the ratable portion of our share repurchase program at 175 million per quarter and opportunistic purchases layered in at attractive.
With that Tony will provide some closing remarks before we open the call to Q&A.
Thanks, Chris before we move on to your questions I want to thank everyone at CF industries for their outstanding work during the first half of the year, we ran our plants extremely well leveraged our logistics and distribution capabilities and made continued progress on our strategic initiatives.
Importantly, we did this safely our trailing 12 month recordable incident rate was 0.21 incidents per 200000 labor hours significantly better than industry averages.
Our consistently strong operational performance, along with nitrogen industry conditions favorable to North American producers have led to record financial results over the last year.
In the last 12 months, we have begun investing in our clean energy growth initiatives retired $750 million of debt and regained investment grade ratings and returned approximately $1 $4 billion to shareholders. This includes $1 $1 billion to repurchase more than 15 million shares representing seven.
Percent of shares outstanding at the start of the period.
We are well positioned to build on our track record of shareholder value creation going forward as we focus on our mission to provide clean energy to feed and fuel the world sustainably.
With that operator, we will now open the call to your questions.
We will now begin the question and answer session.
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The first question is from Joel Jackson with BMO. Please go ahead.
Hi, Good morning, everyone. Good morning, Joe.
Can we talk about are the gas price differentials in Europe , I mean, obviously well it seem to me yes.
If there was enough demand right now.
To get into the European supply.
Have a lot higher nitrogen prices. So can you talk about what's been going on there what are the margin on Clos are now in the industry is just a seasonal thing and as demand picks up later in the year, we will get into where European gas costs are or do you think about differently than the way I'm laying it out.
I think as Bert mentioned in his prepared remarks.
Nitrogen prices have to rise.
Given where the cost of marginal production is it's not just in Europe . It's in Asia as well if you think about it I think India has announced that they're not getting as much LNG import from Russia as they were expecting they have curtailed some of their urea production, they're competing with Europe on LNG cargos and.
But you know you're you're looking at a situation with $60 at T. T. F. You know plus as Bert said its $2000 ammonia, that's not where the market is trading right now.
So you know in our in our view this.
This is actually pretty constructive about the go forward. It means that the amount of production in those high cost regions as is going to be somewhat limited. The challenge there of course as it means the world is going to be incredibly tight availability of product as we get into.
You know both both the winter and then into the spring next year, particularly if the situation in Europe is not resolved in the coming months because that just further pressures the whole the whole system with with winter coming.
Joel This is Burton when you look at.
What's going on globally, it's not just the gas it's what the gas is changing enforcing and that's a change in trade flows change or movements and are probably even a change in the type of fertilizer, you'll be using because an inability possibly to get ammonium nitrate. For example, Europe today represents 15 million tons of ammonia.
9 million tons of urea 4 million tonnes of U a N and probably nine or 10 million tons of ammonium nitrate that is a substantial amount.
Of nitrogen that's constrained and so you're going to see the north African tons move that direction, but even from other places they have to be supplying Europe and so like Tony said.
The prices have to move up or youre going to see Europe become much more of an import dependent.
Market than it already is.
Both bode well for prices, Yeah, and I think on that point exactly on an ammonia.
The urea production, you're talking about just the gas component of urea being over $1400 a short ton.
So at $60 gas. So you know that's not where the market's trading the market's got to move up substantially and given our position as a north American producer we're.
Expecting to benefit from that.
Okay.
Our next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
Yes, thanks, good morning, everyone.
Yeah good morning.
Maybe following up on that kind of line of questioning and you alluded in the prepared remarks to having a record export book, Tony Bert I'd Love to hear you kind of just talk about it.
Some of the opportunities and challenges around increasing that and specifically thinking about U a N N.
What had been tariffs in Europe .
But we're also it would seem like nitrate producers in Europe are under a lot of stress at current prices. So could you help us think about how to how you can grow your export business and actually serve some of these deficit markets that might be emerging.
Yeah, you bet and I'll start and then I'll give the mic over to Bert here in just a second but the.
As Bruce said in his remarks.
The the way our product pricing sits kind of in the moment.
Where where it kind of margin indifferent between the type of product that is being produced which is unusual that ammonia pricing and margins are so high on a on a nutrient basis that that's pretty unprecedented.
But it also means that there's no reason for us to make UA on and sell it at fill pricing in the tanks or inventory and at this point when the world is going so short ammonia.
Yeah, we do have record exports, we are you know.
Exporting some UA on where we had a very limited UA unfilled program, specifically, because our focus is on ammonia and exports right now and I think that's going to bode really well for us not only in the near term based on what demand and margin opportunities look like but also when it becomes spring time.
And in the Northern Hemisphere next year, because all of those you know that the skull tons are not going to be sitting in the system in the channel and in the U S. So we're very constructive about what the what the forward looks like.
Yes, good point, Tony and that's exactly right and we saw these dynamics building.
In Q2, and now into Q3, and it's really a testament to the flexibility that's been built into our system with a weekend.
Shift product.
Production mix on a on a production shifts in it.
Eight hour period, the load out in Donald's Seville is substantial and were even able to bring interior tons to Donaldson bill to load whether that be through our midstream operation or off of our own dock and so the level of exports is over I think 30 vessels today and our export lineup and you're right. We saw these opportunities it was based on.
On the economics of the decision of not only the operating economics, but the the global economics predicated on freight and margin returned to CF industries, and so we have shifted that production mix and we'll continue to do so I do see a tariff cut coming in Europe , they've all.
Already announced they are working on urea and ammonia and we would expect that uhm would be in the same position just because of the needs of the tons in and their requirements of Europe to meet their their agricultural fertilizer needs.
So how do we grow and serve those markets every day, we're focused on that and communicating with our customers our global customer base and leveraging our system to do that.
The next question is from Joshua Spector with UBS. Please go ahead.
Hi, Good morning. This is Lucas Beaumont answer Josh So I just wanted to follow on from your comments on nutrient tons crossing that and sort of translate that into your volume outlook.
So your gross ammonia production guide for the second half seems to imply that volumes might be down sort of flat to down slightly in the first half. You've also got your three key turnaround activity coming that probably less than last year. So could you. Please just discuss your updated volume outlook for us in the second half and whether you expect.
To see product ton shipments above the first half levels and how you see the product mix evolving between ammonia urea and <unk>.
Yeah normally the bulk of our turnaround activity as Q3 and to some extend into Q4.
Just given that that's seasonally in the northern hemisphere, the tends to be the weakest point of the year, both from a pricing and a volume perspective.
And so this year is no different or our.
Expectation around gross ammonia production, which from our perspective is really the critical driver on the rest of it we make decisions about which products to upgrade based on instantaneous margin opportunities, but the one thing that you know if youre not making ammonia then you don't have those other options. So our focus is really on running our.
The ammonia assets it at maximum.
Capacity in an on stream factor and we're still in the car.
Nine and a half to 10 range on on that for the full year again as you pointed out with a little heavier turnaround activity here in Q3, but.
Ashraf has the plants running really well and safety is terrific and relative to product mix. That's really you know a function of where margins are and right now we're favor in ammonia and where favorite in exports because that provides.
So both the best instantaneous.
Option for minded monetizing the product and then also just sets us up really well for come springtime.
The next question is from Stephen Byrne with Bank of America Securities. Please go ahead.
Yeah. Thank you I was wondering if you had a view on.
On how much.
Nitrogen consumption was in globally in the first six months of this year relative to historical levels.
And to follow on to that one being what do you think that the impact might be on a global crop production in 2022, and then secondly, do you do you expect a you know a a tighter market. This fall, particularly in the U S. As you.
You are.
I have a strong export book.
Well good morning, Steve This is Bert and I'm going to start with the third one first and the tighter market yes.
What's going on globally in Europe , as we just explained and what we believe are low inventories coming out of especially at the retail level coming out of our spring in North America.
Coupled with delayed purchasing and other places such as India with their most recent tender at just 600000 tons and then the announcement yesterday that they're gas constrained and Gazprom is not shipping the LNG to that.
That was a purchased or expected and having to cut production. There are 10% of urea that's going to create an additional import demand to meet their needs and so we're seeing.
Again because of high prices in Q2, some delays that will be materialized in Q3.
But the balance or the negative balances that is lack of gas lack of production and not only Europe , but other constrained area. So.
When you look at the market, we see a tight market through and then well into next year.
When you look at consumption relative to historical.
You know, we had left a little bit lower acres in the United States than expected and a late planting. So I think that had an impact in North America, but when you look at again, what's that's how that's going to balance for the year.
For CF, we have a great book and are eagerly looking to the back half of the year to supply that and I would just add to that Steve that I think your point is a really good one which is globally. There's no doubt the nitrogen consumption was down in the last 12 months because there was can trade constrained supply.
For for periods of the year, you had Russia, Egypt, Turkey, China, all with export restrictions and you had significant curtailments in in Europe , and Asia and so you know the world just had less nutrients to go down and I think from you know from that perspective.
We're not anticipating that there is a any kind of substantial makeup relative to global stocks to use encore screens, which is why we see this persisting.
Demand on the AG side for longer and I, you know I think it is.
It's really going to be an interesting proof point win.
All the harvest information is tallied globally around where.
Yields come in but I.
Our expectation is we're going to be in a deficit situation for quite a while and that just provides.
A longer runway relative to to add demand.
Thank you.
The next question is from P. J do you have a car with Citigroup. Please go ahead.
Yes, hi, good morning.
And Tony Boor do you have thoughts on expanding your existing capacity given the U S. Gulf Coast advantage, especially as you do your blue ammonia projects in Donaldson Avila and yeah. So city. While you go into can you expand those planes and then just secondly on green hydrogen with the mid <unk>.
And you do the feed study you know what are the key variables on the feed in terms of like for example security.
Securing green electricity or the right electrolyze their technology can you just talk about some of the key pinch points on their food and what do you expect on green hydrogen.
Yeah, you bet. So P. J just to correct a couple of things there.
Green ammonia project that we have is at Donaldson Bill and that's a 20 megawatt electric wiser.
In process, and we expect that to be online in.
2020.
At $3 2024 time frame.
And that'll that'll be producing about 20000 tons of green ammonia per year. So it's a it's a little bit of a modest first step in that direction, but we want to get.
Comfortable and confident on the technology and the process and also.
Really testing the market to see what the demand and the price premium is for for Green.
Ammonia the Mitsui agreement that we have is really about a brand new blue ammonia project, so carbon capture and sequestration.
And we're in the in the process of finalizing site selection and trying to get appropriate incentive packages worked out with on state and local authorities to make that happen and I. You know, we're we're anticipating that would be about a 131 4 million ton a year.
Plant that incorporates.
Carbon capture and sequestration to produce blue ammonia.
Yeah, I mean, we're really excited about that.
Competitive position that North American natural gas affords and the ability both from a regulatory regime, but also a geological perspective to be able to do carbon capture and sequestration here. We think it's you know it's great to be able to participate in and take advantage of.
The natural advantages that we have here in the U S.
And where that analysis is going to be very site specific about what is required for that ammonia plant and also to get it.
A pretty tight estimate on cost and then we'll we'll use that information and a thoughtful disciplined way around making the investment decision or not but our expectation is particularly given where the cost of hydrocarbons are in the rest of the world and how chronically short Europe is and what the cost of building out and.
We're placing existing capacity with green is that that project at least initially has terrific economics associated with it and we just need to prove it out before we go ahead and green lighted and move forward, but our expectation is yes, we are absolutely going to be participating.
And the demand growth in this in this space and what what we like is being able to participate in the clean energy aspects of low carbon ammonia. So that probably is not going to be an upgrade plant for fertilizer consumption, that's really going to be a clean energy plan.
Relative to Debottlenecking the existing system.
We've done a lot of that over the years and we've kind of hit sort of natural breakpoints on a number of our plants in terms of.
Hum.
It really makes more sense to invest in new capacity at this point than it does to continue to try to squeeze more out of what is already there because you end up hitting the limits on heat exchangers and other things with that.
Then you end up with reliability problems, we're very proud of the reliability of the on stream factor of our network. We're running at you know really well very safely and it you know it's kind of a finely tuned right now so I think you're more likely to see US do new plants. Then you are debottleneck existing and P. J. This is Chris the only thing I would add.
To add to what Tony said is with the inflation reduction Act that is being proposed in Congress right. Now everything you said about the low carbon projects and the advantage of North American producers, specifically U S. Just becomes even greater with.
Potential for an increase in the 45 Q from $50 to $85 and then additionally on the green side potentially some hydrogen tax credits. So those are also things that we will continue to evaluate as we look at these projects going forward.
The next question is from Chris Parkinson with Mizuho. Please go ahead.
Great. Thank you. So you don't want a European.
European producers importing ammonia you have got the moroccans, taking products from the Caribbean and as far as Argentina at the same time pneumonia bark Evo essentially cut off a lot of the Russian tons would be the two pipelines that are down in Ukraine.
That's an interesting dynamic in the third quarter, but how sustainable is that in the fourth quarter in terms of tightening.
And from your perspective is this ultimately going to be the catalyst that basically forces you to go back to the Middle East North Africa tons, and then further tightened things not only for the the west but potentially the east I mean, just how should we be interpreting that current dynamic and how sustainable is it into 2023. Thank you.
Yeah, Chris I'll start and then give it to Bert but I think all of it is driven on gas availability and gas price into Europe , and Asia, and if youre looking at $60 gas you know those urea plants and just the pure ammonia plants are not going to run.
You can't make that math work when you can imported instead. So I think it's you know it's very sustainable everything that we're seeing in terms of the forward gas curves in those regions suggest the situation is not going to resolve itself soon.
And that's one of the reasons why we believe the energy spread differential is going to remain wider for longer and also gives us a lot of confidence around kind of what the intrinsic value of our asset base and even though you didn't ask this question I'm going to answer it anyway, which is why we stepped up share REIT.
Purchases in the quarter, because we're taking a fundamentally different view around.
How much are what the demand looks like for our products, where the supply points are what the energy spread differential in the margin opportunity is and it makes us very bullish so.
That's my my point I'll turn it over to Bert No I appreciate that and I think those are all spot on Chris This is Burton.
I think when you take a step back just a focus on EU, but you list out some of the.
Areas and issues driving our markets demand and supply youre.
Youre going to see an additional let's say three to 4 million acres of corn in North America for next year on top of strong corn demand ethanol is running at 90% China is gonna be importing a significant level of corn and your protein sector is healthy. The dollar is very strong today and thats going to incentivize global production of.
Feed drains.
The problem in the United States as we've got a drought that covers 30% of the corn production area. So it's a question we will even hit the yields we want to add.
And then you look at what's going on globally, not just with gas with freight costs, it's $100 70 to $100 to move product out of Russia.
Freight costs overall, even coming out of the middle East position CF as a domestic producer in a wonderful position.
And there's not a lot of new tons coming onto to add capacity to the market.
You've talked about the Russian ammonia pipeline is down those exports are down to a 200000 tons of ammonia per month, not moving to the north African phosphate producers.
Farm incomes at its highest level probably in 10 years. So the money is there not only for the American and Canadian farmer, but for the Brazilian and I think with because of the weak currency in Argentina, even more so in Argentina.
And we're an import dependent markets, we have to attract these tons as well now Europe and requiring more imports and then you throw in what Tony just talked about with a gas shortage.
And Thats there is only limited supply of LNG, now with India, being 40% to 60% dependent on imported gas and unable to get it they're going to have to import more urea.
So we're structurally with those issues driving our market, whether that'd be the grains there.
Livestock.
It's an all energy.
All require what were producing at.
At a very strong level. So for that reason, we're very constructive forward.
At least 'twenty three 'twenty four.
The next question is from Jeff Zekauskas with J P. Morgan. Please go ahead.
Thanks very much.
I guess type of a couple of questions.
If the production cost of ammonia in Europe .
Remains at $2000, a ton or $2000 a short ton.
What should be the rational price of ammonia in the United States.
Okay.
If I may.
If you produce screen ammonia.
Do you get high Tricia credits for that because hydrogen as a part of ammonia or don't you because it's not a separate product.
And thirdly in any blue any production of blue.
Bohn, you or a blue hydrogen.
Is it unlikely that though that that production can get a hydrogen credit because of the way gas leakage.
Or the.
Oh, two effect of gas leakage is calculated.
Yes, so Jeff this is Chris I'll start with the hydrogen credit production for ammonia yet so.
The hydrogen is just an input into the ammonia production process. So it's our understanding where you'd be able to receive the tax credit that would if one were to pass related to the green.
The green ammonia of with the hydrogen tax credit, which is quite substantial based on a number of criteria that we'd have to meet but would make it definitely much more economical going forward.
Related to your second question with some of the methane slip and such that May happen upstream.
We're talking about is the blue ammonia is what gets the 45 Q. So we'd be taking the CEO too with the dehydration and compression projects at both Tony and I spoke about sequestering that long term and getting that credit, which today for a class six permanent sequestration sits at about $50 per.
Metric ton, but as proposed in this latest inflation reduction to go up to $85 more than enough to cover the incremental operating costs and expense that we have in there. So we're we're.
Pretty bullish about the direction that the clean energy loan.
Low hydrogen.
Low carbon ammonia is going in and on the first part of your question Jeff.
In terms of where should pricing be.
Nitrogen in general is a globally traded commodity so the world bids in a certain amount of capacity on and for the most part.
Ever that highest cost ton that gets built into production plus freight differentials that ultimately sat kind of global pricing.
And right now given the level of curtailments that you see across both Europe and Asia. The global operating rate is operating at a deficit relative to what normal build is during this period of time and so that just cascades forward.
So if you if you say that the forward gas curve for TTS is right.
Eventually you are either going to destroy demand and rash in a very scarce commodity where pricing is going to have to rise to turn on some of those assets and so if you're talking about marginal production cost of $2000 plus or minus that's you know that's where things could have now with.
You know if we get a hopeful resolution to the conflict in Ukraine.
And gas starts flowing again and you see that potentially using then that will ripple through the price stack, but the way that it sits today.
It's shaping up to be a a very scarce commodity as we move into the winter months.
Great. Thanks, so much.
The next question is from Michael <unk> with Cleveland Research. Please go ahead.
Yes, good morning.
One of you talk a little bit about your expectation for UA in imports into the U S. In light of the CVD ruling how quickly can those imports arrive and do you just expect that it may just the COO.
And trade flows if you can and potentially getting more to Europe or to other export markets and where do you see your biggest growth potential in terms of UA and exports and that type of scenario.
Hey, good morning, this is Bert and regarding the expectation we have been as high as lets say $2 5 million tons and is low.
In the recent times is which is last year of one five so a spread of about 1 million tons and with what's going on today with the pricing that's available in Europe .
The tons from Trinidad Wood, which should then I think are going more to Europe and that makes sense our tons are being bid at a higher price than the domestic market and so some of our tons are going to Europe as well as to South America and I think that's again, what Tony referenced as the balancing mechanism of a global market and a global commodity.
And some of the advantages that we have in terms of freight and gas costs. It makes sense for us to make those economic moves.
But regarding the trade case.
We won round one we won round to everyone round three.
Round four was damages.
And so they found that there werent damages and I would argue obviously that my position is if there were have been without that remedy.
There would be future. So we'll see how this settles out but we're positively moving forward and that's the physician, but but our focus is less around you know.
UA on per Se and it's more around what's the best margin opportunity once you've made ammonia and that might be selling it as ammonia it might be making into India granular urea might be making UA on but we're not fixated on UA on per se and that's one of the reasons why as Bert said not only are we export them.
But we're heavily focused on ammonia right now because the value prop is better for us right. There. So that's why our again our focus is not on 19 or 19 5 million product tons. It's on you know.
Nine five to 10 million in ammonia tons, because that's really where you make the value which is the conversion of methane into ammonia.
The next question is from Ben Isaacson with Scotiabank. Please go ahead.
Thank you very much and good morning, one more question on the ammonia market.
You've talked about 15 million tons of capability in Europe . We're also hearing about demand disruption in various pockets of ammonia, whether it's on the nitrogen side or the industrial side, our phosphate is it possible that when the northern hemisphere, we engages in the fall that we won't need the Europeans.
At all.
And essentially they will be temporarily kicked off the curve.
So.
What does that mean for ages.
Our marginal cost of ammonia production. Thank you.
Yeah. So.
There's no doubt that DNA.
A globally tight commodity price has got to rash and demand right because theres just not enough supply to go around so temporary whether you call. It demand destruction of deferral has got to happen because there's just not enough product to go every place that it's it's desired.
And so certainly those that are of.
Value at last.
Or not can have access to it.
But but that said historically those assets have run and they've run at a reasonably high on stream factor and the globe is needed those tons in order to be able to run the food production system as well as the industrial applications of ammonia and without those tons showing up.
You know Youre chronically short and something is.
As someone who's going to go without so think about the world as being approximately 180 million tonnes of ammonia production.
And our consumption and it needs that if you've got 15 million tons. That's a huge percentage of it that's offline and Thats just Europe , that's not even including whats going on in Asia, and with curtailments going on in India, and so forth. So this is a this is a big deficit that the world is facing relative to it.
Nitrogen availability as we move forward through the balance of this year and into next spring. This is Burton when you look at global capacity for ammonia, it's about $235 237 more.
Million tons, but running at 80% on stream factor you have about 190 million tons of supply and trade is about 17 million tonnes. So then taking out that whatever number you want to put to Europe of 10 to 15 million tons of a lack of that supply like Tony said it just.
It tightens up and Theres only so much available and then it's whereas the gas that's available to produce that Tun.
It's going to be tight.
The next question is from Andrew Wong with RBC capital markets. Please go ahead.
Yeah.
Hey, good morning.
So we always hear a lot about European Nat gas you touched on aging that cost a little bit.
Can you maybe just speak to that a little bit more of a we don't get a lot of visibility into that part of the Nat gas market as much as Europe .
How much.
You add it up like the higher cost production in Asia cluster up like how much does on makeup of <unk>.
Global supply and all your cost curve.
And then just maybe separately on industrial demand what are you seeing there.
Yeah. So this is Bert and when you look at the you're right. This is a global gas market just like it's a global nitrogen market.
The basis points that we follow are obviously Henry hub for North America, and BP for U K TTS for Europe , and Jay km for Asia, and those are traded points that are on the on the.
The board and so youre able to follow that by the minute what those prices are and what is happening and has happened as Asia and Europe are trading in concert and the reason for that is they are competing for that ton and over the last several months, it's almost like the Asian buying groups have been slower than I think.
We're in a better position and that has pushed more LNG to Europe to fill their needed storage and especially with the reflection of the limits on Nord stream. One that was a good move so the different groups of targeted.
Percentage of storage that we hope that they get there and thats just to operate and to keep homes warm in the winter.
But that does have an industrial component.
And I think that will limit industrial production in Europe , and there's many discussions going on with what can be cut what levels for power or like the ASF importing ammonia and they're not meeting that gas for that type of their component or the industrial footprint.
But I think what's going to happen over the next several months is as we compete and get closer to winter, India short, we've already mentioned that so they're already asking for a 10% cut of urea production and half of that production is using imported gas.
There are other areas, China also has areas that important in Japan.
But there are other countries, Malaysia, Indonesia that have their own production in their own production of nitrogen. So this is going it's imbalanced today price is bidding it and we'll see where that settles out over the next several months, but there's a very limited amount of LNG.
That's available whether that's from Qatar, Australia, United States, Indonesia, Malaysia, and with the Freeport explosion that took two Bcf a day off the market. It's just that much tighter. So we'll see how it goes but that's.
Today, it's tight.
The next question is from Vincent Andrews with Morgan Stanley . Please go ahead.
Thank you and good morning, everyone.
Or Tony could you comment on the sort of the psychology of the U S customer in North American customer base since the end of the spring season.
And I guess I'm, just wondering why they are not being more aggressive to rebuild inventory going into the fall and into next spring.
And you guys, obviously you've laid out.
So some pretty significant dynamics that are going on when we can all obviously see what's happening in the energy curves. So is it the case that the U S. Folks just financially don't want to hold that much dollar amount inventory or the credit issue or sort of what's what's going through their heads right now and how do you see that evolving as we move into the fall.
Good morning, Vincent So I'll give you sort of just.
Quick high level perspective, and then let Bert jump into some more of the details given that he is.
No more actively involved in some of those conversations, but I think theres certainly.
A question and.
Our risk off from our just inventory cost.
Cost position when you are carrying it for a long period of time that that does create a little bit of hesitancy. I think you also tend to in some cases trade last year's news and if you looked at where we were trading last year.
This time pricing was 40% or more lower than where we arent today and so I.
That there is a general expectation of while this year is going to end up looking something like last year the year before.
It's not really predicated on current situation of whats going on with gas spreads globally and they don't have an urgent immediate need for it. So the thinking is well, let's hold off because maybe tomorrow will be cheaper than today I think that last point is.
Salient.
There isn't a need they've had a fantastic year, our retail wholesale trader.
Checks and relationships and communication they've all closed out on a fertilizer year, which is July through June a very profitable year and they.
They don't want to start off and then negative position. So those who thought that some of the fill in fall prices were high just chose not to purchase which is fine we want to support that group that wants to push it to spring but.
But with the dynamics, we've laid out today, our communication to them as.
That's fine but prices do move it is a global commodity and a commodity market, where corn and soybeans and wheat and cotton and sugar all higher pricing in high demand there is going to be a significant level of demand. In addition to the industrial needs. So.
I think that we'll see that mindset probably improving.
Further into this quarter next quarter.
Yes.
And Vince I would just add that the longer you see high gas prices globally.
Bigger the snap is going to be when it comes in terms of the.
You know the price move because.
First of all with.
North American customers, showing a little bit of hesitancy in the export book that we've laid on and the lack of availability of tons elsewhere in the world. It is just going to make it that.
That much bigger of a price impact when the realization hits home.
The next question is from John Roberts with Credit Suisse. Please go ahead.
Thank you.
You have five years left on the mosaic ammonia contract do you think the changes in the ammonia market likely accelerate the renegotiation of that contract or might we have to wait to the ace exploration before you get a renegotiation.
Hey, Good morning, John This is Bert and we have a great relationship with mosaic, they're a very good partner they built their harvest vessel it.
Ratably it comes in and out of our facility loads very quickly and we like being in partnership with some of these phosphate producers were also exporting to other locations for phosphate production and so you're right. There is a time life of this contract we look at our contracts all the time and are in conversation with our customers.
And we'll see how we progress with that.
Okay. Thank you.
The next question is from bumps you're with Barclays. Please go ahead.
Yes. Good morning, everyone. Just wanted to follow up a little bit on what you said around just rationalization and in European production I mean, you've made the announcement on the U K site.
Where do you stand there in terms of the negotiation redundancy Youtube, obviously with 160 ish million in the quarter.
But what are you seeing with amongst competitors in terms of similar.
Restructures going on within the European or Slash B U K market. Thank you.
Yes, I think most of what we've seen so far is curtailment as opposed to announcements of permanent closures. There have been a number of kind of green ammonia projects that have been announced although those are probably at least five years away.
And the cost of replacing existing conventional ammonia with green is very high so I'm not sure how much of that capacity actually gets built.
But we have not seen a lot of announcements or at least I'm not aware of a lot of them that I've talked about permanent.
Closure of facilities, it's more Ben.
Curtailments at this point.
Okay. Thank you.
Ladies and gentlemen that is all the time, we have for questions today I would like to turn the call back over to Martin <unk> for any closing remarks.
Thanks, everyone for joining us this morning, and we look forward to our follow up conversations and seeing you at conferences throughout the quarter.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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Yeah.