CF Industries' Low-Cost Nitrogen Production Should Remain Profitable as Prices Stabilize

Strategist

Seth Goldstein

CF Industries is the largest nitrogen producer in North America, with production based in the United States and Canada. CF's plants, which benefit from low-cost North American natural gas, are connected to its main customers in the US Corn Belt by an extensive distribution network of pipelines, rail, and barge, giving the company a transportation cost advantage over foreign competition without pipeline access.

With roughly 80% of nitrogen sold as fertilizer, CF's sales and profits are largely tied to US corn planted acreage. Nitrogen fertilizers are key to achieving higher yields in corn, as the crop, unlike soybeans, does not produce its own nitrogen. As a result, US corn-planted acres are a big driver of North American nitrogen demand.

CF's largest plants are its Donaldsonville, Louisiana, and Port Neal, Iowa, locations. The company has the flexibility to shift production to the various nitrogen fertilizers, which allows it to produce based on market demand in any given year while retaining additional capacity to produce higher-margin industrial products. Donaldsonville’s seaborne location also allows CF to export fertilizer products and take advantage of nitrogen demand in South America, a region that heavily imports nitrogen fertilizer.

On the cost side, natural gas is the main feedstock used in nitrogen fertilizer production, accounting for nearly 50% of production costs. Lower North American natural gas costs relative to the rest of the world have made CF and other North American producers more competitive compared with overseas rivals, which rely on higher-cost natural gas or coal-based feedstock. Urea is the general benchmark for all nitrogen fertilizers. Urea prices generally fall in line with marginal cost producers that currently use European natural gas-based feedstock.

CF is also investing in carbon-free (blue and green) ammonia, which should see increased demand as a substitution for hydrogen fuel or as a cost-effective way to transport hydrogen. The company plans to produce this at existing plans and through the buildout of new plants. This represents an incremental demand source as ammonia would be used as a low-carbon fuel.

Business Strategy & Outlook

We award a narrow economic moat rating to CF Industries due to the company's cost-advantaged nitrogen production. 

For nitrogen producers, feedstock cost is the most important determinant of a producer’s cost position. Nitrogen is generally made from natural gas, with some Chinese producers also using anthracite coal. Globally, the lowest-cost natural gas is produced in North America and the Middle East. In recent years, natural gas prices have risen in Europe as the EU works to reduce its reliance on Russian natural gas, a trend we expect will continue under midcycle conditions. For nitrogen production, European producers are generally the marginal cost producers due to a higher natural gas cost. Given our outlook for European natural gas prices to remain well above North American natural gas prices, we think this steepening of the cost curve will result in higher midcycle nitrogen prices, which should benefit low-cost North American producers, including CF. 

For CF Industries, over 90% of its nitrogen is produced using low-cost North American natural gas, which provides the company with a strong cost-advantaged nitrogen operation. Additionally, the company’s plants allow it to produce multiple nitrogen products; this allows CF to change its production based on demand and price differentials of the various nitrogen fertilizers, versus peers that are only able to make ammonia or urea. Regardless, CF’s position at the low end of the global nitrogen cost curve is ultimately the largest driver, in our view, of its durable cost advantage. As a result of higher midcycle nitrogen prices, we are confident CF is more likely than not to generate excess returns on invested capital through a cycle and for at least the next decade.

Narrow

Economic Moat

CF Industries Holdings

CF Industries Holdings, Inc. engages in the manufacture and distribution of nitrogen fertilizer. The firm owns and operates nitrogen plants and serves agricultural and industrial customers through its distribution system. It operates through following segments: Ammonia, Granular Urea, UAN, AN, and Other. The Ammonia segment produces anhydrous ammonia. The Granular Urea segment offers granular urea. The UAN segment creates urea ammonium nitrate solution. The AN segment makes ammonium nitrate. The Other segment includes diesel exhaust fluid, nitric acid, urea liquor, and aqua ammonia. The company was founded in 1946 and is headquartered in Deerfield, IL.

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CF Industries excels in 2022, eyes growth in clean energy

CF Industries delivered exceptional financial performance in 2022 with record earnings and cash flow.
The company faces challenges from market volatility and tax disputes but is well-positioned for long-term growth.
Opportunities lie in expanding low-carbon projects, meeting clean energy demands, and strategic investments.
Overall, CF Industries' focus on sustainability, disciplined investments, and shareholder returns bode well for the future.

CF Industries reports strong Q1 earnings, eyes growth in clean energy

CF Industries is performing well financially, focusing on Clean Energy growth and enhancing ammonia production capacity.
Challenges in Europe's nitrogen market and logistics are being addressed, while opportunities in agriculture and exports are being pursued.
The company's strategic investments and focus on decarbonized ammonia position it well for long-term growth and shareholder value.

CF Industries reports robust earnings, eyes clean ammonia opportunities

CF Industries Holdings projects a positive outlook for the nitrogen market, with strong demand and low inventory levels. The company is strategically positioned to drive cash generation, make prudent investment decisions, and capitalize on global demand dynamics.

CF Industries reports robust earnings, eyes growth through clean energy

CF Industries Holdings demonstrates financial strength with solid earnings and cash flow performance. While facing challenges in global nitrogen market conditions, the company is poised for growth through strategic acquisitions and clean energy initiatives. Opportunities lie in capitalizing on strong demand in key markets and returning value to shareholders through share repurchases.

CF Industries reports strong 2023 performance amidst market challenges

CF Industries navigated challenges in 2023, focusing on sustainable production and exploring new markets. Despite market constraints and production setbacks, the company remains optimistic about growth opportunities in 2024.

CF Industries resilient in Q1 amidst challenges, eyes sustainability growth

CF Industries navigated Q1 challenges to deliver solid financial performance and strategic growth initiatives.
The company's focus on sustainability, safety, and shareholder value underscores its long-term vision.
Opportunities in clean energy investments, green projects, and market positioning offer avenues for future success.
Challenges from production issues, geopolitical impacts, and market dynamics require strategic management and adaptation.

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CF Industries Holdings, Inc. engages in the manufacture and distribution of nitrogen fertilizer. The firm owns and operates nitrogen plants and serves agricultural and industrial customers through its distribution system. It operates through following segments: Ammonia, Granular Urea, UAN, AN, and Other. The Ammonia segment produces anhydrous ammonia. The Granular Urea segment offers granular urea. The UAN segment creates urea ammonium nitrate solution. The AN segment makes ammonium nitrate. The Other segment includes diesel exhaust fluid, nitric acid, urea liquor, and aqua ammonia. The company was founded in 1946 and is headquartered in Northbrook, IL.

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