CF Industries, whose shutdowns last year led to UK food as well as fertilizer shortages, underlined its readiness to mothball the capacity again, as it underlined the profitability gap between European and US nitrogen production.
The US-based group, which was handed tens of millions of pounds in UK government subsidy after the closure of its Billingham and Ince plants prompted widespread disruption in the food supply chain, said that it was prepared to keep the sites open when they were running in the black.
“We are okay running… our UK business and assets when it’s profitable to do so,” Tony Will, the CF Industries chief executive, told investors.
However, he added that the group, whose Ince site remains closed, was also willing to renew a blanket shutdown if margins slid into the red.
“We’re also okay taking those plants off-line when it’s not profitable to do so.”
‘Cycle on and cycle off’
In line with this strategy, CF was taking a day-to-day view on European prices of gas, the key raw material for most nitrogen producers, rather than buying forward.
“We think those plants ought to cycle on and cycle off given where they sit in the global cost curve,” Mr Will said, noting that CF’s UK assets were “pretty de minimis in terms of the contribution they make to the overall profitability of the enterprise as well as the ammonia production volume”.
It is the North American business “that carries the freight in terms of what drives this company”.
September’s plant closures prompted widespread UK food market disruption, thanks more to the knock-on effects for the supply byproducts, notably carbon dioxide, rather than to supplies of nitrogen itself.
CF produces about 60% of the UK’s supply of carbon dioxide which, besides being used in the likes of fizzy drink production, is also used in food packaging, as it lengthens the storage life of fresh produce.
Gas price spreads
For Europe as a whole, nitrogen plants “will be running more intermittently”, because of the region’s soaring gas prices, as it tries to wean itself off Russian supplies in the face of the Ukraine war.
European gas costs, at some $30 per MMbtu (metric million British thermal unit) were more than three times those in the US, with its well-developed shale gas industry.
Bert Frost, CF’s head of sales, said that “with the gas spreads taking place today at $30 TTF against $7-8 in North America, it is difficult to produce and participate in the global [nitrogen] market from Europe, as they have in the past”.
“You’re going to see European production continue to be constrained and especially in the absence of Russian gas as we approach winter this coming fall and winter, I think it’s going to be very challenged.”
China export outlook
Chinese plants, which use anthracite coal as their energy source rather than gas, actually boasted more profitable margins than European ones.
While US plants had a margin advantage of roughly $650 a tonne over European rivals in urea output, against Chinese producers that gap was less than $100 a tonne.
However, Chinese urea exports looked unlikely to fill the world supply void given official curbs on shipments in a drive to ensure domestic supplies.
Mr Frost, flagging reports “about a continued enforcement of those export bans possibly through or into 2023”, said that it had scaled back expectations for a resumption of Chinese urea exports in the second half of this year.
“Let’s just say we had probably expected 3m-4m tonnes. It could be half or less than that, looking at it today.”
This represented a further squeeze on world urea supplies already threatened by the fallout from the Ukraine war.
“With what’s going on with restrictions or sanctions out of Belarus and Russia, and then you factor in 100% limitation because of the war out of Ukraine and then shipments out of the Black Sea and then governmental restrictions from China, you’ve taken out of urea, 25% of the urea supply,” Mr Frost said.