stockrowWhat it does
CF Industries Holdings, Inc. produces ammonia and nitrogen products used mainly as fertilizers. It makes ammonia by combining nitrogen from the air with hydrogen from natural gas. The company sells ammonia directly or processes it into other products, including granular urea, urea ammonium nitrate solution, known as UAN, and ammonium nitrate, known as AN.
Farmers use these products to supply nitrogen for crop growth. CF Industries typically sells to cooperatives, retailers, fertilizer distributors, traders and wholesalers rather than describing farmers as its principal direct customers. It also sells to industrial users. For example, ammonium nitrate is used in commercial explosives, while diesel exhaust fluid helps control emissions.
The company operates manufacturing facilities in the United States, Canada and the United Kingdom, supported by storage and transportation networks. It also has an interest in an ammonia production joint venture in Trinidad and Tobago. Its Billingham facility in the United Kingdom imports ammonia and converts it into other nitrogen products.
CF Industries is investing in lower-carbon ammonia, made with technology intended to capture and store some of the carbon dioxide released during production. The company expects applications to include fertilizer, power generation and steel production. Its principal executive offices are in Northbrook, Illinois.
How it makes money
CF Industries earns revenue by manufacturing and selling ammonia and products made from it. Its reporting segments are Ammonia, Granular Urea, UAN, AN and Other. The company uses gross margin, the difference between sales and the cost of those products, to assess segment performance and allocate resources.
Ammonia is both a product sold to customers and the starting material for other products. The Ammonia segment includes sales for fertilizer, emissions control and industrial uses. Granular urea and UAN are mainly fertilizer products; AN is used in fertilizer and commercial explosives. The Other segment includes diesel exhaust fluid, urea liquor, nitric acid and aqua ammonia.
Prices depend on global supply and demand, and customers compare the delivered price of competing products. In the latest reported fiscal year, higher average selling prices increased gross margin, while higher natural gas costs reduced it. Some ammonia and other material is transferred at cost into the products made from it, rather than recorded as an external sale.
Fertilizer demand follows planting and application seasons. North American demand is generally strongest in spring, with another period of strong demand after the fall harvest. CF Industries manufactures and distributes throughout the year, and it or its customers build inventory ahead of peak demand. Weather, purchasing patterns and the timing of imports can shift sales between quarters. The company also makes low-carbon ammonia; its first sales earned a premium over traditional ammonia.
Customers and how it sells
CF Industries sells to agricultural cooperatives, retailers, independent fertilizer distributors, traders, wholesalers and industrial users through its internal marketing and sales force. These customers can distribute nitrogen products to farmers or use them in industrial processes. The company also sells ammonia for emissions control and supplies products used in commercial explosives.
CHS was its largest customer in the latest reported fiscal year, accounting for approximately 13.0% of consolidated net sales. CHS also owns a minority interest in CF Industries Nitrogen, a subsidiary that owns most of CF Industries’ U.S. manufacturing facilities. Under a supply agreement, CHS has rights to buy specified volumes of granular urea and UAN at market prices.
The company has manufacturing facilities in the United States and Canada, as well as Billingham in the United Kingdom. It has an interest in an ammonia joint venture in Trinidad and Tobago. Its North American distribution network includes terminals and storage facilities, and products move by truck, rail, waterway and pipeline. Donaldsonville and Billingham can also export by seagoing vessel.
Billingham primarily serves agricultural and industrial markets in the United Kingdom. CF Industries completed its first sales of low-carbon ammonia to customers in Europe and Africa. Its Blue Point partners have committed volumes for uses including power generation and steel production.
Suppliers and costs
Natural gas is both the principal raw material and the primary fuel for CF Industries’ ammonia production. The company buys gas through daily spot and term purchases from a variety of suppliers and uses financial instruments to hedge gas prices.
Manufacturing facilities connect to natural gas trading hubs through pipelines. Costs also include maintenance, other manufacturing expenses and distribution. CF Industries uses trucks, railcars, barges and pipelines to move products, with transportation patterns varying by facility. It leases railcars and much of its river fleet and also uses contract marine services.
Higher natural gas costs, including the impact of realized derivatives, reduced gross margin in the latest reported fiscal year. The company says purchases of ammonia for its U.K. operations and fixed costs at the idled Yazoo City facility have also driven recent cost increases.
For carbon capture, CF Industries has contracted with ExxonMobil to transport and permanently store captured carbon dioxide from Donaldsonville and Yazoo City. At Blue Point, a Linde subsidiary is to supply oxygen and nitrogen from an air separation unit that it will own and operate.
- Revenue$7.1B
- Cost of revenue−$4.4B
- Selling, general and administrative−$364.0M
- Other operating costs−$60.0M
- Operating income$2.3B
Competitive position
CF Industries competes in global nitrogen markets, primarily on delivered price. Reliability, customer service, product quality and low-carbon attributes also matter; during peak demand, availability and delivery time can influence purchasing decisions.
Its primary competitors with North American operations include Nutrien, Koch Fertilizer, LSB Industries, CVR Partners and Yara International. CF Industries also faces imports, including products from regions where producers may have lower natural gas or other feedstock costs. In the United Kingdom, it competes with imported products supplied by companies including Yara, Origin Fertilisers, Ameropa and Thomas Bell & Sons.
Its facilities have on-site storage, and its distribution network includes access to rail, waterways and an ammonia pipeline serving the Midwestern U.S. corn belt.
Our reading: Production capacity and a network of storage and transport assets provide a meaningful operating advantage in reaching North American customers, particularly when timely delivery matters. Our reading: That advantage is limited by competition on delivered price and by widely traded imported products; the company identifies limited barriers to entry for ammonia, urea and UAN. Our reading: Low-carbon production could differentiate some sales, but its durability depends on customer demand and competing supply.
| Competitor | Where they compete | Threat (our reading) |
|---|---|---|
| Nutrien Ltd. | Nitrogen products in North America | Medium |
| Koch Fertilizer LLC | Nitrogen products in North America | Medium |
| LSB Industries | Nitrogen products in North America | Medium |
| CVR Partners, LP | Nitrogen products in North America | Medium |
| Yara International | North American nitrogen products and U.K. imports | Medium |
| Origin Fertilisers | Imported nitrogen products in the United Kingdom | Medium |
| Ameropa | Imported nitrogen products in the United Kingdom | Medium |
| Thomas Bell & Sons Ltd. | Imported nitrogen products in the United Kingdom | Medium |
Growth opportunities
CF Industries is investing in lower-carbon production at existing facilities and in a new plant. Its Donaldsonville carbon-capture project enables the company to produce low-carbon ammonia. ExxonMobil transports and stores captured carbon dioxide, and the project qualifies for U.S. tax credits. CF Industries also expects to use carbon capture at Yazoo City.
The Blue Point joint venture is building a low-carbon ammonia facility in Louisiana. CF Industries owns an interest in the joint venture, with JERA and Mitsui owning the rest. The partners are required to purchase production in line with their ownership interests. The company says site construction began in August and expects ammonia production to begin later.
CF Industries expects existing and new uses to support demand for lower-carbon products. It has sold low-carbon ammonia to traditional users and says its partners have committed Blue Point volumes for uses including power generation and steel production. European carbon rules are another factor in its demand expectations.
The company has also begun a front-end engineering and design study for a diesel exhaust fluid project at Courtright. It expects Blue Point and its carbon-capture projects to add $400.0 million to its mid-cycle EBITDA estimate. That is a company estimate, not a reported increase in current earnings.
- $6.5BFY2021
- $11.2BFY2022
- $6.6BFY2023
- $5.9BFY2024
- $7.1BFY2025
Structural risks
- Nitrogen cycles and competition: Operating results fluctuate with global nitrogen supply and demand. Industry oversupply can adversely affect selling prices and results, while imports compete with CF Industries’ products in its markets.
- Natural gas and other inputs: Ammonia production depends on natural gas and utilities supplied by third parties. Changes in gas prices, or delays and interruptions in raw materials or utilities, can affect production costs and operations.
- Plant disruptions: An incident in the ammonium nitrate upgrade area at Yazoo City required production to be idled. CF Industries expects to start up components of the site as it rebuilds and reconfigures operations.
- Low-carbon projects and demand: The market for low-carbon ammonia may develop slowly or fail to reach the size the company expects. Blue Point also carries construction, funding, schedule and permitting risks.
- Environmental rules: CF Industries’ facilities emit greenhouse gases and operate under environmental and permitting requirements. More stringent rules could increase costs, require capital spending or limit operations.
- Debt and seasonality: Debt service and borrowing restrictions can limit cash available for other purposes. Fertilizer demand and working capital requirements also vary with planting seasons, weather and customer purchasing patterns.
Bottom line
Our reading
CF Industries is an ammonia and nitrogen-products manufacturer whose results depend on selling prices, natural gas costs and seasonal agricultural demand. Our reading: Its manufacturing and distribution network supports its position in North America, but global commodity competition limits how much control it has over pricing. Low-carbon projects offer another source of demand, while adding construction, regulatory and market-development exposure.