CF Industries Holdings Inc (CF) — Q2 2022 Earnings Call Transcript

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, we'll review the results, discuss our outlook, and then host a question-and-answer session. Statements made on this call and in the presentation on our website that are not historical 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 will 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 is 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. 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 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 will 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 project at Donaldsonville, our partnership with Mitsui, positions 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 will discuss global nitrogen market conditions in more detail. Bert?

Thanks, Tony. The first half and 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 a time of resilient agricultural led demand. Last week, prices at the Dutch TTF natural gas hub exceeded $60 per MMBtu. This would put ammonia production costs for efficient plants in Europe above $2,000 per metric ton. At current product prices, this production is not sustainable, which is why we have seen several producers in Europe, including BASF, Yara, OCI, and Fertiberia 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 can see further curtailments and increased nitrogen imports into Europe. At the same time, government actions continue to play a role in limiting global supply. Since October of last year, 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 it appears total exports in 2022 will be well below the level of the 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 meet global demand in the form and 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 UAN fill program this year. We launched it at a price point about 40% higher than last year and completed the program quickly. Between 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 if product prices do not incentivize greater production in high-cost regions. With that, 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. 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 the next steps in our exploration of new blue ammonia capacity in the United States. This includes a FEED study that we expect to begin in the second half of 2022 once we finalize the site and technology provider for the proposed plant. Additionally, our green and blue ammonia projects at Donaldsonville are advancing. The site where a 20-megawatt electrolyzer will be located has 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 Donaldsonville project 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. This starts 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 $1.5 billion share repurchase program, which we view as both a return on and return of capital. Through the first six months, we have repurchased 6.6 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 our stock price fell despite positive industry fundamentals. Moving forward, we expect to maintain this approach with a ratable portion of our share repurchase program at $175 million per quarter and opportunistic purchases layered in at attractive levels. 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. Most importantly, we did this safely. Our trailing 12-month recordable incident rate was 0.21 incidents per 200,000 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 7% 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.

Hi, good morning, everyone.

Good morning, Joel.

Can we talk about the gas price differentials in Europe? I mean, obviously, what it seemed to me if there's enough demand right now to get into the European supply, we'd have a lot higher nitrogen prices, so can you talk about what's been going on there? What are the marginal costs around the industry? Is it just a seasonal thing? And as demand picks up later in the year, will we get into where European gas costs are, or do you think about differently than the way I'm laying it out?

I mean 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've curtailed some of their urea production; they're competing with Europe on LNG cargoes. And you're looking at a situation with $60 at TTF plus as Bert said, it's $2,000 ammonia that's not where the market is trading right now. So, in our view, this is actually pretty constructive about the go forward. It means that the amount of production in those high-cost regions is going to be somewhat limited. The challenge there, of course, is it means the world is going to be incredibly tight availability of product as we get into 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 system with winter coming.

Joel, this is Bert. When you look at what's going on globally, it's not just the gas; it's what the gas is changing and forcing and that's a change in trade flows, a change in movements and probably even a change in the type of fertilizer you'll be using because of an inability possibly to get ammonium nitrate, for example. Europe today represents 15 million tons of ammonia, probably 9 million tons of urea, 4 million tons of UAN, and probably 9 million or 10 million tons of ammonium nitrate. That is a substantial amount of nitrogen that is constrained. And so, you're going to see the North African tons move that direction. But even from other places, they have to supply in Europe. And so, like Tony said, either prices have to move up, or you're going to see Europe become much more of an import-dependent market than it already is, both bode well for prices.

Yes. And I think on that point, exactly on ammonia into urea production, you're talking about just the gas component of urea being over $1,400 a short ton. And so at $60 gas, so that's not where the market is 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.

Yes, thanks. Good morning, everyone.

Good morning, Adam.

So, 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 some of the opportunities and challenges around increasing that and specifically thinking about UAN and what had been tariffs in Europe, but also would seem like nitrate producers in Europe are under a lot of stress at current prices. So, can you help us think about how to grow your export business and actually serve some of these deficit markets that might be emerging?

Absolutely. I'll begin and then let Bert take over shortly. As Bert mentioned earlier, the current pricing structure shows that we are indifferent to margins across various product types, which is quite unusual given the high ammonia pricing and margins relative to nutrients. This situation implies that there’s no need for us to produce UAN and sell it at lower fill pricing for storage when the global supply of ammonia is tightening. We are indeed seeing record levels of exports and, while we are exporting some UAN, our UAN fill program is very limited because our primary focus is on ammonia and exports right now. This strategy positions us favorably not just in the near term given demand and margin opportunities, but it also looks promising for the upcoming spring in the Northern Hemisphere next year, as we anticipate that there won't be excessive inventories in the US channel. So, we remain optimistic about our future prospects.

Good point, Tony, and that's exactly right. And we saw these dynamics building in Q2 and now into and is really a testament to the flexibility that's been built into our system where we can shift production mix on a production shift. So, it would be in an eight-hour period to load out in Donaldsonville substantial, and we're even able to bring interior tons to Donaldsonville to load, whether that be through a midstream operation or off of our own dock. And so the level of exports is over, I think, 30 vessels today in our export lineup. And you're right; we saw these opportunities. It was based on the economics of the decision of not only the operating economics, but the global economics predicated on freight and margin return 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 already announced they're working on urea and ammonia. And we would expect that UAN would be in the same position just because of the needs of the tons and the requirements of Europe to meet 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.

Good morning. This is Lucas Beaumont on for Josh. Thanks. So I just wanted to follow on from your comments on nutrients and pricing there 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 3Q turnaround activity coming, but 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 UAN?

Yes. Normally, the bulk of our turnaround activity is Q3 and to some extent in Q4, just given that that's seasonally in the Northern Hemisphere that tends to be the weakest point of the year, both from a pricing and a volume perspective. And so, this year is no different. 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 if you're not making ammonia, then you don't have those other options. So, our focus is really on running our ammonia assets at maximum capacity and on stream factor. And we're still in kind of 9.5% to 10% range on that for the full year. Again, as you point 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 a function of where margins are. And right now, we're favoring ammonia, and we're favoring exports because that provides both the best instantaneous opportunity for monetizing the product and also just sets us up really well come springtime.

Yes, thank you. I was wondering if you had a view on how much nitrogen consumption was globally in the first six months of this year relative to historical levels. And two follow-ons to that. One being, what do you think that the impact might be on global crop production in 2022? And then secondly, do you expect a tighter market this fall, particularly in the US as you are – you have a strong export book?

Good morning, Steve, this is Bert. I'm going to start with the tighter market. Given the global situation in Europe and the low inventories at the retail level in North America following the spring, along with delayed purchases in other regions like India, where the recent tender was just 600,000 tons, and the announcement that they are gas-constrained and not shipping the expected LNG, leading to a 10% production cut in urea, there's going to be additional import demand to meet their needs. We're noticing that high prices in Q2 have caused some delays that will affect Q3. However, the downside is the lack of gas and production constraints not only in Europe but in other regions as well. We see a tight market continuing through well into next year. In the U.S., consumption compared to historical levels is affected by slightly lower acreage and late planting, which we believe has impacted North America. However, CF has a strong order book and we are looking forward to the second half of the year to fulfill 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 that nitrogen consumption was down in the last 12 months because there was constrained supply. For periods of the year, you had Russia, Egypt, Turkey, China, all with export restrictions, and you had significant curtailments in Europe and Asia. And so, the world just had less nutrients to go down. And I think from that perspective, we're not anticipating that there is any kind of substantial makeup relative to global stocks to use Suncor screens, which is why we see this persistent demand on the ag side for longer. And I think it's really going to be an interesting proof point when all the harvest information is tallied globally around where yields come in, but 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 ag demand.

Yes, hi, good morning. Tony, Bert, do you have thoughts on expanding your existing capacity given the US Gulf Coast advantage, especially as you do your blue ammonia projects in Donaldsonville and Yazoo City? Can you expand those plants? And secondly, on green hydrogen with Mitsui, as you do the FEED study, what are the key variables on securing green electricity or the right electrolyzer technology? Can you just talk about some of the key pinch points on the FEED and what do you expect on green hydrogen?

Yes, you bet. So, P.J., just to correct a couple of things there. The green ammonia project that we have is at Donaldsonville, and that's a 20-megawatt electrolyzer that's in process, and we expect that to be online in the 2024 timeframe. And that will be producing about 20,000 tons of green ammonia per year. So, 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 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 process of finalizing site selection and trying to get appropriate incentive packages worked out with state and local authorities to make that happen. And we're anticipating that would be about a 1.3 million to 1.4 million-ton-a-year ammonia plant that incorporates carbon capture and sequestration to produce blue ammonia. And yes, I mean we're really excited about the 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 great to be able to participate and take advantage of the natural advantages that we have here in the US. And we're – that analysis is going to be very site-specific about what is required for that ammonia plant and also to get a pretty tight estimate on cost. And then we'll use that information in 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 replacing 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 greenlight it and move forward. But our expectation is, yes, we are absolutely going to be participating in the demand growth in this space. And 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. It's really going to be a clean energy plant. 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 – 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's already there because you end up hitting the limits on heat exchangers and other things, which then you end up with reliability problems. We're very proud of the reliability and the on-stream factor of our network. We're running it really well, very safely, and it's kind of finely tuned right now. So, I think you're more likely to see us do new plants than you are to debottleneck existing ones.

And P.J., this is Chris. The only thing I would 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 US, just becomes even greater with potential for an increase in the 45Q from $50 to $85, and then additionally, on the green side, potentially some hydrogen tax credits. So those are also things that we'll continue to evaluate as we look at these projects going forward.

Thank you. So you have a lot of European producers importing ammonia. You've got the Moroccans taking product from the Caribbean and as far as Argentina. At the same time, in the ammonia market, you've essentially cut off a lot of the Russian tons via the two pipelines, which are down in Ukraine. 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 the you to go back to the Middle East, North Africa tons and then further tighten things not only for the West, but potentially the East? I mean, just how should we be interpreting that current dynamic and how sustainable is it in 2023? Thank you.

Yes, Chris, I'll begin and then pass it to Bert. The situation is largely dependent on gas availability and prices in Europe and Asia. With gas prices around $60, urea and ammonia plants are not going to operate profitably; it just doesn't add up when imports are a better option. I believe this situation is quite sustainable. The forward gas curves in those regions indicate that the issue is unlikely to be resolved soon. This is one reason we think the market will remain challenging for an extended period, which also reinforces our confidence in the intrinsic value of our assets. Although you didn't ask, I'll address why we increased our share repurchases this quarter. It relates to demand for our products, supply locations, energy spread differentials, and margin opportunities, all of which make us very optimistic. That's my perspective. Now, I'll hand it over to Bert.

I appreciate that, and I think those points are very accurate. Chris, this is Bert. If you take a moment to consider the focus on the EU, you'll notice several factors affecting our market's demand and supply. We expect an increase of around 3 million to 4 million acres of corn in North America for the upcoming year. In addition to strong corn demand, ethanol production is currently at 90%. China is set to import a substantial amount of corn, and the protein sector remains robust. The dollar is quite strong, which will encourage global production of feed grains. However, in the United States, we are facing a drought that impacts 30% of the corn production area, raising concerns about achieving our desired yields. Looking at global dynamics, not just gas but also freight costs are noteworthy. It costs between $70 to $100 to transport products out of Russia. Overall freight costs, even from the Middle East, position CF favorably as a domestic producer, and there isn't much new capacity being added to the market. You mentioned the Russian ammonia pipeline being down, which affects exports. Consequently, 200,000 tons of ammonia per month are not being delivered to North African phosphate producers. Farm incomes are at their highest in a decade, benefiting not only American and Canadian farmers but also Brazilian ones, and due to Argentina’s weak currency, even more so there. We are in an import-dependent market and need to attract these shipments, especially with Europe also requiring more imports. Additionally, as Tony mentioned, there is a gas shortage. With India being 40% to 60% reliant on imported gas and facing difficulties in obtaining it, there will be an increased need for urea imports. Therefore, we are facing structural issues influencing our market, whether regarding grains, livestock, ethanol, or energy, all of which require our strong production levels. For these reasons, we remain very optimistic looking ahead to at least 2023 and 2024.

Thank you very much. I have a couple of questions. If the production cost of ammonia in Europe stays at $2,000 a ton, what should be the reasonable price of ammonia in the United States? Also, if you produce green ammonia, do you receive hydrogen credits because hydrogen is involved in ammonia, or not since it is not a separate product? Lastly, for any production of blue ammonia or blue hydrogen, is it unlikely that such production would receive a hydrogen credit due to the way gas leakage and the CO2 impact from gas leakage are calculated?

Yes. So, Jeff, this is Chris. I'll start with the hydrogen credit and production for ammonia. So, ammonia – the hydrogen is just an input into the ammonia production process. So, it's our understanding; we would be able to receive the tax credit that would – if one were to pass related to the green – the green ammonia 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 was some of the methane slip and such that may happen upstream. What we're talking about is, the blue ammonia is what gets the 45Q. So, we would be taking the CO2 with the dehydration and compression projects that both Tony and I spoke about sequestering that long term and getting that credit, which today Class 6 permanent sequestration sits at about $50 per metric ton, but is 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 pretty bullish about the direction that the clean energy, low hydrogen or I mean low carbon ammonia is going.

Regarding your first question, Jeff, nitrogen is essentially a globally traded commodity. The market determines pricing based on the highest production costs and shipping differentials. Currently, due to significant cutbacks in Europe and Asia, the global operating rate is below normal levels for this time of year, which has downstream effects. If we assume the forward gas curve for TTF is accurate, we will either have to decrease demand and ration this scarce resource or see prices increase to activate certain production assets. Marginal production costs are likely around $2,000. If the situation in Ukraine improves and gas supplies resume, this could influence prices. However, as things stand now, nitrogen is becoming increasingly scarce as we head into the winter months.

Yeah, good morning. Just wanted to talk a little bit about your expectation for UAN imports into the US in light of the CBD ruling. How quickly can those imports arrive? And do you just expect that it may just be Canadian trade flows if you can end up potentially getting more to Europe or to other export markets? And where do you see your biggest growth potential in terms of UAN exports in that type of scenario? Thanks.

Hey, good morning, this is Bert. And regarding the expectation, we've been as high as, let's say, 2.5 million tons and as low in the recent times, which is last year of 1.5 million. 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, 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 is 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 1, we won round 2, then we won round 3. Round 4 was damages. And so they found that there weren't damages. And I would argue, obviously, that my position is that there would have been and 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 position.

But our focus is less around UAN 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, might be making it into granular urea, might be making UAN, but we're not fixated on UAN per se, and that's one of the reasons why, as Bert said, not only are we exporting, but we're heavily focused on ammonia right now because the value prop is better for us right there. So, that's why, again, our focus is not on 19 million or 19.5 million product tons. It's on 9.5 million to 10 million ammonia tons because that's really where you make the value, which is the conversion of methane into ammonia.

Thank you very much and good morning. One more question on the ammonia market. You talked about 15 million tons of capability in Europe. We're also hearing about demand destruction in various pockets of ammonia, whether it's on the nitrogen side or the industrial side or phosphate. Is it possible that when the Northern Hemisphere reengages in the fall that we won't need the Europeans at all? And essentially, they will be temporarily kicked off the curve. And if so, what does that mean for Asia's marginal cost of ammonia production? Thank you.

Yes. So, there's no doubt that in a globally tight commodity price has got to ration demand, right, because there's just not enough supply to go around. So, temporary, whether you call it demand destruction or deferral, has got to happen because there's just not enough product to go every place that it's desired. And so certainly, those that value it less are not going to have access to it. But that said, historically, those assets have run and have run at a reasonably high onstream factor and the globe has 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're chronically short and someone is going to go without. So, think about the world as being approximately 180 million tons of ammonia production annually, and it needs that. If you've got 15 million tons, that's a huge percentage of it that's offline and that's just Europe, that's not even including what's going on in Asia and with curtailments going on in India and so forth. So, this is a big deficit that the world is facing relative to nitrogen availability as we move forward through the balance of this year and into next spring.

Yes, this is Bert. When you look at global capacity for ammonia, it's about 235 million, 237 million tons, but running at 80-plus percent onstream factor, you have about 190 million tons of supply and trade is about 17 million tons. So then taking out that whatever number you want to put to Europe of 10 million to 15 million tons of a lack of that supply, like Tony said, it just – it tightens it up and there's only so much available. And then it's where is the gas that's available to produce that ton, it's going to be tight.

Hey good morning. So, we always hear a lot about European NAT gas. You touched on Asia NAT gas a little bit. Can you maybe just like speak to that a little bit more, we don't get a lot of visibility into that part of the NAT gas market as much as Europe. How much if you added it up like the higher cost production in Asia plus Europe, like how much does that make up of your global supply and on your cost curve? And then just maybe separately, on industrial demand, what are you seeing there?

Yes, this is Bert. When you consider the global gas market, it operates similarly to the global nitrogen market. We track several key pricing points, including Henry Hub for North America, NBP for the UK, TTF for Europe, and JKM for Asia, which are all actively traded. Currently, Asia and Europe are trading closely together because they are competing for limited supplies. Recently, Asian buying groups have appeared to lag behind, which has allowed more LNG to flow to Europe to meet their storage needs, especially in light of reduced capacity on Nord Stream 1. Various groups have set storage targets that they need to meet to ensure homes have warmth over the winter, which also affects industrial production in Europe. Discussions are ongoing regarding necessary production cuts, particularly regarding how much gas industries like BASF need for ammonia production. In the coming months, as we approach winter, India is already seeking to reduce their urea production by 10%, which relies significantly on imported gas. Other countries like China, Japan, Malaysia, and Indonesia have their own production concerns as well. Pricing dynamics are currently tight, and the availability of LNG from sources such as Qatar, Australia, the United States, Indonesia, and Malaysia is limited, especially after the Freeport explosion that removed 2 Bcf per day from the market. Overall, the market feels constrained right now.

Thank you and good morning everyone. Bert or Tony, could you comment on the sort of the psychology of the U.S. customer, a North American customer base since the end of the spring season? And I guess I'm just wondering why they're not being more aggressive to rebuild inventory going into the fall and into next spring? You guys obviously have laid out some pretty significant dynamics that are going on, and we can all see what's happening in the energy curve. So, is it the case that the US folks just financially don't want to hold that much dollar amount of inventory or a credit issue or sort of what's going through their heads right now? And how do you see that evolving as we move into the fall?

Good morning, Vincent. I will provide a brief overview before letting Bert elaborate on some of the details, as he is more involved in those discussions. There is definitely a concern regarding inventory costs, especially when held for an extended period, which can lead to some hesitation. Additionally, it's common to react to previous year's trends. If we compare our current pricing to last year at this time, prices were over 40% lower. There seems to be a general expectation that this year will mirror last year or the one before, rather than being based on the current global gas spreads situation. There isn't an urgent need for inventory, so the prevailing thought is that it might be better to wait, as prices could be lower tomorrow.

I think that last point is salient in that 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 don't want to start off in a negative position. So those who thought that some of the fill and 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 with the dynamics we've laid out today, our communication to them is that's fine, but prices do move; it's a global commodity. And in a commodity market where corn and soybeans and wheat and cotton and sugar are all higher price and a high demand, there's 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 in the further into this quarter and next quarter.

And Vince, I would just add that the longer you see high gas prices globally, the bigger the snap is going to be when it comes in terms of the price move because, first of all, with North American customers showing a little bit of hesitancy and the export book that we've laid on and the lack of availability of tons elsewhere in the world, it's just going to make it that much bigger of a price impact when the realization hits home.

Thank you. I think you have five years left on the Mosaic ammonia contract. Do you think the changes in the ammonia, like we accelerate the renegotiation of that contract or might we have to wait to the expiration before you get a renegotiation?

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 comes in and out of our facility, loads very quickly. And we like being in partnership with some of these phosphate producers. We're 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.

Good morning. Just wanted to follow up a little bit on what you said around just rationalization and European production. I mean you've made the announcement on the UK side. Where do you stand there in terms of the negotiation redundancy you took, obviously, $160-ish million in the quarter. But what are you seeing amongst competitors in terms of similar restructures going on within the European/the UK market?

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 have talked about permanent closure of facilities. It's more been curtailments at this point.

Thanks, everyone, for joining us this morning. We look forward to our follow-up conversations and seeing you at conferences throughout the quarter.