Thursday, October 25, 2007

CF Industries (CF) Preview

We should be given a good preview of CF Industries (CF) by the Potash (POT) earnings report simply because Potash has its hands in all parts of the fertilizer game. As an aside the earnings report for Potash is a very good read, almost like a magazine article about all the macro economic forces at play - I suggest you read it if interested in this space - it's almost like a beginner's guide to fertilizer with such nuggets as

"Many regions of the world are enjoying unprecedented wealth creation and their people are developing an appetite for more nutritious food," said PotashCorp President and CEO Bill Doyle. "These fundamental changes are driving significant growth in demand for the nutrients needed to produce grain and meat. With tight global supply, especially in potash, we are capturing greater value for our products and delivering record performance for our shareholders."


The combination of rising global population, higher incomes and increased protein consumption in many countries continues to propel strong demand for agricultural commodities, pushing prices for many key crops to record levels. Against this backdrop, the world's stocks-to-use ratio for wheat and coarse grains declined in the quarter to 14.6 percent, the lowest level ever recorded by the United States Department of Agriculture (USDA). Together, these conditions provide farmers in all regions with the foundation for vastly improved profitability. They are therefore motivated to increase plantings and invest in fertilizer to maximize yields, continuing the strong demand for nitrogen, phosphate and potash.

So we know potash is doing well, but what can the company tell us about CF Industries 2 drivers, Nitrogen and Phosphate (Mosaic already told us Phosphate prices are doing incredibly well)

Third-quarter nitrogen gross margin of $123.9 million was almost double the $62.4 million in the same period last year and raised our year-to-date total to $399.4 million, surpassing the record full-year gross margin of $318.7 million set in 2005.

Realized prices for ammonia and urea were up 11 percent and 37 percent, respectively, compared to the third quarter of 2006, while prices for nitrogen solutions jumped 51 percent quarter over quarter. Although nitrogen prices have historically decreased after the second quarter because of a seasonal decline in natural gas costs and sales volumes, strong demand limited the size and duration of the pricing decline from the second quarter of 2007.

Higher prices and continuing strong demand resulted in record phosphate gross margin of $129.9 million for the quarter, compared to $29.8 million in the year-earlier period. This raised our year-to-date phosphate gross margin to $290.9 million, surpassing our full-year phosphate gross margin record of $228.5 million set in 1998.

Strong global agricultural demand pushed up realized prices for solid fertilizers by 70 percent compared to the third quarter last year. Many producers allocated more of their phosphoric acid to solid fertilizer production, tightening supply of other phosphate products. Liquid fertilizer realized prices were up 39 percent from last year's third quarter.

Rising costs for sulfur negatively impacted phosphate gross margin in the quarter. Reduced oil refinery production and high demand from the phosphate industry tightened global sulfur supply and raised these costs by 8 percent compared to last year's third quarter and 29 percent from the trailing quarter.

So it looks like CF Industries should see quite a quarter as well - I was not concerned about phosphate but didn't have much visibility into nitrogen - Potash is indicating nitrogen is benefiting from all the same trends and natural gas prices being so weak has helped even more. Remember, CF Industries reports Monday.

Last, some more color on the Russia situation from Reuters:
  • In the past day, Potash Corp learned that Silvinit, one of Russia's largest potash fertilizer producers, is concerned that a sinkhole caused by mine flooding is threatening the railway it uses to ship potash.
  • "This situation is currently unfolding and potash customers and producers are watching very closely as it could put significant pressure on an already tight supply situation," Potash Corp. Chief Executive Bill Doyle told analysts on a conference call.
  • Doyle said a bypass is being built around the Russian sinkhole, and is slated for completion in February. But a Silvinit representative told an industry conference that there is a danger that it will be unable to ship potash if the railway company fails to meet its deadline, Doyle said.
  • Doyle said Potash Corp would honor existing shipping agreements, but would not make any new sales to North American customers, or from its New Brunswick supplies, until it finds out more about the situation.
  • "I wouldn't be surprised to see Canpotex adopt the same strategy," he said, referring to the marketing agency for all Saskatchewan potash producers, of which Potash Corp is the largest.
  • Doyle also told analysts the unfolding situation could affect Russia's current potash price negotiations with China, the world's largest volume buyer.
Not much more to say - even without this 'benefit' we have a full blown bull market in this sector - and if this comes to pass the position for Mosaic and Potash only becomes stronger by yet another magnitude.

Worried about new potash mining supply coming online?

As global demand for potash grows, the prospect of greenfield projects continues to be discussed, but no one has committed to undertaking such a long-term project. The cost to develop a conventional underground 2-million-tonne greenfield mine and related mill - if constructed on a viable deposit - is estimated at more than $2.2 billion, excluding infrastructure outside the plant gates, with costs and lead times for construction inputs and new equipment continuing to rise. Such an investment would not generate positive cash flow for five to seven years. Given an expected potash consumption growth rate of 3-4 percent annually, roughly equivalent to one new greenfield mine per year, we believe long-term potash industry fundamentals are very positive. Through debottlenecking and expansion projects at existing facilities, PotashCorp is currently developing approximately 6 million additional tonnes of production to come on line incrementally over the next several years, providing additional gross margin leverage based on expected higher volumes and prices.

Long all 3 names in fund; long all 3 in personal account

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