Abstracts from CF Q3 2015 on China:
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Yeah, Vincent, let me kind of step back and talk about where we sat in 2012 when we made the decision to move forward with these projects. At the time, the forward curve was above $5.50 per MMBtu and that dramatically changes what the profitability of the output of these plants are. We did anticipate at that time based on the number of projects that had been announced and were in flight in Middle East, North Africa, as well as in China that kind of 2016 was going to be sort of a low point in the pricing curve. [...]
Chinese government devalued their currency during the third quarter. This devaluation, along with less expensive coal and ocean freight, help to push the international price of urea lower.
However, over the last few months, China has been reducing its exports. This decline has also been evidenced in the last three India urea tenders, which saw lower Chinese producer participation. Additionally, over the last few weeks, several large curtailments of urea facilities have been reported in China. [...]
While all these factors have led to a depressed pricing environment, we believe pricing is beginning to stabilize and that we have reached the seasonal floor of anthracite coal-based production in China at around $250 a ton delivered to the U.S. Gulf.[...]
I hope in 2016, we see return to Brazil [...]. So the 5 million tons of demand out of Brazil will probably be there and a return to some other markets. And I don't think that Chinese anthracite coal producer can continue at their current rate of production and we're seeing that reflected in operating rates in China.
And so, when you look at the 13.6 million tons exported last year, estimating 12 million tons this year, I expect that to slowly wind-down to probably an acceptable rate in the 5 million to 10 million tons longer term, which sets up available options for CF.
The other point, Joel, that I'd like to bring up is, as you sort of rewind the clock, you can look forward and see there was this ongoing tail of new plants that were coming online in China and Middle East, North Africa. That sort of tail, by the time we get to the middle of next year, is largely empty from there going forward. The U.S. plants will be online. Most of the Chinese plants will be completed and operating. So there has been this pretty significant build that's left this overhang of capacity and the marginal stuff swings on and off depending upon where price is. And, as you say, it sort of puts a relative cap on where prices get to before the marginal producer swings back into production again.
The global nitrogen demand is growing about 2% per year and that requires four to five world-scale ammonia complexes being brought on every year just to meet what the demand is. And so, as we look forward and the existing capacity gets absorbed into the marketplace, any kind of rebound in the Chinese economy with attendant increase in coal prices there, all of a sudden makes this marketplace shift into a different dynamic from a really over-heavily supplied position to one where there is some price appreciation. So, we think this is kind of the tough area to get through, but even at these ranges we're highly, highly profitable. And as we get into a recovery mode, we'll participate in that very, very nicely.
Yeah, when you look at China, every year is an anomaly. When you see the numbers ramp-up from zero tons, 2 million tons, 4 million tons, 8 million tons, 13 million tons, and so, we're modeling this year coming down to 12 million tons. I think based on – again, cost structure market optionality and how we see the market developing, I think, that's a declining run rate. But I'm not comfortable giving you a specific number.
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It looks like they did their homework and given the strong financial position of the company they have room for coping a low point in 2016. They anticipated it, they are not reacting to unexpected economic shifts. I think the Q4 call will set the tone for the next decision on CF. |
