A merger of CF Industries and Yara would match a growing nitrogen production base with the world's most expansive fertilizer distribution network, allowing the combined company to capitalize on steady access to low cost feedstock even if demand growth in the US levels off.
CF and Yara announced on 23 September they were holding <a href="http://direct.argusmedia.com/newsandanalysis/article/930318">discussions</a> about a potential merger of equals. The combined company would have a market capitalization of about $27bn, just shy of PotashCorp's $29bn.
The companies have both been focused on key strategic initiatives and, as the global fertilizer market has evolved, the value of these disparate investments might be greater if combined than left separate.
CF is in the midst of two capacity expansion projects that further capitalize on its most important competitive advantages in the global market: long-term access to cheap natural gas feedstock and freight advantage to the center of US agriculture. The US consumes around 13mn st of nutrient nitrogen every year, according to the US Department of Agriculture, third to India and China.
CF is spending $3.8bn to construct new ammonia and urea/UAN plants at the Donaldsonville, Louisiana, nitrogen complex and new ammonia and urea plants at the Port Neal, Iowa, facility. These projects will increase CF's urea and UAN capacity by about 2mn st (34pc) and 1.8mn st (28pc), respectively.
These capacity additions could be significant factors in reducing the US' reliance on imports of nitrogen fertilizer. US UAN32 capacity will increase 12pc to just over 16mn st, according to the Fertilizer Institute. The impact to the US urea market is even more pronounced with capacity increasing 74pc to almost 5mn st.
Meanwhile, Yara's strategic focus has been leveraging its scale and supply chain expertise through acquisitions in high-growth markets, namely Latin America.
This initiative began in earnest in late 2012 with the announcement of Yara's agreement to buy Bunge's Brazil fertilizer business. The $750mn <a href=" http://direct.argusmedia.com/newsandanalysis/article/825773">acquisition</a> gave Yara 22 blending units across the country and fertilizer sales volume of nearly 5mn metric tons.
The company initially targeted annual synergies of $25mn from improved raw material sourcing, more efficient freight operations and an enlarged footprint for distribution of premium products. By 2014, synergies from the acquisition reached $50mn, according to a Yara presentation last month.
In late 2013 Yara announced another acquisition in Latin America to compliment the Bunge assets. The company paid $425mn for OFD Holdings, which includes fertilizer production and distribution resources in Colombia, Peru, Panama, Costa Rica and Bolivia including over 700,000t of blending capacity across 12 sites. The transaction <a href="http://direct.argusmedia.com/newsandanalysis/article/932548 ">closed</a> last week.
Both companies have also increased their focus on Diesel Exhaust Fluid (DEF), a urea solution used for nitrous oxide abatement in diesel-burning vehicles. CF's sales of "other nitrogen products," which includes DEF, have increased 43pc since 2011 to 770,000st. Meanwhile, in 2013 Yara constructed a 17,500 cubic meter DEF storage tank in the Netherlands, opened a new DEF terminal in Virginia and initiated production and distribution of the product at the Belle Plaine, Canada, nitrogen facility. A combined CF-Yara could enhance the company's scale and distribution for this niche, high-growth product.
CF has a clear competitive advantage in cost of production. Its nitrogen fertilizer plants use about 250 mmBtu/yr of feedstock natural gas. The company's average cost was $4.28/mmBtu, $3.39/mmBtu, and $3.66/mmbtu in 2011, 2012, and 2013, respectively. Meanwhile, Yara's feedstock energy purchases run about 300 mmBtu/yr, with an average cost of over $8/mmBtu over the last three years.
But Yara is in a stronger position in terms of its international distribution base with 200 terminals, warehouses, blending plants and bagging facilities in more than 50 countries. The company's revenue is well-diversified geographically with North America, Latin America and Europe accounting for 14pc, 29pc and 43pc, respectively, with Latin America poised to increase to over a third with a full year of inclusion of the recent acquisitions.
A combined CF and Yara would provide the expanded US production capacity more opportunity for international distribution, particularly to Latin America, where US exports have a freight advantage over shipments from further east.
Even though the US is a net importer of nitrogen fertilizer, producers still opportunistically export to manage supply during periods of weak demand. In 2013, for instance, the US imported over 3mn t of UAN. That same year, the US exported just under 450,000t UAN.
Yara's broad distribution system and scale would provide CF more flexibility to opportunistically export, which could be increasingly important with US nitrogen capacity expanding amid what could be a prolonged decline in farm profitability.
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