With ammonia costs tripling from final yr, CF Industries Holdings (NYSE: CF) is reaping the advantages. CF is the most important international ammonia community, with over 9.3 million tons of Gross Ammonia Manufacturing in 2021. In the meantime, CF Industries Holdings inventory is down 12% because the market continues promoting off, presenting an fascinating shopping for case.

Though the ammonia market was in a surplus earlier than the pandemic, a number of key elements are squeezing costs greater. For one factor, rising meals and power costs result in a pure rise in worth.

However costs skyrocketed when Russia invaded Ukraine. For instance, ammonia costs have been round $480 per ton in 2020, and on February 24, costs reached $1,503, a rise of 213%. But, CF Industries doesn’t see the market slowing anytime quickly.

The truth is, the corporate says fertilizer costs are more likely to stay excessive for no less than one other two years whereas the world replenishes. With this in thoughts, is it time to purchase CF Industries Holdings inventory?

World’s Largest Ammonia Manufacturing Community

After promoting its phosphate enterprise a number of years in the past, CF solely focuses on the ammonia market. That mentioned, ammonia is a important compound farmers depend on to develop crops.

The three most important plant vitamins embrace…

• Nitrogen
• Potash
• Phosphates

As farmers use the land to develop meals, it depletes the pure minerals within the soil. In consequence, fertilizer is required to replenish the important minerals and compounds required for wholesome meals to develop. With this in thoughts, CF Holdings produces nitrogen fertilizer merchandise, with its core product being ammonia (82% nitrogen).

Then, CF upgrades its nitrogen merchandise to incorporate granular urea, urea ammonium nitrate answer (UAN) and ammonium nitrate (AN).

Fertilizer Costs Hovering

Earlier than the pandemic, fertilizer shares flew below the radar because the market operate correctly. Nevertheless, provide chain disruptions began pressuring the market as transportation and transport turned scarce.

Then, Russia’s invasion of Ukraine ignited it additional, with each nations enjoying an important function within the international fertilizer and meals industries. As an illustration, Russia accounts for 23% of the worldwide ammonia provide.

Provide is tight between sanctions and firms refusing to do enterprise with the nation. With practically 1 / 4 of the world’s ammonia coming from Russia, nations might want to look elsewhere to fill the availability hole.

Nevertheless, there’s one other key factor to think about. The conflict is inflicting skyrocketing pure fuel costs, a key power supply to make fertilizer. With this in thoughts, the price of pure fuel doubled YOY, costing $6.48 (per MMBtu) in Q1 in comparison with $3.22 a yr in the past. Will the rise in prices have an effect on CF inventory?

Why It Issues for CF Industries Holdings Inventory

Round 90% of ammonia is utilized in fertilizer because the world depends on it to keep up meals manufacturing. At present, vegetation depend on nitrogen to develop. So, with out fertilizer, the price of meals will proceed working as much as make up for the dearth of provide.

We already see among the results as protests erupt over rising meals costs. With this in thoughts, demand for meals is at its highest in a long time.

What this has to do with CF Industries Holdings Inventory:

CF Industries sees a possibility with international meals demand anticipated to stay excessive. For one factor, international grain shares are down as consumption exceeds manufacturing. In keeping with the newest Grains Report from the U.S. Division of Agriculture (USDA), inventory is down in all main grains, together with…

Nonetheless, the inventory will have to be replenished, creating an excellent greater demand for fertilizer sooner or later. In consequence, the market helps greater planting and fertilizer use as we advance. Because of this, CF administration expects U.S. corn plantings to be between 91-93 million acres this yr, close to historic highs.

Though pure fuel costs proceed climbing, CF Industries is overcoming it with a positive power unfold. Not solely that, however the firm is in a greater place than friends outdoors the U.S. Specifically, Europe’s pure fuel prices round $34 per Btu in comparison with about $5.2 within the U.S.

A Clear Power Alternative?

The opposite 18% of fertilizer comes from hydrogen. With hydrogen exhibiting promise as a renewable power supply, CF Holdings is on a mission “to supply clear power to feed and gasoline the world sustainably.”

With the fertilizer business relying closely on fossil fuels to function, this could be a large alternative for CF Industries.

The corporate is working to decarbonize its ammonia community so it may produce inexperienced and blue ammonia merchandise. CF targets to scale back its emissions by 25% per ton of product by 2030. After which it desires to attain net-zero by 2050.

It will be spectacular if CF Holdings might accomplish this, given its present reliance on fossil fuels. Thus far, the corporate is making progress with a number of new tasks advancing blue ammonia manufacturing.

The truth is, the fertilizer maker believes it can have the power to supply 1.7 million tons of it yearly. Or in different phrases, about 1 million tons of net-zero carbon ammonia.

CF Industries Holdings Inventory Forecast

CF Industries is reaching file free money move with demand anticipated to stay excessive and provide missing. In consequence, buyers are seeing vital returns this yr, with CF Industries Holding Replenish 42% YTD.

The necessity for fertilizer is climbing, and as meals consumption exceeds manufacturing, demand will proceed to develop. Most significantly, CF is well-positioned regardless of rising power prices to proceed its run.

Moreover, CF inventory is down from its excessive of over $113 per share final month. Regardless that fertilizer demand expects to stay excessive, the market selloff is leaving few secure spots to cover your cash.

CF Industries Holdings inventory appears able to proceed its uptrend after taking a step again. The pattern nonetheless appears intact regardless of the continued market selloff. Although there could also be a number of bumps within the street, CF inventory appears like an excellent take care of strong money move, rising demand and a plan to assist clear power.

Lastly, fertilizer shares are cyclical, and when provide meets demand, we are able to see decrease costs. Preserve a watch out for indicators that the market is easing for those who plan to purchase.