CF Fertilisers Announces Proposals to Restructure Operations

Source: 6/8/2022, Location: Europe

CF Fertilisers UK Limited, a subsidiary of CF Industries Holdings, Inc. announced proposals to restructure its operations in the United Kingdom to position the business for long-term profitability and sustainability and enable it to continue to supply fertiliser, carbon dioxide and other industrial products to its domestic customers.

• CF Fertilisers UK proposes to focus its manufacturing operations in the UK exclusively at the Billingham manufacturing facility in Teesside
o Billingham is the largest ammonia, ammonium nitrate (AN) and carbon dioxide (CO2) production facility in the country
o The Company believes that the facility is better positioned for long-term sustainability as it has sufficient capacity to meet all forecasted domestic demand for AN fertiliser from CF Fertilisers UK, is more efficient than the Ince manufacturing facility, has an installed industrial customer base, and has the ability to import ammonia
• Aligned with this approach, the Company is proposing to:
o Permanently close the Ince manufacturing facility near Chester, which could result in up to 283 redundancies at the site; the Ince manufacturing facility has not produced ammonia since September 2021
o Adopt CF Industries’ global operating model for corporate functions, which could result in up to 55 redundancies; this would entail the permanent transfer of select business activities to CF Industries’ headquarters in the United States, with certain functions continuing to be performed in the UK to support the Billingham manufacturing facility and UK business
o Optimise Billingham manufacturing operations by closing Billingham’s operations centre, which is a legacy of the multiple utilities and chemical businesses across the broader Billingham site, and reorganise the maintenance and support team, which could result in up to 33 redundancies at the facility
• CF Fertilisers UK anticipates that some of the proposed redundancies might be avoided by redeployment opportunities.
• The Company will be entering into collective redundancy consultation with its recognised union, Unite, and elected employee representatives regarding its redundancy proposals
• Additionally, in order to provide greater resilience to operational issues, low-priced imports and macro-economic forces, the Company will:
o Enter into a separate consultation process under applicable pensions legislation, including with its pension trustees, regarding a proposal to reduce the maximum employer contribution level for the defined contribution (DC) pension scheme; there are no changes proposed for defined benefit (DB) pension schemes
o Discuss proposed revisions to current pay and conditions arrangements with Unite

“The people and facilities that make up CF Fertilisers UK are part of a proud, 100-year history of providing customers in the UK with products vital to the country’s food security and industrial activity,” said Brett Nightingale, managing director, CF Fertilisers UK. “However, as a high-cost producer in an intensely competitive global industry, we see considerable challenges to long-term sustainability from our current operational approach. Following a strategic review of our business, we believe that the best way to continue our legacy of serving customers in the UK is to operate only the Billingham manufacturing facility moving forward while addressing cost pressures throughout our business.

“We expect to begin collective redundancy consultation with union and other employee representatives shortly. We intend to provide our team with all possible support through what we recognise will be a very challenging time for them.”

Commercial Environment Overview
Global nitrogen industry conditions are expected to remain challenging for nitrogen producers in the UK and Europe. The cost of producing nitrogen fertilisers is highly dependent on the cost of natural gas, which is the principal raw material and primary fuel source used in the ammonia production process for manufacturing facilities in the region. For many producers globally, more than 70% of the total cost to produce ammonia is from the cost of natural gas. Natural gas forward curves suggest that nitrogen facilities in the UK and Europe will be the world’s high-cost marginal producers for the foreseeable future, presenting a constant challenge to the sustainability of current operations.

Operations at both the Billingham and Ince manufacturing facilities were halted in September 2021 due to high natural gas prices that made production at the sites unprofitable. The Billingham manufacturing facility was subsequently restarted that month following an interim agreement reached with the UK government to cover the costs associated with restarting the ammonia plant to produce CO2 for the UK market. Since September 2021, no redundancies have been made at the business and all CF Fertilisers UK employees have been paid full salaries and bonuses, with payroll-related expenses totaling approximately £35 million during that time, several times larger than the government support provided.

Against this backdrop, a strategic review was recently completed that confirmed additional challenges facing the business.

The Company’s AN fertiliser sales volumes to domestic customers have fallen by nearly 30 percent since the 2017-18 season due to intense competition from lower-cost imports. As a result, when both plants are producing AN even at minimum levels, the Company has not been able to profitably sell the entire volume domestically over the last four years. This has caused CF Fertilisers UK to increasingly turn to exporting at unsustainably low margins in order to continue to operate both facilities. As carbon costs continue to increase substantially in the UK, the Company expects that its production will be placed at an even larger competitive disadvantage against imports without a carbon border adjustment mechanism to ensure a level playing field.

As a result of the strategic review, CF Fertilisers UK believes that only one manufacturing facility is needed to fulfill the domestic demand it has been serving. In this scenario, the Company expects Billingham to be best positioned for the longer-term:

• Billingham has the capacity to produce enough AN to meet all forecasted domestic customer demand.
• Billingham has a meaningful volume of ammonia and nitric acid industrial contracts that pass-through the cost of natural gas to customers, providing a foundation for profitable operations.
• The facility has a lower production cost per tonne as it is 10-20% more efficient than the Ince manufacturing facility and is a less-capital intensive facility than Ince as it has fewer production facilities
• Billingham has additional operational flexibility from a 40,000-ton ammonia storage tank and the ability to import lower-cost ammonia if necessary.
• The facility is also able to supply a substantial volume of CO2 to industrial gas customers, though this has become less important to its future as industrial gas customers diversify their CO2 supply away from CF Fertilisers UK.

Redundancy Consultation Process Timing
CF Fertilisers UK has sent notification to employees of the restructuring proposals and will be holding employee meetings over the next two days. The Company also has shared information about the proposals with Unite, which represents 442 CF Fertilisers UK employees, and with pension trustees. CF Fertilisers UK will be submitting the relevant Form HR1 filings to the UK government today. The redundancy consultation process will formally commence following the election of representatives for employees who are not represented by Unite. None of the proposed redundancies would take effect until at least 45 days following the start of the consultation.

At this time, the information detailed in this press release are the Company’s proposals and no decisions will be undertaken without engaging in the required consultation processes. Management cannot preempt the outcome of the consultation process.

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