Hello and welcome to the OCI Global first quarter 2023 results. My name is Elliot, and I'll be coordinating your call today. If you would like to register a question during the presentation, please press star followed by one on your telephone keypad. I would now like to hand over to Hans Zayed, Global Investor Relations Director. The floor is yours. Please go ahead.
Yes. Good afternoon and good morning to our audience in the US. Thank you for joining the OCI Global first quarter 2023 conference call. With me today are Ahmed El-Hoshy, our Chief Executive Officer, and Hassan Badrawi, our Chief Financial Officer. On this call, we will review OCI's key operational events and financial highlights for the quarter, followed by a discussion of OCI's outlook. As usual, at the end of the call, we will wrap it up with a Q&A. The results press release and the presentation are available on our website at oci-global.com in the Investors section. We will be referring to slides in the results presentation during this call. I'd like to remind you that any forward-looking statements made on this call involve risks, and the actual results could differ materially from those statements. Let me hand over to Ahmed.
Before we go into results, we start every call with reaffirming our strong commitment to safety, which remains our top priority. Our 12-month rolling reportable incident rate was 0.39 incidents per 200,000 man-hours at the end of the last quarter, significantly beating industry averages. Despite being a relatively good number, we will continue our relentless focus on operational and process safety throughout the organization as part of our manufacturing improvement plan. It's fair to say that Q1 experienced both market and operational challenges, which we set out to explain and bridge in the numbers in the results that we share with you today. Compared to the record results in 2022 in the same period, prices were much lower, driven by a large reduction in European natural gas pricing affecting the cost curve, along with weather-related events in the United States, which ultimately affected buying patterns.
We realized gas hedging losses during the quarter. Our operations also experienced some unplanned outages, partially related to the U.S. winter freeze at the end of last year. While our plants have been running smoothly since the repairs were undertaken, the impact on Q1 was quite visible in our figures, as you can see. The impact takes both the form of opportunities lost in EBITDA and material incremental maintenance expenses that were reflected in EBITDA. We try to take advantage of such situations to improve our plants on a sustainable basis to be better positioned for the future as part of our improvement journey. In spite of such short-term volatility, we remain positive on the overarching fundamentals of the commodity markets in which we operate.
We have seen good signs of recovering demand during the second quarter, which re-emphasizes the supportive fundamentals we are seeing in agricultural markets more broadly. Buyers that have deferred demand have stepped up purchases, particularly in the United States, which is driving up pricing. Those buyers are also now facing logistical bottlenecks when product is needed and highlights the need to buy earlier in the season rather than some of the just-in-time demand buying we've seen. During the call, we will also share progress with our hydrogen fuels transition initiatives, which OCI is clearly developing and where OCI is clearly developing a leading position, leveraging our development experience and globally advantaged existing facilities, infrastructure, and distribution network. Starting with the highlights of our performance during the quarter, I'll begin by handing over to Hassan to walk through some of the key aspects of the first quarter results.
Thank you, Ahmed. Turning to slides seven and eight for a summary of our financial results for the quarter. We reported consolidated revenues of $1.4 billion, adjusted EBITDA of $336 million and an adjusted net loss of $15 million for the first quarter of 2023. Our Q1 results were lower compared to a year ago, which can be explained by several factors Ahmed already alluded to, which includes lower nitrogen selling prices in Q1 amid sharply lower natural gas pricing, which resulted in continued demand deferral and lower volume sold than typically expected. We also recorded realized natural gas hedge losses of $98 million, comprised of a negative $60 million in the nitrogen segment and $38 million in methanol.
We continue to view our long-term natural gas hedges as a risk management approach, providing the company with a suitable long-term cost structure. As we have stated before, we are hedged in the U.S. for the balance of the year until 2029 at a weighted average price of $4.30 per MMBtu. As is typical in the gas curve, you see the higher pricing for winter compared to summer spreads. Given expectations for very tight gas markets, we hedged Q1 2023 gas at higher levels. The hedge price for the balance of the year is materially lower. Our European nitrogen business was naturally the most impacted by European energy prices and demand deferral. Deliveries of own-produced volumes in Europe were down 46%.
Margins in the European nitrogen segment were impacted by high-cost inventories produced in Q4 and sold in Q1, as we experienced a record single-quarter fall in TTF of about 40%. We estimate the effect of this to have been around $52 million. We also had restarted delays following the fourth quarter 2022 turnaround, which we estimate to have an impact of around $22 million. Lastly, unplanned outages in the methanol U.S. segment resulted in extremely low utilization rates and additional repair costs during the quarter. This was partly due to the winter freeze in the U.S. We quantified the negative impact from these outages following this event at around $30 million. In Texas, we had further shutdowns that resulted in around $47 million of lost volume opportunity and extra repair costs.
Following the restart of the facilities in February, the plants in Texas have been running well. It's worth noting that our fuels business was not affected and contributed to the tune of $21 million to our EBITDA in the quarter. The U.S. Nitrogen business generated an adjusted EBITDA of $89 million compared to $153 million a year ago. Excluding realized gas hedging losses, the adjusted EBITDA per segment would have been $132 million. On slide nine, we highlight the continued competitive position of IFCO, our Iowa-based production facility and distribution center, which has been able to achieve relative to its U.S. peers. We are consistently generating higher margins and higher EBITDA per nutrient ton than any other North American business, reflecting its competitive positioning in the premium U.S. Midwest market, leading position in DEF, and overall improved operational performance.
IFCO has also had the highest free cash flow conversion metrics in the industry, given tax advantages and lower maintenance CapEx expenditure resulting from young assets, age, and efficiency metrics. Adjusted EBITDA for the underlying business, excluding the N7 distribution business, was 49% in Q1, and excluding realized gas hedge losses, this was about 75%. Our Abu Dhabi-listed Fertiglobe subsidiary also reported a resilient performance. Total owned produced sales volumes were up 9%. First quarter 2023 adjusted EBITDA was $297 million, with free cash flows of around $271 million. Fertiglobe also guided for H1 2023 dividend of at least $250 million, which is payable in October later in the year, half of which, of course, is received by OCI. The final dividend amount will be confirmed with the second quarter results, which is scheduled for August.
Looking at slide 10, with the recent volatility in commodity markets, it is worth noting the structural cost advantages inherent to our platform. Almost all of our plants currently sit in the first quartile of the global cost curve, reflecting a multitude of factors which we describe in our investor presentation on page 10. Only our European business, which represented 6% of our global gas consumption in the first quarter, and similarly in 2022, is on the higher end of the cost curve. However, relative to European peers, our European nitrogen assets are top quartile from a gas to ammonia conversion efficiency perspective. Nevertheless, we aim to further optimize our cost position through our operational excellence program, which is on track to deliver better reliability of our plants on a sustainable basis.
Additionally, we also recently launched a group-wide initiative to reaffirm our cost-conscious culture and assess opportunities to reduce both operating costs and overheads. As part of this, Fertiglobe has already identified and is targeting annualized run rates of at least $50 million in savings to reinforce its cost position, which is planned to be achieved over the next 12 to 18 months. Benefiting from the recent valuation of the Egyptian pound, which is expected to have a positive impact on the company's cost base. We will provide an update on the target for OCI as a whole on terms of cost reduction as part of our second quarter results. Turning to slide 11.
We recorded free cash flow before growth CapEx of $161 million during the quarter and a reduction in net debt of 9%. Our consolidated net leverage stood at 0.3x as of March 31st, 2023. After the close of the quarter, Fertiglobe distributed $700 million, of which of course, $350 was received by OCI, while OCI distributed approximately $800 million or the equivalent of EUR 3.5 per share to our shareholders. OCI plans to provide guidance on the next annual dividend typically 10th October as part of the Q2 results.
As we look ahead, all of our plans and approach to investment opportunities and strategic initiatives continue to be subject to our financial policy, which we set in place last year for the long term. I'll end my comments by also reaffirming some guidance we provide on a regular basis, which includes leakage to minorities. Given the guidance by Fertiglobe for October dividend of at least $250 million and the known dividend to Sonatrach from Sorfert Algeria, which a Fertiglobe subsidiary, as a result of the super equity merge formula for the 2022 results, we expect around $1.4 billion of minority leakage in 2023. This is unusually high figure due to Sorfert and will be at much lower levels given lower prices in 2024. The number will be normalized.
Our CapEx guidance is unchanged from what we had mentioned on previous calls. We expect maintenance CapEx in the region of $300 million per annum at a run rate and growth CapEx between $350-$450 as stated earlier. With this, I'd now like to hand back to Ahmed for further commentary on the market backdrop, our ongoing growth initiatives, and a few remarks on the strategic review. Ahmed?
Thanks, Hassan. I'll start with highlighting some interesting dynamics in the nitrogen market that have driven results in the sector as a whole and may come across as somewhat detached from fundamentals which remain healthy over the short, medium, and long term. As discussed, nitrogen markets have been volatile, driven by huge swings in natural gas pricing, which was exacerbated by the Ukraine conflict and concerns over energy and food shortages. An exceptionally mild winter resulted in gas pricing normalizing quite quickly. In return, sorry, in turn, this had an impact on lowering marginal costs and resulted in higher-priced inventory carryover for producers and at the retail level.
This caused buyers to defer demand closer to the start of the season and actually application time and led to nitrogen price correcting in Q1 2023, as well as much lower volume exchange over the course of the quarter. In the U.S., as we entered the season with the largest lags in urea and UAN buying that we've seen. In Europe, farmers substituted nitrates at times with cheaper urea imports from unusual origins such as Nigeria and Vietnam, aided by the recent temporary removal of duties and tariffs against some of the other markets driven by the EU during the period of higher pricing last year. At the same time, global trade flows normalized with Russia exporting more grains, urea, and UAN in 2022 than pre-war levels, also at a discount to almost all key markets.
However, we remain constructive on the market outlook for nitrogen both in the short and medium term, backed by three key structural drivers. First, as you can see on page 12, agricultural fundamentals are underpinned by decade-low grain stocks during a period of heightened concerns for food security and more volatile weather. It is still expected to take at least two more growing seasons to replenish these stocks, and that's assuming conducive weather in the key growing regions. This translates into outstanding farmer economics for the third year in a row, which combined with the decrease in fertilizer pricing and the 50% improvement in nitrogen affordability should drive global demand higher in 2023 and 2024, including substantial pent-up demand from key importing regions that were priced out of the market last year.
We're now seeing this thesis play out in the United States with a significant acceleration in nitrogen demand and a rebound in corn acreage driving urea pricing higher and expected to also provide an uplift for UAN pricing from side-dressed demand. A reset in nitrates pricing in Europe has also resulted in higher sales volumes in Q2 after floor, as it appears, have been reached. Higher domestic production in India with the new plants from 2022 ramping up and now running at 80% capped imports in Q1, where we only saw one major tender. With demand expected to be up over 2% this year, this implies imports in the 7 million ton range this year, which is still quite robust.
This together with capped exports, sorry, from China and a recovery in demand driven by improved affordability levels should provide support for urea during the balance of the year, particularly as the new production from last year gets digested in the system, the run rate production levels we've seen over the new year. Second, cost curve economics should eventually play out. You see that on page 13 of the slide deck. Ammonia pricing today is around $100 per ton below the marginal cash cost floor, excluding CO2 pricing, which is not sustainable in the long term in Europe. We expect curtailment in Europe to go up from the current levels of approximately 30%, replaced partially with higher ammonia imports and also marginal closures in other regions such as Indonesia and the Far East over the summer to balance the market.
We're also not out of the woods yet on gas, with LNG imbalances not expected to meaningfully change until the middle of the decade into 2026 when new capacity comes online. European gas futures over the next winter and 2024 to 2025 winter are pricing expectations of a tighter market than current levels. For this coming winter, they imply ammonia cash cost support levels of $650 excluding CO2 and $815 including CO2, which is increasingly becoming a variable cash cost that people think of like natural gas and electricity. Third, incremental supply is unlikely to keep up with demand growth over the next few years, as highlighted in our presentation in the press release.
Similarly, on ammonia, only one project in the U.S. is commissioning later this year or is expected to, and the only other large project that has reached FID is ours in Texas, which is starting in 2025. This will be the first ammonia plant to capture the incremental regulatory value at a world scale arising from the IRA and CBAM in Europe, and several years ahead of other new build projects that are announced, as highlighted on page 15. On the methanol side, we've seen pricing come down as a result of higher global operating rates and demand impacted by global macro headwinds, lower coal cost support, and slower than expected rebound from the Chinese reopening post the Lunar New Year. However, we also remain constructive on medium-term methanol market fundamentals driven by three key factors.
One is that end demand should pick up by improving methanol affordability levels that we've seen, and we expect to see upside from the Chinese rebound in the second half of this year with housing and construction recovery maintaining low inventory levels in Asia. We've already started to see MTO operating rates recovering to about 70% level from the recent historic lows of 60% and still below the run rate levels we've seen in the past. Cost curve economics are also supportive with low U.S. gas pricing and high oil pricing. Methanol remains a much cheaper fuel source than, for example, LNG or gasoline. We should see more affordability-driven demand for that type of substitution.
Thirdly, methanol as a marine fuel is quickly becoming a reality with only 300,000 tons per annum consumed today and in the next few years ramping up over 10x to 4 million tons per annum. We're focusing on this third driver. You can see that laid out on page 17 as we have in the chart. With over 135 new methanol fuel container ships slated for delivery, increasing and supporting this demand projection I just gave. There's also an increase over the last quarter where we were at 3 million tons per annum estimate, and we moved that now up to 4 million tons. Turning now to our energy transition focused on growth projects.
We've been talking this past year about the strategic position of both methanol and ammonia as incumbents in the energy transition supply chain being some of the most effective carriers from a technological and sustainability footprint, perspective. Spearheading the transition for OCI is our 1.1 million ton blue ammonia project in Texas, which has advanced significantly over the past few months, and the project remains on track to start production in the first half of 2025. Notable to mention is that Linde signed an agreement with ExxonMobil in April for the CO2 off-take and sequestration to take advantage of the IRA incentives that were driving a lot of the benefits of this project. In our pricing.
On slide 20, we shared some photos of the site, and the project is in a key construction phase where piling is near completion, and we've ramped up critical labor on-site to accelerate civil work and foundation work as we start receiving major pieces of equipment over the coming six to 12 months. We're estimating a 15%-20% unlevered IRR range at mid-cycle grade pricing when we look at the last 10 years. This doesn't include upside from premiums for low carbon ammonia. To give you a sense, for every $50 incremental blue ammonia premium, that should add approximately 4% IRR. A clear upside is expected to come about with the regulatory measures in the Far East and Europe to incentivize use of lower carbon products.
The implementation of the CBAM or the Carbon Border Adjustment Mechanism in the EU Maritime from 2026 is expected to create a differential for ammonia price where low carbon ammonia has an inherent advantage relative to gray ammonia, and we should see that continue to develop and be embedded in marginal cost lines with the phase-out of EUA allowances post-implementation of the CBAM. Given the forward EUA pricing, this adds approximately at least another $100 a ton of returns net of freight for our blue ammonia from Texas going into Europe. We're also very excited that we recently announced an agreement with NuStar to enhance our ammonia distribution infrastructure and competitive Midwest positioning by connecting to their existing ammonia pipeline network at our IFCO plant.
This allows us to transport ammonia very cost-effectively and safely from the U.S. Gulf Coast into the Midwest to better serve the core agricultural market, leveraging the Midwest premium and our existing infrastructure storage facilities in IFCO, as well as our distribution capabilities there. This very cost-effective project allows OCI to buy cheap ammonia tons out of the season in the U.S. Gulf, utilizing the NuStar pipeline and transporting those tons to Iowa. We definitely see that as a possibility, not only with our own Texas blue tons, but third-party tons, to be able to move those tons up to the Midwest. We can make a large margin uplift on these tons in season at a fraction of the logistics costs involved in transporting ammonia using other modes, including more expensive barging, given Jones Act.
Moving to page 25, our gasification opportunity in Athens has also made progress with the submission of our application to the EU Innovation Fund in March. The vision here is to potentially transform renewable waste-driven feedstocks such as wood waste, agricultural waste, and non-recycled municipal solid waste into renewable circular methanol, adding to our existing low carbon and green methanol supply that has robust demand ahead of it in the marine and vehicle fuel sectors, as we've discussed in the past, as well as in the chemical markets. We've entered into a strategic partnership with Petrofac, where Petrofac will be the exclusive global engineering partner for gasification-based hydrogen fuel projects in the future as we ramp up our learning curve and knowledge of this sector.
This is a potentially critical step in scaling green methanol and hydrogen technologies with a future focus on transportation fuels, and further solidifies our leadership in that market today. Also worth noting is our Egypt green hydrogen project, which we announced the commissioning of in COP27 in November 2022, during the quarter, not only produced green hydrogen, but we were able to also produce green ammonia on spec in March to do so for the first time in the Middle East and Africa. A major strategic milestone as we build up to the potential FID of the larger 100 MW project, which we continue to do work on. Finally, on the topic of the strategic review, which is briefly addressed in the earnings press release.
In March, we received a letter from one of our shareholders, which highlighted that OCI's share is trading at a significant discount to our intrinsic value. We have shared our views as management that we fundamentally agree with those comments received regarding the trading levels of our shares. This disconnect has been at the forefront of our strategic thinking as we remain diligent in our focus on value creation. We view our business through an activist prism on a continuous basis and are self-reflective. With that said, the board has given management permission to conduct an internal strategic review to evaluate our current business model and business lines. This will include an evaluation of our current Dutch listing in light of our future strategy.
We'll be looking to further unlock the strength of our incumbent business, galvanize our pioneering lead in hydrogen fuels transition within a framework of our financial policy, as Hassan had mentioned. We'll keep the market updated on any developments that may arise from the review as and when appropriate. To conclude, we're proud of what OCI and Fertiglobe teams have continued to achieve so far. We continue to be excited about the prospects of the group over the medium and long term. We'll open the line for questions.
Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your device is unmuted locally. Our first question today comes from Christian Faitz from Kepler Cheuvreux. Your line is open.
Yes. Thank you. good afternoon, good day, Ahmed, Hassan, and Hans. two questions, if I may. an operational one and regarding the listing. On that, your listing comments, can you please elucidate your remarks regarding the Amsterdam listing? What are the options here from your viewpoint? I mean, would your key shareholders, including the activist, be ready to take the company private? Or do you believe you are likely to see a more appropriate market rating if you were listed in a different region? Then the operational question, how has European nitrogen demand been so far this season, i.e., also going into Q2?
I'm aware we had a rather slow start, weather-related, also in the U.S. obviously. European farmer economics are also in pretty good shape. Do we see more volumes in the meantime, i.e., trading conditions in March, sorry, in May? Thank you.
Thanks, Christian, for the question. With regards to the trading, the volumes question, we are seeing demand really pick up. Like I said, a lot of just-in-time, you know, buying was an exacerbation of the fact that farmers don't like to buy when pricing is going down. They like to buy when pricing is going up. That's, you know, the focus on trying to find a floor became a bit of a challenge with the onslaught of the ramping up of the 2022 supply in the nitrogen market, and European natural gas pricing going down. What we've witnessed, particularly over the last several weeks, is that, you know, demand has been robust. Inventories remain low at the retailer and the farmer level.
We do anticipate that picking up because to your point, the affordability levels look quite strong still in Europe, and we see that continuing for the next several months, including on into July with the grassland demand on the nitrate side. We've seen some switching between urea and nitrates at times affecting those different levels. You know, as OCI, given we have exposure to both those types of products, you know, we think We're on kind of both sides of that trade, to put it lightly. We've been seeing, you know, very good market share from Fertiglobe for urea, and now we're seeing now more nitrates going down into the market and are seeing, you know, stronger volumes here in Q2.
With regards to the listing venue, you know, we. When we look at the different locations, you know, the Netherlands is, let's say, We have it in the investor presentation, 15% of our proportionate EBITDA, right? We've been listing the Netherlands for approximately a decade now. Part of the strategic review is to look more broadly at other potential listing venues because we do have a sizable part of our business, as you know, in the United States as well as in the Middle East. You know, the focus for a lot of our growth is in both the United States and the Middle Eastern markets, as we think about these decarbonization projects and what we've and what we've moved forward with. We look at the...
When we think about the sum of the parts and what the Inclusive Capital said in the letter, when we look at the individual pieces of the business and we look at the jurisdictions in which some of our peers trade in, we see a discount for how we're traded at ultimately at the hold co at the Dutch level. That's kind of the driver behind those, and that's why accordingly, we're looking at alternative venues.
Okay. Very helpful. Thank you very much, Ahmed.
Our next question comes from Mubasher Chaudhry with Citi. Your line is open.
Hi. Thank you for taking my questions. Just following up on the last question, to be honest. You're talking about a listing in a different region, as a means to close your discount to some of the parts. I think in your own comments, you just said that the d-listing in a different region will help close the discount to peers. I'm just wanting to kinda connect the difference between the two comments because if I look at some of the U.S. peers as well, I think they're, arguably, they're also trading at a discount to some of the parts. I'm just trying to understand why a listing in the U.S. is the right way to go, even if the U.S. peers are already trading at a discount.
Or is the real aim of the game here to try and close the discount to peers? 'Cause I think those are two different levels. That's the first question. The second question is a little bit more kind of admin related. Is there any timing to be communicated around the strategic review and the outcome of the strategic review? When can we expect this? Maybe, I don't know, 3 Q, 4 Q? The final one is around the gas hedges that you've got, in the U.S. Is there a way of you exiting those hedges, should your internal view on the long-term gas prices in the U.S. change? Because at the moment, those spot prices are well below those hedges.
I was just wondering if there's an option for you to exit those, and if yes, at what cost? Thank you.
Sure, Mubasher. You know, I think I heard you fully there, but on your first question with regards to the listing venues and how we're looking at, on the sum of the parts basis, you know, we think in terms of the overall, the European market, we've been seeing probably maybe looking at both the US business, our Middle East business, and European business, that, we are trading at a discount to our peers and globally for the internal and some of the parts. Maybe it's on valuation metrics we've used, the time period you're looking at, when we look at it, for example, on a mid-cycle basis, when you look at replacement costs, all of the above, we do see that discount.
I think Inclusive Capital in their letter also shares our view on that remark. You know, this isn't fit to complete. It's something that we're looking at as we speak in discussions with our Q1 board results as part of the strategic review as being a possibility. Right. On the second question with regards to. The third one was on the gas hedges.
The strategic review timing.
The strategic review timing. We're, as we said in the prepared remarks, we're gonna come to the market, you know, when appropriate, if there's something to say that's market appropriate. Something obviously we're spending a lot of time on now. In any case, we will provide an update to the market with the Q2 results.
Maybe I will add. Maybe I'll take the third question on gas hedges. I mean, as we previously disclosed, our gas hedges are go out all the way to 2029. It's, you know, the curve, the forward curve has moved around a lot. I don't think we'll be looking to exit these at this time, but we just continue to monitor how these hedges perform.
I mean, in the past, we've recorded net gains, up to 2022, and we'll just see how the energy landscape continues to evolve going forward.
The question wasn't will you exit them. The question was if you wanted to exit them, can you? It was more a hypothetical question. I understand it depends really on your view of the forward curve, but I just wanted to kind of understand the mechanics. If you wanted to exit them...
No, there's. There's always the possibility, but then you'll be crystallizing a loss which may not exist, as you get closer to the period.
We've seen that, we've seen that move around quite a bit. These are liquid instruments, Mubasher, nothing too exotic. There, you know, there's a market if we could, if we wanted to exit them. You know, just reiterating what Hassan said, there's obviously a bid ask with intermediaries at times. It's definitely something we could adopt, but it's just not in the cards.
Understood. Thank you.
Yeah. It's a commercial call. I think just one other thing, Mubasher, to your question on the first part of your question. Just in terms of how you look at the various businesses, and you look at the some of the parts, even individual ones, I think, we've had, some conversations with our IR team on this. I think that the comparables, when you take into account, for example, our U.S. Nitrogen business, which we shared some data on using publicly available information today in our slide deck, you can see the incremental EBITDA per nitrogen ton premium that IFCO, for example, enjoys over all U.S. nitrogen peers and has for the last several quarters and years. I think that's one example.
I'm sure that there are others in terms of differences in valuation when you look at how peers are trading relative to our own production. Also, how you value the clean ammonia project in Texas, which also has innate advantages with the blue ammonia production that we expect to have when the plant starts up. I think there's some idiosyncrasies around that problem.
Our next question comes from Faisal Azmat from Goldman Sachs. Your line is open.
Hi, thanks for the opportunity to ask questions. Maybe just a question on the blue ammonia project. I guess given the high level of returns that you anticipate for that expansion, why not do more? If it's a matter of capital, why actually not bring in ADNOC as a partner, potentially given they have global ambitions on that front? That's or maybe Fertiglobe. That's my first question. Just my second question from a, you know, going back to that listing component. Are you fixated on particularly on the U.S., or would you look at any other market, potentially even in the Middle East? That's my second question. Thank you.
No, Faisal, appreciate the question. With regards to the Texas blue project, where we have the ability to do the second line, and we have invested in some utilities, underground piping, OSBL, certain things where definitely the cash cost of the second line would be less than the first line. That stays and remains to be a possibility. We have not FID such a project, and we would take it into account with our financial policy, you know, as Hassan stated, when we think about those. The opportunity of potentially partnering with others is always there. As you can imagine, following the strategic review and even in advance of that, we've had a lot of inbound inquiries as the only blue ammonia project that is FID in North America, for a new world-scale class, right?
There's inbounds from different geographies and others that could potentially invest and want to be, you know, participate in the project, which could allow us to bring more tons into the market. I also think, you know, our team is working and executing this first one first and foremost. That option does exist. And, you know, we wanna execute well on this one, and we're pleased with what's been happening so far, given it's on schedule and on budget so far. With regards to the listing, you're right. In terms of where it could be, U.S., given a lot of our investments and presence in the U.S. today, a big part of our business is there, is one potential venue of evaluation.
The Middle East, given our recent IPO in Abu Dhabi in the second half of 2021, is another potential area given we have growth within our Middle East business that we've had in the past. You know, we have familiarity with that market, and that's been a very growing market for you know, new listings as we've seen over the last couple of years. We're just still thinking it through.
Thank you.
Our next question comes from Rikin Patel with BNP Paribas. Your line is open.
Hi. Thanks for taking my questions. Had a follow-up on the market. It sounds like you're a lot more constructive on demand and farmer economics for Q2. So I wanted to check if we should be assuming that volumes in nitrogen will be up year-on-year. And I guess taking into account, you know, whether what, what you see around production and any potential outages for the quarter, whether that's, I suppose, is a safe assumption to make. Secondly, sorry, just going back to the debate around the listing. I mean, is it on the table for you guys to consider a dual listing at all? Are you just considering moving it altogether? Thank you.
With regards to the first question, if I heard you correctly, you were asking about our view on nitrogen demand and how constructive we are on it for Q2 and more broadly for this year. Is that what you're asking?
Yeah. No, I'm just curious if volumes will be up year-on-year in Q2.
Generally, as we said, we've been seeing as we start of Q2 here, not just volumes, but also pricing in U.S. and Europe continue to do better than Q1. It's on the right trajectory. Obviously, you're still less than halfway through the quarter, and weather tends to be a big swing factor. Directionally, we're seeing that we're making up for a period of under an application of nitrogen last year, right? We had 3% decline in nitrogen demand last year driven by affordability credit level issues in the nitrogen markets last year.
We're seeing new some buyers come back in the African markets, in Australia, in some South American markets come up and look for more demand than they had last year. You know, the only exception would be India that has been, you know, importing less, but they're still gonna be putting. They're gonna still have some decent demand given their wheat stocks. For now, from what we can see, it looks quite good for Q2. If I can leave it at that on terms of volumes. Okay. With regards to the listing venue, I'd say that we're, you know, we're doing the evaluation right now. It's, you know, wouldn't comment on whether it be a dual listing or a singular listing at this stage here.
We're just looking at the other markets, and we're taking into account what maximizes shareholder value. Obviously, we're gonna be focused on liquidity. We would be a bit concerned about split liquidity at times.
Great. Thanks.
Our next question comes from Chetan Udeshi with JP Morgan. Your line is open.
Yeah. Hi. Thanks. I just want to follow up on the outages in the methanol business because, you know, this business tends to have outages almost after every two or three quarters. I know we had a Texas freeze. I don't know if it's more got to do with the just the follow-up from the disruptions from Texas freeze. I think I'm just curious, why do we seem to have so many outages at the methanol business of OCI, especially in the U.S., given that, you know, these are, you know, quite, I would say, young plants compared to some of the other plants in the U.S. Gulf Coast. The second question was just around the blue ammonia project.
Are you expecting to get a premium over the benchmark ammonia prices with your blue ammonia sales? Because from what I understand, one of your peers in the U.S. have agreed to sell ammonia to a Japanese power company at cost-plus model. It doesn't feel like they necessarily are charging a premium. How realistic will it be for you to assume a premium if one of your key competitors is willing to, you know, sell blue ammonia in cost-plus or on cost-plus basis? Thank you.
Yeah. Chetan, I mean, on your points on the operational side, you're absolutely right. This is, it was not a good operational showing for our U.S. business. You know, we've been on this manufacturing improvement journey that's been, I think, directionally moving in the right direction. We've seen stronger site leadership and corporate teams on the manufacturing side that just weren't there in the last few years. We have a relentless focus on process safety and reliability, where, you know, we're doing things in terms of monitoring our operating windows, putting in leading standards for KPIs on the process safety side that have continued to improve. From a leading perspective, we see that we're moving in the right direction.
You know, looking at this last quarter, I can't say that we're happy about where we're at. This was one of the worst production quarters that we've had in the last several years, particularly in the Texas site. Does this start with the winter freeze that happened in mid-December? Upon restart, we did have, as we saw in the prepared remarks and in the press release, several issues upon startup with that freeze. You know, we had, if you recall a few years ago in Iowa, some winter-related issues and outages where you have learnings of winterization, right? Where you may have certain parts of the plant that are exposed that don't have what's called heat tracing to keep the plants warm during very cold periods.
In Texas, we've had unseasonably cold winter weather in certain weeks in December and also two years ago in February 2021. You know, those we learn from them so that we can avoid the winter outage in and of itself. Overall, we do continue to feel strongly that we will see improvement in our production and volumes after what was a very tough quarter that started with these winter freezes. That's on the operational side. On thePremium for blue. I think what you're referring to for the East Asian sales into Japan and Korea, I think these have all been MOUs with no bona fide agreements signed, right? Also no bona fide FID new blue ammonia projects other than the one that we've announced.
They've been mainly, you know, brownfields where they're doing carbon capturing. Cost plus, obviously a big question is gonna be what's the plus, right? What's the cost? Both of those are big questions. The plus and the cost will determine what the price ultimately looks like. I think we're still in the early innings of what that looks like in terms of where the market sales are at. The beauty of our Texas blue projects and our global ammonia reach is that this ammonia will find its way home into fertilizer markets, most likely in the Midwest, as via this recent announcement on the Nu Star pipeline. It'll find its way into the domestic U.S. Gulf Coast market where we have an existing 350,000 tons of production.
It'll, you know, be exported not just towards the Far East potentially, but also into Europe, where as you know, we've been running a curtailed ammonia in our OCI Nitrogen facility now. We're running only one of two lines at, you know, 40% of our overall capacity. You know, we have effectively over the last 18 months had a 600,000 ton short for ammonia. We know just given where marginal costs are, that we're gonna start seeing more permanent shutdowns following CF's announcement in the U.K. and BASF's announcement in Germany of reducing ammonia production. To the extent you go, for example, into that European market with CBAM that's moving in the right direction, as I mentioned earlier, Europe is gonna be pricing from 2026 carbon at a price.
Carbon today is 100 EUR in the forward curve ± a ton. Every ton of ammonia is about 2 tons of carbon. It's about a 200 EUR carbon charge that will start being implemented. Structurally, different than having a bilateral negotiation today on what's the value of blue or green, structurally there will be an advantage to having something that's a blue product versus a gray product in the market. That can allow for the premium that we're discussing here.
As you saw in the economics we shared in the slide deck, we were showing the economics excluding that type of premium and just showing a sensitivity if you had, for example, a $50, you know, blue premium, we'd get an extra 4% on the IRR.
Thank you. As a reminder, to ask any further questions, please press star one on your telephone keypad now. We have no further audio questions. I'll now hand back to Hans Zayed to answer questions received on the webcast.
Yes. Hi, there are a few questions on the webcast that I will read through. The first question that we have is, we saw a lot of delay in demand in the first quarter. In the press release, you stated that the market is tight and demand is improving. Why don't we see this back into urea and ammonia pricing? The information via CRU shows that there is still a lack of buying interest.
We've seen an uptick in both urea and nitrates pricing and volumes in the last several weeks, as I was saying. Urea, more broadly is up about $25 in the last month. We've seen some buying into the Mediterranean markets, with Egypt stepping back up. Really it's been, you know, in the U.S. quite significant where we see U.S. Gulf pricing, going up over $130 a ton in one month. That's for, short ton I believe, so, $143 per metric ton. The European nitrates pricing in particular has also moved week-over-week.
We've seen participants in that market, including ourselves again this morning, adding to pricing, selling limited volumes, and then going up in pricing as inventories have been low on the retail side. you know, I think that some of the challenges that we experienced in OCI Nitrogen part of the business was we produced inventories in Q4 of this year at elevated gas pricing, right, at almost EUR 100 a megawatt hour. The prevailing gas pricing was in the EUR 40 megawatt hour lower price level in Q1. What that meant is when we made sales in Q1, we were selling them at a loss because of one of the biggest gas price drops in history going into the buying season. A lot of the retailers had similar issues.
They bought some tons in Q4, right, and Q3 at elevated pricing, and they were very worried about buying, and they suppressed their buying until they really saw the demand in front of them from the farmer side. We're starting to see that emerge where it gets low enough, you see a bottom to the market where they can go in and buy during the season here. You know, that's what we're seeing kind of week to week now. Obviously, weather plays into it as a factor, and we're also going to be seeing, you know, I think a recovery more broadly in these under applied nitrogen demand markets and key growing markets over the next several quarters and into 2024.
Thanks, Ahmed. The next question is, can you comment on how a possible increase in gas prices in the next six months may influence next quarter's results?
For an increase in gas prices, is it specified the U.S. or Europe? Those have different implications. Every $1 an MMBtu increase in European marginal gas price adds $65 a ton marginal cost, excluding CO2, as we've stated. You know, cost curve economics will play out. As we said, we're already operating at levels below the European cash cost today at the low teens trading levels. We can see that be quite substantial when we think about, you know, the pricing environment.
Thanks. The next question is, the first quarter was a difficult quarter in terms of volumes and prices. Can you shine some light on Q2 and Q3, on Q2, and if Q2 will be significantly better?
From a volumes perspective, overall, we don't give specific guidance, but clearly volumes were very, very low in Q1 with this demand deferral that I was talking about earlier. Q2 is generally a normally seasonally strong quarter. We've seen, you know, April and into May be better on the nitrogen side, and our methanol plants, as I said, have been back up and running. Therefore, directionally, we see that, you know, Q2 2023 should be, you know, definitely better than Q1, and it looks like directionally moving to be better than Q2 2022. This will also obviously depend on the pricing environment that we see as well.
The next question is, how sustainable is the expected cash flow for paying the base dividends of $400 million this year?
I can take that one. We've when we already set out our dividend policy, any deviations in the future will depend on market conditions. With, of course, a view that we are continuously trying to maximize shareholder return. We'll provide more guidance on the H1 2023 dividend as part of our Q2 results. As Ahmed mentioned, it's been a volatile market. We're seeing signs of recovery now, as we mentioned in our prepared remarks and the commentary Ahmed's alluded to in the context of the Q&A. We still have a constructive view on the outlook, and we'll be balancing that with the long-term growth prospects, and make these determinations accordingly.
Thanks, Hassan. I think there's a question on, there's a call, in the queue. Operator?
Yes, we have a question from David Hales from Ninety One. Your line is open. David, your line is now open. We have no further questions.
In that case, we'll go to the next question. We as shareholders still have fresh in mind the course of events about strategic review of the methanol business in 2019. It took a long time and a lot of talk for the shareholders what the outcomes were of this review. Can you ensure that this strategic review will be communicated to shareholder in a more comprehensive manner?
I mean, I think, in this case, you know, we intend to continue to communicate to shareholders in a transparent manner as we continue, as we've tried to do over the last several years. If I recall, the last, the strategic review that happened on the methanol side was also during a period where we entered into the COVID-19 pandemic crisis in the middle of that strategic review, where, you know, oil prices went negative, and gas prices were, had dropped off meaningfully. It was a very big fundamental change in the market in that short period of time. I think we discussed that on some of our quarterly calls, as that developed.
Here we have obviously a strategic shareholder or, Inclusive Capital and others, who've voiced their views on the market and, you know, we'll do our best to continue to stay transparent.
Thanks, Ahmed. The next question is there a financial allocation to start a large buyback program?
The way we think about whether it's buybacks or dividends or return of capital, it's all coming from that same pool of returning capital to shareholders. I think we've gotten some of these questions separately. That could be, you know, part of the way and form of returning capital to shareholders, depending on, you know, what we decide to do with the board in terms of how we do so.
I'd agree. I think it's we've had this question before. We've had an efficient manner to, efficient mode to return capital to shareholders previously. We continuously reevaluate what is the optimal avenue to do so.
obviously continue with our commitment towards investment grade in our financial also.
Maintaining our liquidity, of course.
The next question is, how sustainable is the expected cash flow for paying the base dividend of $400 million this year?
I think we already covered that question earlier.
We did. Okay. There's no further questions, and I'll hand back to Ahmed.
Okay. Thank you all for joining this call and look forward to our next discussion of the Q2 results.
Thank you.
Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. You may now disconnect your lines.