CF Industries. This is a rehash of my one of my older posts. Talking about the low cost moat in a commodities company

 The commodities market is an interesting one. Different commodities have different moats.

Investing in the commodities market really boils down to investing in producers that have a low cost moat, and buying it cheap. 

The cyclicality comes as the build out of capacity for certain commodities takes a number of years. While for other commodities, the capacity build out might take fewer years. Lets takes the example of a copper mine. In order to expand an existing mine, the investment may not take that many years. However, a new discovery may take half a decade or longer to expand capacity. Roads need to be built, machinery needs to come in, and a new hole needs to be dug. Then there are staffing requirements, it takes time to educate people. Salaries need to increase and jobs need to be available before people study to become a geologist, or whichever job a company needs.

The lag time between when the commodity prices are high, and when supply is actually able to react to high prices, is normally what gives commodities its cyclical nature. An old saying goes, "The cure for high prices is high prices, and the cure for low prices is low prices". As higher prices incentivizes new production, the production may take 5 years or more before it hits the market, production may very well come in when the market has collapsed. Thereby forcing prices to go even lower. An example of this is the oil market. The collapse in 2014 took about 7 years before demand came back and the old investments in oil fields stopped coming online.

The commodity's cost curve, aka what the various commodity producers cost of production is generally what determines the price of the commodity. Higher demand creates higher prices, higher prices will then incentivize more supply. It works the other way around as well. In good times, the cost curve becomes steeper. As higher cost production is able to make profit and come online. In bad times the cost curve flattens. As people start to cut costs and higher cost producers go bust.

This is an example of a cost curve(From CF Industries, also an old idea. 1st(bottom) quartile low cost producer in the US):- 

A commodities company with a very strong low cost moat is a company that benefits from the commodity cycle. This is precisely the reason I invested in OMH, however management seems oblivious to its low cost advantage.

A commodity company with a low cost moat, ie: bottom quartile cost curve. Who is able to expand production at its cost. Is an anti fragile company. It benefits from the cyclicality of the commodities industry.

How does it do this? Well, during times when prices are good. The company makes a higher profit due to its low cost position, when the market is bad, They are taking market share from other people, as players go bust. They are able to expand their low cost advantage.

They are like a 6 foot tall person in a 5 and a half foot tall river. The water is rising but it doesn't reach them.

OMH low cost position is due to their access to low cost electricity. However management is so incompetent, they have shut off their production during periods of high prices for meaningless conversions. They have continued operating a high cost mine and scheduled major maintenance for their furnaces during periods where there is a global energy crisis. OMH is unaffected by the energy crisis as their electricity is guaranteed by their PPA, which is supplied by low cost hydropower.

This is an anti fragile company. However management has not been able to capitalize on their low cost advantage and have been plagued by operational issues. Its ridiculous.

My mistake is holding this company for too long. The investment thesis is the bolded parts.