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Mosaic earnings beat year-ago; company cuts potash production, takes write-down
The Mosaic Co. reported an increase in operating earnings for the second quarter ending Nov. 30, 2008, despite an inventory write-down of $293.5 million. Operating earnings were $682.0 million on sales of $3 billion, compared to the year-ago $529.6 million and $2.2 billion. Net earnings were up even more, to $959.8 million ($2.15 per diluted share), due in part to a $673.4 million gain from the sale of Saskferco. This compares to year-ago net earnings of $394.0 million ($.89 per share).
“Second quarter earnings were up from the prior year as we executed our strategic game plan and benefited from higher realized selling prices, especially in our potash business unit,” said Jim Prokopanko, Mosaic’s president and CEO. “Toward the end of the quarter, however, worldwide crop nutrient sales activity dropped sharply, and it is expected to remain weak through at least the third quarter. Because of these conditions, we are reducing our production to manage excess inventories, reducing capital expenditures, and working to maintain financial strength and flexibility.”
Mosaic said it would cut potash production by 1 million mt during the second half of its fiscal year, which ends in May 2009. Mosaic had already begun moving toward the cut with reduced rates during the recent holiday period. Mosaic already cut phosphate production by 1 million through December, and expects another 1 million cut in the second half of its fiscal year, which ends in May.
Despite the uptick in earnings and revenues, phosphate and potash sales volumes were off in the second quarter. Total phosphate volumes were 1.23 million mt, down from the year-ago 2.28 million mt. Phosphate crop nutrients to North America dropped to 366,000 mt, down from the year-ago 845,000 mt. International was also off, at 740,000 mt from the year-ago 1.2 million mt. While DAP prices have been on the decline, Mosaic second-quarter average prices still exceeded year-ago levels by a wide margin at $1,083 mt versus the year-ago $417/mt.
Second-quarter phosphate operating earnings were $258.8 million on sales of $1.75 billion, versus the year-ago $346.8 million and $1.23 billion, respectively.
Six-month phosphate volumes were down to 3.3 million mt from the year-ago 4.5 million mt. Six-month phosphate earnings were $1.2 billion on sales of $4.34 billion, versus the year-ago $657.0 million and $2.4 billion, respectively.
Second-quarter potash volumes were 1.72 million mt, down from 2.0 million mt. Most of the drop in potash crop nutrients was to North America, where volumes were down to 524,000 mt from the year-ago 789,000 mt. International volumes were off only slightly, at 921,000 mt from 948,000 mt. The average second-quarter MOP price was $529/mt versus the year-ago $174/mt. Second-quarter potash operating earnings were $547.5 million on sales of $973.2 million, versus the year-ago $161.2 million and $431.6 million, respectively.
Six-month potash volumes were down to 3.6 million mt from 4.1 million mt. Six-month earnings were $1.02 billion on sales of $1.95 billion, versus the year-ago $271.4 million and $843.4 million.
Mosaic’s Offshore business segment put in the worst performance during the second quarter with an operating loss of $120.1 million on sales of $562.4 million, compared to year-ago earnings of $25.7 million on sales of $644.3 million. For the first six months, the unit had operating earnings of $38.9 million on sales of $1.61 billion, versus the year-ago $55.8 million and $1.14 billion, respectively.
Much of the Offshore segment’s loss resulted from inventory valuation write-down of $149.3 million and lower sales volumes. Mosaic expects the unit results to remain weak at least through fiscal 2009, primarily due to slow demand, mainly in Brazil.
The remainder of the $294 million write-down came from phosphates at $213 million and nitrogen at $6 million. The write-down was partially offset with a net credit of $74 million in the Corporate/Other segment.
“We are experiencing a perfect storm in the crop nutrient markets with a combination of factors dramatically affecting farmers, producers and the entire supply chain in all parts of the agricultural world,” Mosaic Executive Vice President and CFO Lawrence Stranghoener told analysts.
Prokopanko added that a late harvest exacerbated the situation. He said a number of regions battled the elements through the end of November, with many farmers unable to complete all of their field work. As an example, he noted that the Iowa Department of Agriculture reported that farmers had completed just 43 percent of their planned fertilizer application by Nov. 30, compared to a five-year average of 66 percent in the state.
Stranghoener said potash sales volumes are expected to remain soft at least through the third quarter, with realized prices expected to decline slightly compared to second quarter levels due to a higher percentage of lower priced industrial sales. He put normal industrial sales at 15 percent of production.
“We expect the phosphates segment results to be much weaker at least through the third quarter because of lower selling prices and margins, soft sales volumes, and lower production levels,” he said. “Because of the write-down, we expect that most of our third quarter phosphate volumes will be sold at no gross margin.”
Stranghoener said Mosaic believes it has the best liquidity position among its peers, with total cash of $2.8 billion and debt of $1.4 billion as of Nov. 30, 2008. However, he noted that the company is now providing less guidance than in the past due to significant uncertainties in the market. The company has already withdrawn any sales volume guidance for the year, and has no current update now other than to say it expects weak sales volumes at least through the company’s third quarter, which runs through February. It has also not provided product price guidance, though it expects third-quarter realized phosphate prices to be down substantially and realized potash to be down slightly from the second quarter.
Stranghoener said the company is reducing capital spending guidance for the year down to $800-$900 million from the previous guidance of $900 million to $1.1 billion. He said the company remains committed to its planned potash expansions as it still likes the long-term outlook for potash. However, he said the company is evaluating whether to moderate the pace of its expansions in light of near-term market conditions and less robust cash flow.
Prokopanko was encouraged by a 25-30 percent increase in crop commodity prices since Dec. 5. “If this rally continues though to the spring, then higher grain prices coupled with lower production costs for diesel, propane and crop nutrients, will provide an added boost to farm economics and should provide the self-correction mechanism needed to reverse the current downturn.” He said he expects to see dealers will average down their inventory costs through new purchases at lower prices. “This along with lower retail prices eventually will facilitate movement of inventories through the pipeline. This difficult process will happen, but it may take some time.” He noted that many dealers had a great year in 2008, and they may have to give some of it back in 2009.
Prokopanko believes a new potash deal with China will come in the first half of the calendar year, perhaps the first quarter. He is hopeful China would buy more this year than next, but would not make that prediction. He said a continued rally in soybeans will have to occur for the outlook for tonnage to Brazil to improve.
Prokopanko said the company estimates that about half of the world’s phosphate production is shut down. “We are starting to get to a period where you just can’t turn that back on in a day and ship all the product and have it there next week. So you’ve got not just the phosphate producers that have idle capacity but you have the important links in the supply chain, rail companies that have idled capacity, and I think we’re starting to really play a dangerous game of chicken here that it’s going to be too late to get product into some positions when farmers actually want it.”
Prokopanko said that Morocco phosphate rock prices have fallen to as low as $250/mt FOB for the first quarter. While this price still puts pressure on non-integrated DAP makers, he noted that these producers still have existing inventories of rock to work through, which would mute the impact of the situation. Analysts noted that it would be difficult for a non-integrated producer to operate with $250/mt rock with current DAP prices.
Mosaic Vice President of Analysis and Strategic Planning Dr. Michael Rahm told analysts that the company is baking in a 5-10 percent drop in the national average application rates for P&K. Mosaic is projecting corn acreage in the mid-80s million acre range. This is based on about a 10 percent drop in P&K use in the U.S.
Industry mourns loss of Dr. John Douglas
The fertilizer industry mourns the loss of industry veteran and long-time friend, Dr. John Douglas, 85. The much beloved Dr. Douglas, with wife Ardy at his side, was a staple at major industry conferences for decades. A firm hand shake and smile from the ever optimistic Dr. Douglas were always treasured moments at such meetings.
Colonel John R. Douglas, USAF (ret.) Ph.D., died Tuesday afternoon, Jan. 6, 2009. Born in Mount Pleasant, Tenn., on May 13, 1923, to John R. Douglas and Emma Trice Douglas, he graduated from Columbia High School. He served as an engineering officer with the Air Force in the Pacific during World War II.
He graduated from Harvard University and went to work for TVA in Knoxville and then in Muscle Shoals, during which time he earned his Doctorate in economics from Iowa State, retiring in 1985 from the position of assistant director of the Fertilizer Development Center.
After his retirement he became a consultant to the fertilizer industry and financial institutions, a third career at which he worked right up until the time of his death.
Douglas retired from the Air Force after 31 years. He formed and was the first commanding officer of the 119th Tennessee Air National Guard in Knoxville. His service spanned four wars: World War II, Korean, three tours of duty in Vietnam, and an assignment with the State Department during the Israeli Seven Day War. Douglas lived, worked, and served in many countries during his careers in the military and with TVA.
Douglas was a racing enthusiast at the highest level as a former owner and sponsor of both INDY 500 and ARCA race cars.
Survivors include his wife of 20 years, Ardinelle Dugan Douglas; sons, John R. Douglas III, Ronald Douglas, Michael Douglas, Stan Shepherd, and Jerry Shepherd; daughters, Becky McKinney and Jill Spurling; grandchildren, Lindsey and Ashley Cundiff, Mark Douglas, Ron Douglas, James, Thomas, and Megan Cherry, Sharon Moore, and Terry Arcasia; and six great-grandchildren.
Visitation will be noon-1:30 p.m. Saturday, Jan. 10, at Spry-Williams Funeral Home, Florence, Alabama. The funeral service will follow at 2 p.m. at Tri-Cities Memorial Gardens Mausoleum chapel, Florence, with full military honors.
Charles Whittington and David Ellis will officiate.
Memorials may be made to Heifer International, P.O. Box 6021, Albert Lea, Minn. 56007-6621.
Spry-Williams Funeral Home is directing. Their number is 256-764-6401.
Russia cuts off natural gas supplies
The Russian gas monopoly, Gazprom, stopped natural gas shipments to and through Ukraine Jan. 6. The shutdown came because of a price dispute with Ukraine. Gazprom, the Russian gas monopoly, wants to boost the price from $179.50 per thousand cubic meters to $450.
The Russians also accuse Ukraine of siphoning off gas destined for Europe. In addition, political analysts have been quoted in the international media saying that Russia is trying to pressure Ukraine to back away from its desire to enter the North Atlantic Treaty Organization.
The immediate impact of the Russian action is that Neochim and Agropolychim in Bulgaria were forced to shut down when the gas supplies were turned off.
More plants in Europe and Ukraine are expected to follow suit.
Late in the week, the Russian press was reporting that the Odessa portside fertilizer plant, OPZ, had suspended production due to gas cuts. While the plant could still get some gas, officials reportedly said it was not enough to keep the plant in operation.
The gas war hit the Polish fertilizers industry, and its first victim was the giant factory of fertilizers Pulawy in central Poland. On Jan. 7, the government cut gas deliveries by 12 percent in accord with a new law permitting the government to change gas deliveries to all firms.
While the government downplayed concerns about the Russian gas, citing six underground reservoirs and the Yamal Europe gas pipeline, gas does flow from Ukraine into southern Poland. Ukrainian Naftogaz has blocked gas deliveries to south European countries, including Poland. “We see an important crisis which may ruin Polish fertilizers and chemical industries,” said Andrzej Szczesniak, a Polish gas expert. Poland buys gas mainly from Russia and has agreements until the year 2022, but it is expected to resume talks with Gazprom on new deliveries to be held still in January.
At present all major fertilizers plants – Pulawy, Tarnow, Kedzierzyn, Anwil, and some smaller plants – are reportedly working normally, but the gas shortage could force them to make cuts in production.
Police fertilizers in northern Poland has reduced production by 15-20 percent, but one of the directors, Andrzej Siwiec, thinks that the factory will resume “normal production” in the forthcoming spring months. “Our farmers are doing now quite well and will be in new fertilizers to be produced by (the) Police plant,” he said, adding that the company wants to widen its products and is investing around $60 million to do so.
Gas strike has major impact on Indian urea production
Urea production in India has taken a major hit, with 17 out of a total 28 urea plants, mainly on the HBJ pipeline, shutting down in the wake of the strike by key sector PSUs ONGC and GAIL, according to The Economic Times. Sources say the development has thrown the fertilizer sector into a tailspin, and the crucial Rabi output in the short term, and food security in the longer term, into jeopardy.
The Times said at least 13 of the units are on the HBJ gas pipeline, while the rest are standalone units. Concerns are if the strike continues beyond a few days, other units running on fuel oil and naphtha could also be affected. The fertilizer companies identified as closed down completely are Kribhco (Hazira unit), NFL (Vijaipur unit), CFCL (Gadepan), Iffco (Aonla, Phulpur), Indo-Gulf (Jagdishpur), KSFL (Shahjahanpur), TCL (Babrala), GSFC (Vadodara), and RCF (Thal).
Among the units that have closed down but are not on the HBJ pipeline are those of GSFC, RCF, IFFCO (Kallol), and Nagarjuna Fertilizers.
“This is happening at a time when demand for urea is peaking and is bound to have severe impact on agricultural production in the Rabi season,” according to a quote in the Times made by a senior Fertilizer Association of India (FAI) official. “It will add further to the farmers’ woes. We can ill afford a strike of this nature at this crucial juncture, and the sooner the authorities take appropriate measures to remedy the situation, the better for us.”
New rule would lessen groundwater cleanup for Idaho phosphate miners
A new rule awaiting approval by the 2009 Idaho Legislature would allow Agrium Inc., the J.R. Simplot Co., and Monsanto to mine phosphate without being forced to restore groundwater beneath their operations to its natural condition. The rule is backed by the phosphate processing industry but opposed by environmental groups such as the Greater Yellowstone Coalition and Idaho Conservation League, who say it gives mining companies near the Idaho-Wyoming border license to pollute indefinitely.
It stops short of a 2007 draft pro-mining proposal developed by the Idaho Department of Environmental Quality (IDEQ) that was never formalized. The proposal would have required companies to clean up groundwater below their mines within eight years of ceasing activities.
According to the new rule, companies could pollute groundwater below their extraction, tailing, and reclamation activities with high concentrations of naturally occurring elements such as selenium. They would be required to monitor groundwater at “points of compliance” as close as possible to the mining area to ensure the pollution didn’t migrate off site.
Jack Lyman, an Idaho Mining Association lobbyist, said the new rule would protect groundwater outside mining areas without burdening companies planning to expand existing mines or build new ones with unrealistic clean-up requirements.
Efforts to revise Idaho’s 16-year-old Groundwater Quality Plan began in 2007 after IDEQ, the mining industry, and environmentalists agreed the exemption allowing mines to pollute groundwater in some instances was vague. Environmentalists said the ambiguity made it easier for companies to pollute. Mining companies feared uncertainty over cleanup requirements could stifle new projects.
After more than a year of negotiations, the proposed rule was approved by the IDEQ board earlier in 2008. It will be taken up by the 2009 Legislature when the session starts Monday, Jan. 12. Such rules are rarely rejected, especially after securing board support.
Justin Hayes of the Idaho Conservation League said IDEQ caved to industry pressure. Environmental groups fear mining pollution in Eastern Idaho, especially after at least four horses and hundreds of sheep died in the late 1990s from drinking selenium-tainted water from defunct phosphate mines and their waste piles near Soda Springs. Hayes said groundwater does not stay stationary by its very nature, noting an aquifer is recharged by rain and snow water, then moves elsewhere.
Lyman said environmentalists exaggerate the danger of migrating mining pollution. He compared open-pit phosphate mines to a septic tank at his home. He said he’s never worried that what goes down his sink drain will show up a quarter mile away on his neighbor’s property, adding that because groundwater below a mine is polluted does not mean it will flow into Soda Springs.
Intrepid mine expansion will be delayed
Denver-Intrepid Potash Inc. said Jan. 7 that the U.S. Bureau of Land Management (BLM) has determined that an Environmental Impact Statement (EIS) will be required to evaluate the environmental impacts of Intrepid’s proposed HB Solar Solution Mine project in Carlsbad, N.M. As a consequence, final permitting and approval of the HB Solar Solution Mine will be delayed, and related capital expenditures deferred, for an as-yet-undetermined period. Intrepid said the delay will not have any impact on 2009 potash production volumes. The mine has been in the planning stages for years. Finally, last September, BLM hosted two public meetings in Carlsbad concerning the project. At these meetings, Intrepid presented the technical aspects of the project and answered citizen questions. The BLM then provided a 30-day public comment period, but received no comments. An oil and gas company thereafter submitted objections to the project based on alleged environmental impacts. “We are clearly disappointed with the BLM’s decision to allow an oil and gas company to delay such an environmentally friendly project in our nation’s potash reserve,” said Bob Jornayvaz, Intrepid CEO. “The project has been extensively publicized and supported by the community, and remains so, because it takes advantage of an unused, non-potable water source to recover potash from the existing Eddy potash mine and produce it in solar evaporation ponds rather than having to burn natural gas or coal. Potash solution mining is a widely used and accepted technology. The oil and gas company’s actions are further disappointing because the solar solution mining project, which is funded for immediate construction, creates numerous long-term jobs in the face of the nation’s current economic crisis and actually opens more areas for oil and gas drilling.” Jornayvaz noted that it is in litigation with the oil and gas company over their planned drilling in the nation’s Potash Enclave and the resulting destruction and waste of potash. He said Intrepid worked diligently with BLM to address the environmental impacts alleged by the oil and gas company and showed them to be without merit. He said while the determination, if followed by the BLM, will lengthen the timeframe for approval of the project, it does not change the criteria for the final BLM decision.
SQM subsidiary to merge with Anagra
Santiago-Sociedad Quimica y Minera de Chile S.A. (SQM) said Jan. 7 that its Chilean subsidiary, Soquimich Comercial S.A. (SQMC), and Anagra S.A., a Chilean fertilizer distribution company, signed a memorandum of understanding oriented to implement the merger of the two companies. SQMC imports, blends, and distributes specialty and commodity fertilizers in the Chilean market. SQM said the merger would result in the creation of a new fertilizer distribution company in Chile that would benefit from cost synergies and efficiency gains, enabling the company to better serve customers in this market. The merger must be approved by the Chilean Antitrust Commission in order for it to go into effect. SQM will continue to be the majority shareholder of the new company. SQMC reported profits of approximately US$16.5 million as of Sept. 31, 2008, representing approximately 4 percent of SQM’s consolidated profits. SQM, an integrated producer and distributor of specialty plant nutrients, iodine, and lithium, has sales in over 100 countries.
CF Rosemount plant eyed for future growth
Rosemount, Minn.-CF Industries Holdings Inc. and Rosemount city officials have reached agreement on how any future expansion of the company’s fertilizer distribution center would fit into city’s long-range planning process, according to word from both sides. CF spokesman Charles Nekvasil told Green Markets that CF and the city have had numerous meetings and conversations on what the city is calling its 2030 plan. “We agreed that submitting a planned unit development would ‘memorialize’ our respective interests and objectives and ensure that there is a clear and abiding record of the opportunities and constraints associated with future use of the CF Industries site,” Nekvasil reported. He said the PUD submitted last month provides conceptual plans for potential development, although at this point the company does not have any specific plans for expanding its properties. Called the Pine Bend UAN Solution Terminal, the Rosemount center is one of the important elements in CF’s large distribution network. Situated in east central Minnesota near Minneapolis on the Mississippi River and close to several major highways, including Interstates 94, 35, 55, and 52, it can effectively serve key local agricultural markets for crops such as corn and wheat.
Two workers sent to hospital after Agrium NH3 leak
North Bend, Ohio-Two Agrium Inc. employees were sent to a local hospital after a minor ammonia leak at a company nitrogen production facility Monday, Jan. 5, at around 10:30 a.m. One suffered a burn to his thighs; both were released the same day and returned to work the next day, according to an Agrium spokesman. The workers were preparing a line for maintenance when a small amount of ammonia – about two-three gallons – was released, which was estimated at about 20.3 pounds. The plant was down at the time of the incident. Agrium said there was no environmental release above the reportable quantity, and that it was contained at the site. Agrium said it will conduct a full investigation of the situation and instituted a work stoppage at the facility until it could assess the situation and feel comfortable releasing people to go back to work. North Bend produces industrial chemicals and liquid nutrients, including nitric acid, ammonium nitrate solution, aqua ammonia solution, and UAN.