P&K demand rebounding, says Mosaic; sees big turnaround in 2010

Mosaic Co. sees a rebound for phosphate and potash in 2010. “We are pleased to see nutrient markets beginning to rebound worldwide,” said Jim Prokopanko, Mosaic president and CEO. “The demand for phosphate is growing, and we are confident potash demand will emerge as well as farmers increase nutrient applications. As we come out of this downturn, we are confident in the long-term nutrient demand outlook.”

These comments were made as the company released results from the second quarter ending Nov. 30, 2009.

Second-quarter net income was $107.8 million ($.24 per diluted share) on sales of $1.71 billion, compared to the year-ago $959.8 million ($2.15 per share) and $3.0 billion, respectively. Operating earnings were $200.1 million versus the year-ago $682 million. However, year-ago results included a pretax gain on the sale of its interest in Saskferco of $673.4 million, or $1.03 per share.

As for phosphates, Mosaic said the decline in operating earnings was primarily due to the effects of lower selling prices, partially offset by higher sales volumes and lower raw material costs. “Phosphate sales volumes have returned to more normal levels,” said Prokopanko. “We look for improved gross margins in calendar 2010, though margin expansion may be constrained by higher raw material costs and the normal lag between our average realized prices and prevailing market prices.”

Mosaic said the phosphate market began to recover during the second quarter, especially in Asia and the Americas, as distributors purchased crop nutrients to meet farmer demand. Since the end of the second quarter, it said the average DAP price has continued to strengthen, with the early January Tampa price at $380/mt FOB – up from around $280/mt back in early November.

Mosaic expects its phosphate sales volumes to range from 2.2-2.6 million mt in the third quarter ending Feb. 28, 2010. The estimated Mosaic realized price for the quarter is $310-$350/mt FOB.

As for potash, second-quarter results were impacted by a sharp decline in sales volumes, a decrease in the average MOP selling price, and the effects of significantly lower production levels, partially offset by lower Canadian resource taxes and royalties.

Mosaic said potash is gaining traction, what with the settling of the China contract and recent increased potash application in the Americas driven by depleted soils and strong grain and oilseed prices.

Mosaic Vice President of Market Analysis and Strategic Planning Dr. Michael Rahm gave analysts several reasons for a strong demand recovery in 2010. First, he cited strong commodity prices for corn, soybeans, and other products such as palm oil and sugar. Analysts have noted that corn and soy prices may increase further once a better assessment of crop loss due to late harvest is made.

Second, Rahm said that after a wet October, ideal weather in November allowed most farmers to complete their harvest and salvage the fall application season. He said P&K shipments during November were the largest so far during the fertilizer year, and nearly equal to the three-year average. Rahm added that the combination of increased shipments and lower production resulted in a sharp drawdown in Mosaic phosphate inventories, to 420,000 mt at the end of December. He said this was the lowest month-end total in the five-year history of Mosaic.

Third, Rahm said there have been consistent reports of a recovery in P&K application rates throughout most of North America.

Fourth, he said the biggest surprise was that China came into the market in November and bought 600,000 mt of DAP.

Finally, he said buyers around the world are positioning phosphate for next spring. “We shipped 15 unit trains from Central Florida to customers throughout North America in December, and as of today we are scheduled to ship a total of 28 unit trains in January and February.”

Rahm said suppliers of dry fertilizers, particularly urea and potash, will need to supply near-record tonnage during the first half of 2010 in order to meet even a moderate rebound in demand. He said the phosphate market is expected to remain tight, especially during the first half of 2010. He said producer stocks are extremely low, and reports indicate that many producers have committed production for the next 60-90 days. “The Northern Hemisphere demand is still ahead of us, and a strong uptake in Southern Hemisphere buying is expected to follow by midyear.

“The potash market is projected to come into balance during the first half of 2010,” Rahm continued. “We expect that the recent decline in potash prices will unleash large pent-up demand from all corners of the globe. In particular, we forecast that global potash shipments will increase to 47-50 million mt in 2010, compared to about 32 million mt in 2009.” As a result, he expects North American inventories to drop to average or even below-average levels by midyear.

Mosaic said it expects to have $1-$1.2 billion in capital spending for fiscal 2010. It continues to execute against its multi-year potash expansion plan and invest substantial funds to further improve operating performance of its existing plants and mines. Mosaic said a new greenfield potash project would require $600-a-ton potash in perpetuity to get a return on investment, while a brownfield would require $300-a-ton.

Mosaic told analysts that it has spent just over $35 million in the second quarter in response to an elevated brine inflow at its Esterhazy potash mine. The company expects this expense to remain flat over the next few quarters. This was up from the first quarter’s $28 million. CFO Larry Stranghoener said these higher levels of brine inflow occur from time to time. “It’s something that we have proved to be able to manage effectively….”

Mosaic six-month net earnings were $208.4 million ($.47 per share) on sales of $3.17 billion, versus the year-ago $2.14 billion ($4.81 per share) and $7.33 billion. Operating earnings were $334.3 million versus the year-ago $2.23 billion.