All Posts from September 23, 2013

Mosaic cuts guidance; CEO sees over-reaction to BPC “high drama;” Uralkali strategy doesn’t pass “sniff test”

The Mosaic Co. cuts its guidance Sept. 16, noting that the domestic and international crop nutrient markets have softened, in part as a result of the distributors’ cautiousness caused by the Belarusian Potash Co. (BPC) break-up.

"The long-term positive outlook for crop nutrient demand has not changed; high commodity prices are driving record farm returns and making our products more affordable than ever before. These strong fundamentals are expected to drive near-record global phosphate and potash shipments in calendar 2013," said Jim Prokopanko, president and CEO. "In the short term, however, dealers are cautious and are deferring purchases. As a result, we have lowered our price and volume guidance for both the Potash and Phosphates segments for the third calendar quarter of 2013."

In Potash, the revised quarterly guidance range of 1.45- 1.65 million mt reflects lower near-term demand. Previous guidance had been 1.8-2.1 million mt. The company’s realized price expectations are now in the range of $330-$340 per mt, net of transportation and other distribution costs. This had been $330-$360/mt. The Potash gross margin rate is now expected to be in the low-to-mid 30 percent range. This had been in the mid-to-high 30 percent range.

In Phosphates, Mosaic said distributors’ cautious sentiment with respect to potash is spilling over as buyers are in a wait-and-see mode. The company has lowered third-calendar-quarter 2013 volume guidance to 2.6-2.8 million mt, down from 2.9-3.3 million mt. Also, third-quarter realized prices are now expected to be in the range of $430-$440 per mt net of transportation and other distribution costs, down from $430-$465/mt. The Phosphates gross margin percentage rate is expected to be in the mid-teens. It had been expected to be flat with the prior quarter.

Additionally, the company now expects its effective tax rate for the seven-month transition period to be in the low-20 percent range; it had expected the mid-20 percent range. All other guidance is unchanged.

As for the BPC break-up, Prokopanko told attendees of the Credit Suisse Annual Chemical and Ag Science Conference Sept. 17 that fertilizer has become a “headline-rich industry these days.”

“The subsequent high drama still dominates industry news today and continues to provide intriguing theatre, but our assessment is that the market is over-reacting to these developments.”

That said, Prokopanko said there is no denying that fundamentals for all three major nutrients have weakened recently due to a combination of factors. He noted that prices for all major crop nutrients had declined significantly during the past two years, and long before the July 30 OAO Uralkali announcement about its exit from BPC.

On the demand side, Prokopanko says Indian subsidy reductions have resulted in sharp increases in retail prices and significant decreases in phosphate and potash use. Also, add to this the devaluation of the Indian rupee, which has put additional pressure on dollar-denominated delivered prices for fertilizer. He sees little chance for subsidy changes in India until after national elections in 2014.

Prokopanko also cited agricultural commodity prices, that while still elevated, have retreated from record highs last year due to the prospect of a larger global harvest this year.

“On the supply side, several brownfield and greenfield projects are beginning to deliver new supplies to the market,” he added. “And as we have noted before, supply grows in lumpy increments. A couple of years of demand growth may be needed to fully absorb the new capacity. Finally, lower cost from some raw materials such as natural gas and sulfur are helping to reduce the finished product prices.”

Prokopanko said that the uncertainty caused by the BPC break-up has frozen the global potash market and spilled o

North American nitrogen imports still necessary after current wave of expansions, says CF’s Wilson

While over 30 some nitrogen expansion projects have been floated for North America, according to the Green Markets Global Nitrogen Supply & Demand Model, CF Industries Holdings Inc. Chairman and CEO Stephen Wilson said last week that not enough will be built to wipe away imports.

“It’s our view that come the end of 2017 when the current wave of expansions is largely complete, that the U.S. and North America will still be substantial importers of nitrogen,” he said, addressing the Credit Suisse Chemical and Ag Science Conference Sept. 17.

Wilson said due to the high level of imports it almost doesn’t matter what the U.S. corn acreage is each year, as U.S. producers can produce at 100 percent capacity.

CF was one of the early players to commit to a nitrogen expansion, and it did last November – a combined $3.8 billion for existing plants at Port Neal, Iowa, and Donaldsonville, La. “I think there is a preemption value in projects like this, and we’ve achieved it. That doesn’t mean that nobody else is going to build plants. There are other facilities – one other complex that’s already under construction as ours is.” However, he stressed CF’s timing and locations.

Recent months have seen both pullbacks in projects – Yara International ASA and Agrium Inc. – and new ones proposed – EuroChem in Louisiana and Invista in Texas (GM Sept. 16, p. 1). There is still a big question mark as to whether many of the others will get financing.

Wilson noted the evolution of the shale gas phenomenon and how it has put North American companies among the low cost producers. As a result, he said like other commodities, nitrogen floor prices are set by the marginal producers’ production costs.

He noted that the marginal producer in the world right now is China, and once its seasonal export window is over in October, that prices should rise to the level of the other marginal producers in Eastern Europe and the former Soviet Union. CF estimates China’s landed cost of urea at $290/st U.S. Gulf Coast, and Eastern Europe/FSU’s at around $350/st. By coincidence, he said the current NOLA urea price is near China’s landed cost. He said this is about the third time that this floor model has been tested in the past two years. Based on CF’s floor margin analysis, North American producer cost would only be about $140/st, allowing margins of $150/st even at a price of $290/st.

Speaking about gas, Wilson said CF is very comfortable operating essentially in the spot market, which is one of the reasons that it’s putting an additional $3.8 billion into the nitrogen business in North America – because it likes being exposed to North American natural gas. He believes gas prices will remain within the $3.00-$5.00/mmBtu range for a sustainable basis.