PotashCorp says firm potash prices, tax adjustment help offset slow sales

PotashCorp reported net income of $308.3 million ($1.02 per diluted share) on sales of $922.5 million for the first quarter ending March 31, 2009, compared to the year-ago $566.0 million ($1.74 per share) and $1.9 billion. The year-ago first quarter was a company record, and PotashCorp noted that the current quarter was the second-highest first quarter. The company said this was achieved largely on the strength of potash pricing, as sales volumes declined for all three nutrients and prices for nitrogen and solid phosphate fertilizer weakened substantially. Tax adjustments added $166.8 million to first-quarter earnings.

“The first quarter demonstrated the benefits of our potash strategy of matching supply to market demand, as well as our ability to remain profitable even during periods of demand deferral,” said PotashCorp President and CEO Bill Doyle. “While buyers have delayed purchases since the fourth quarter of 2008, the need for potash and other fertilizers cannot be denied. The fundamentals of our business remain extremely favorable, with historically low global grain stocks, supportive crop prices, depleting customer potash inventories and expectations of tight potash supply/demand dynamics for at least the next five years.”

Doyle sees a strong second half and an exceptional 2010.

First-quarter gross margins were $229.6 million, down from $856.0 million, with almost three quarters of the current total generated by potash.

While the company said that North American potash sales ground to a “virtual halt” in the first quarter, the industry should not wait for lower potash prices, according to Doyle. “We believe these expectations are misguided, as the fundamentals of potash globally are very different from the other nutrients,” said PotashCorp. “Despite the recent lull in demand, we believe the potash industry has changed from one that for decades had excess capacity to one that is expected to continue facing intermediate and long-term supply challenges. Potash supply is fundamentally tight and a surge in demand will necessitate increased capacity, which takes significant time and money to build.”

Doyle said the Indians would like to have $200/mt potash instead of $625/mt potash. “Well, that is not going to happen. But even if they were lucky enough to get their wish you have to be careful what you wish for, because if you had $200/mt potash, all potash expansion projects around the world would cease immediately.” Doyle said once demand returned there would be a severe shortage and the industry would not be talking $1,000/mt potash, but $2,000/mt.

“A dangerous game is unfolding around the world,” warned Doyle. “Fertilizer applications are being reduced at unprecedented levels, with our estimates for North American potash applications falling as much as 30-35 percent, phosphate by 20-25 percent and nitrogen by 5-10 percent. To put this in context, U.S. applications this fertilizer year are expected to be similar in total volume to the 1983 PIK (payment-in-kind) year, while farmers now need to generate 90 percent more production than in 1983 and will plant 25 million additional acres of corn, the most fertilizer-intensive crop. Clearly nutrient replenishment will suffer.

“There is no magical bail out for lost fertility in the soil bank,” he added. He said the company is getting estimates that due to reduced applications yield estimates are down 7-10 percent in Brazil and as much as 20 percent in Argentina.

Doyle said that in the global market some 12 million mt of potash has been idled, along with 10 million mt of phosphate and 11 million of nitrogen.

PotashCorp first-quarter potash gross margins fell to $166.6 million on sales of $269.2 million, versus the year-ago $514.6 million and $796.2 million, respectively. Sales volumes to North American customers declined 86 percent, while offshore volumes fell 78 percent. Only 500,000 mt were sold in the quarter, versus the year-ago 2.5 million mt. Potash shipments during the first nine months of the fertilizer year (July-March) were 44 percent less than the previous five year average.

PotashCorp noted that it took 39 mine shutdown weeks during the first quarter, reducing its total potash production to 1 million mt, or 59 percent quarter-over-quarter.

The company expects a more normal second half as the industry rushes to refill the pipeline. It said Brazil is beginning to rebuild inventories, and the company expects ramped-up shipments to Southeast Asia. In addition, it expects China and India to renew contracts by the end of the second quarter. Doyle expects negotiations to begin in earnest at the IFA Conference at the end of May. He is expecting China to import 5 million mt in 2009, and thinks they have about 3 million mt in inventory. He expects the country to rebound next year, taking as much as 12 million mt.

Phosphate gross margins were only $8.8 million on sales of $329.9 million, versus the year-ago $156.0 and $513.2 million, respectively. PotashCorp noted that with slower phosphate demand, the White Springs facility will remain curtailed though the first half.

“It’s like a monkey on a greased pole – the slide down is fast and hard to stop while every inch on the way up is a fight, even with favorable medium-term supply demand fundamentals for phosphate.”

Doyle said the price drop did not increase the demand for phosphate and nitrogen. “It only destroyed value for those companies that are producing those products. So we think, once again it’s been proven that dropping the price does not increase demand for fertilizer products.” Doyle said fertilizer is not like shoes. “If you have a half-price sale people might buy two pairs of shoes, but if you have a half-price sale for phosphate or nitrogen, they’re only going to buy that same ton of nitrogen or phosphate. It just doesn’t work any different and you’d think people would start to understand that after years and years of being in this business.”

Nitrogen gross margins were $54.2 million on sales of $323.4 million, versus the year-ago $185.4 million and $581.2 million, respectively. PotashCorp expects global nitrogen demand will weaken after the North American spring season and industrial demand will remain weak. It says one bright spot for North American production is lower natural gas prices, which should limit imports from offshore competitors.

PotashCorp is expecting second-quarter net income per share to be $1.00-$1.50, with full year ranging from $7.00-$8.00. It estimates full-year potash gross margin to be $2.5-$3 billion, and total shipments to be 6 million mt.