Terra Industries Inc. and Yara International ASA continued to announce curtailments last week and industry giant PotashCorp cut earnings guidance, all due to soft demand.
Terra said Dec. 18 that it has idled its Woodward, Okla., manufacturing facility to manage inventories in light of lower industrial ammonia demand resulting from the economic slowdown. The Woodward facility has the capacity to produce 440,000 st/y of ammonia annually, about 305,000 st/y of which is sold as a finished product. The remainder of the Woodward facility’s ammonia – 135,000 st/y – is upgraded into urea ammonium nitrate (UAN) solutions (currently 300,000 st/y) and urea liquor (25,000 st/y).
On May 8, 2008, Terra announced its intention to build a 525,000 st/y UAN plant at the Woodward facility, which will increase its UAN capacity to 825,000 st/y and decrease its available merchant ammonia capacity to 100,000 st/y. Terra management expects the project to be completed by the end of 2010.
“The current market environment reinforces our belief that the planned upgrading expansion project will add value to the Woodward facility,” said Terra President and CEO Michael Bennett. “The new UAN capacity will use ammonia as a feedstock, thereby substantially reducing the amount of merchant ammonia available from this site.”
Terra has also idled the Woodward facility’s methanol loop, which operates in conjunction with the ammonia process and has an annual capacity of 40 million gallons. The Woodward facility’s staff will continue to work full-time to keep the site in a condition to resume production quickly when market conditions warrant a restart.
Also, on Dec. 18, Terra and joint venture partner Yara International ASA announced that their GrowHow UK Ltd. is temporarily idling ammonium nitrate fertilizer production at the Ince facility to manage inventories. Effective Jan. 2, 2009, GrowHow will idle ammonia production at Ince in anticipation of a mid-January maintenance turnaround. The site has an annual capacity of 365,000 mt of ammonia and 500,000 mt of ammonium nitrate. The ammonia and ammonium nitrate plants will start up when market conditions improve.
Terra said GrowHow has adequate inventory to fulfill all current orders.
As previously reported, effective Dec. 17, 2008, GrowHow temporarily idled ammonium nitrate fertilizer production at the Billingham UK facility to manage inventories (GM Dec. 15, p. 1).
Sources last week expected that more companies will report curtailments over the Holidays or come January. The recent curtailments (see p. 14) have received positive reviews from analysts, prompting stock increases in some cases.
Citing the current softness in demand due to widespread uncertainty in the global economy, on Dec. 18 PotashCorp announced the downward revision of full-year 2008 earnings guidance to approximately $10.75 per share, which is 10 percent below the midpoint of its last indicated guidance range. Fourth-quarter earnings are expected to be the third-highest in the company’s history, behind only the second and third quarter 2008. Full-year 2008 earnings will be the company’s fifth consecutive record year, and should be more than triple the $3.40 per share earned in 2007. The company said the revision was precipitated by weaker fourth-quarter sales volumes in all three nutrients, lower potash volumes to higher netback spot markets, and lower prices and margins in nitrogen and phosphate segments. These impacts have been partially offset by a 1 percent reduction in the consolidated reported corporate income tax rate.
PotashCorp anticipates total potash sales volumes for 2008 will be below 9 million mt, with potash gross margin more than triple that of 2007. PotashCorp earlier announced a 2 million mt (GM Dec. 15, p. 1) curtailment of production beginning in January. It expects 2009 potash volumes could be similar to slightly above 2008 levels, with a strong final three quarters next year. Annualizing expected fourth-quarter 2008 per-mt potash prices alone could push 2009 realizations to almost $200 per mt higher than those for full-year 2008, without considering price increases already achieved by Canpotex for first-half 2009 shipments to Korea and Japan or upcoming contract settlements with China and India for 2009.
PotashCorp noted that potash prices remain strong due to reduced global production while some customers defer purchases and to customer recognition that higher prices are necessary to justify investment in greenfield potash capacity, which has a multi-billion-dollar cost and takes at least five to seven years to develop. Given difficult global credit conditions and increased geopolitical risk in certain regions where prospective potash capacity might have been added over the next decade, PotashCorp believes that the 8 million mt of brownfield capacity it is adding over the next five years is even more valuable today than it was when the projects were announced.
With high levels of nitrogen and phosphate in the supply chain when the financial crisis hit, and with raw material input costs declining dramatically, selling prices for these products have fallen precipitously in recent months, said the company. As a result, it adjusted fourth-quarter volumes and margins downward. It now expects full-year 2008 nitrogen gross margin to exceed 2007 levels by 35 percent and 2008 phosphate segment gross margin to be approximately 2.5 times higher than 2007 levels.
While the company expects a slow start to 2009 for all three nutrients, it believes global production curtailments – the logical economic response to supply/demand imbalances when buyers step away from the market – will significantly tighten these markets when demand returns, which it expects during the second-quarter of 2009.
“Like every other industry, agriculture has felt the impact of the global financial downturn,” said PotashCorp President and Chief Executive Officer Bill Doyle. “Unlike other industries, however, food production and fertilizer applications cannot be delayed indefinitely. The global food crisis captured the world’s focus early in 2008, but attention and capital is currently being diverted to economic issues. That does not mean the food crisis has been resolved. In reality, it could become more severe, increasing the need for and value of fertilizers, especially potash. Given the essential nature of our products and the underlying fundamentals for our business, we anticipate strong demand will return as 2009 progresses, creating even greater opportunities for growth.”