1 Highest Potash Leverage & diversified Portfolio: PotashCorp (Ticker: POT) is the largest fertilizer producer in the world by capacity giving investors exposure to all 3 fertilizer nutrients driven by top-tier assets, greatest barriers to entry and pricing power. More importantly, POT is the largest low-cost producer of Potash with 50% of the worlds deposits located in its backyard which supplies 20% of global demand while sustaining an industry leading Potash margin of 64%. POT also owns substantial investments in major global fertilizer companies (Sociedad Quimica y Minera de Chile, Israel Chemicals Ltd, Arab Potash Company Ltd, and Sinofert) which help participate in strategic global demand for fertilizer ($7.9B unrealized gain and $0.4B in dividends & equity income in 2011). High Walled Barriers to Entry with Potash Expansion Nearly Complete; Well Ahead of Peers POT controls 50% of potential industry Potash expansion at lowest capital cost as its $8.1B Brownfield expansion will be 95% spent by the end of 2012 which positions Pot well for future demand growth even if prices weaken. As a result, Pot has an advantage over its peers that have yet to surpass steep barriers to entry as capital costs may increase (+$8.1B) and long lead times for development (over 7 years) may coincide with market corrections that may make large capital spending unattractive. Solid Strategy allows POT to also be 3 rd largest producer of Nitrogen & Phosphate: Pot has developed a strategy for each of its segments: Potash - disciplined production coupled with growth; Phosphate – improve earnings stability; Nitrogen - maintain low cost position to maximize margins. As a result, POT is also the 3 rd largest Nitrogen producer & fully integrated Phosphate producer with 93% of high quality rock produced in its Aurora and White Springs mines coupled with a diversified product mix. Low Costs and Capex should help weather a downturn: Pot’s operating costs are very low, especially for its potash mines with 65% variable costs and a sustaining Capex of $0.5B which provides POT with a healthy cushion as demonstrated in 2009 when POT suffered from depressed fertilizer prices and a significant reduction of its operating capacity at its potash mines. Despite these headwinds, POT managed to generate $925MM in cash flow from its operations vs. losses sustained by POTs’ peers. Going forward, this strength coupled with a significantly lower capex post-2012, (accelerating FCF +2x) positions Pot as most preferable vs. other industry peers in the event of a global downturn. Theme of oversupply created by rapid potash expansions by 2015 One of the concerns of the market regarding potash is the line up of huge capacity expansion in next 5-7 years. This will pressurise utilisation rates and then pricing as the capacity build up in next 5-7 years will lead to a fall in utilisation rates to 70% on average from historical average of 80% (2005-2011 ex 2009). However given the low cost of these mines, the utilization rate is expected to not have a significant effect on the operating margins. It also important to note that this new capacity will be driven by an oligopoly market with few existing major players which would not materially impact the "supply flexibility" for POT. Thus, new players will act as marginal suppliers in the potash trade market and thus will be price takers rather than price makers. Valuation Currently cheap: POT is an attractive value play with a current P/E of 13.16 trading at the lower end of its 7 Yr. avg. and between 3x to 27x over the past 5 years with an average of 16x. As a result, by applying a discounted 15x PE multiple to our 2013EPS estimate of $3.50, we derive a target price of $52.5 warranted by Pots’ industry leading potash margins, low-cost potash business, oligopoly production capacity growth, and accelerated FCF (expected to double from 2012 to 2014) opening the window for a share Buyback program. Furthermore, the low valuation is not justified given strong growth outlook for the industry. Potash Corp. NYSE: POT Market Cap $37.09B Shares Out. 859.27M Last Closing Price $41.94 52 Week High $51.96 52 Week Low $36.73 Current P/E 13.01x EV/EBITDA 8.00x Source: Bloomberg Potash Corp. Saskatchewan (POT) Buy Report Current Price: CAD $41.94 Estevan Carvajal Fund Manager, Technology and Media [email protected]September 12, 2012 KENNETH WOODS PORTFOLIO MANAGEMENT PROGRAM Phosphate Producers by Nutrient Capacity (nm metric tons), 2011 Potash Gross Margin by Company, 2008-12f
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KENNETH WOODS - Concordia University PotashCorp Assets Potash Corp. Financial Summary POT produces 3 primary crop nutrients: potash, phosphate, and nitrogen. The company’s focus
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Highest Potash Leverage & diversified Portfolio:
PotashCorp (Ticker: POT) is the largest fertilizer producer in the world by capacity giving investors exposure to all 3 fertilizer nutrients driven by top-tier assets, greatest barriers to entry and pricing power. More importantly, POT is the largest low-cost producer of Potash with 50% of the worlds deposits located in its backyard which supplies 20% of global demand while sustaining an industry leading Potash margin of 64%. POT also owns substantial investments in major global fertilizer companies (Sociedad Quimica y Minera de Chile, Israel Chemicals Ltd, Arab Potash Company Ltd, and Sinofert) which help participate in strategic global demand for fertilizer ($7.9B unrealized gain and $0.4B in dividends & equity income in 2011). High Walled Barriers to Entry with Potash Expansion Nearly Complete; Well Ahead of Peers
POT controls 50% of potential industry Potash expansion at lowest capital cost as its $8.1B Brownfield expansion will be 95% spent by the end of 2012 which positions Pot well for future demand growth even if prices weaken. As a result, Pot has an advantage over its peers that have yet to surpass steep barriers to entry as capital costs may increase (+$8.1B) and long lead times for development (over 7 years) may coincide with market corrections that may make large capital spending unattractive. Solid Strategy allows POT to also be 3
rd largest producer of Nitrogen &
Phosphate:
Pot has developed a strategy for each of its segments: Potash - disciplined production coupled with growth; Phosphate – improve earnings stability; Nitrogen - maintain low cost position to maximize margins. As a result, POT is also the 3
rd
largest Nitrogen producer & fully integrated Phosphate producer with 93% of high quality rock produced in its Aurora and White Springs mines coupled with a diversified product mix.
Low Costs and Capex should help weather a downturn:
Pot’s operating costs are very low, especially for its potash mines with 65% variable costs and a sustaining Capex of $0.5B which provides POT with a healthy cushion as demonstrated in 2009 when POT suffered from depressed fertilizer prices and a significant reduction of its operating capacity at its potash mines. Despite these headwinds, POT managed to generate $925MM in cash flow from its operations vs. losses sustained by POTs’ peers. Going forward, this strength coupled with a significantly lower capex post-2012, (accelerating FCF +2x) positions Pot as most preferable vs. other industry peers in the event of a global downturn.
Theme of oversupply created by rapid potash expansions by 2015
One of the concerns of the market regarding potash is the line up of huge capacity expansion in next 5-7 years. This will pressurise utilisation rates and then pricing as the capacity build up in next 5-7 years will lead to a fall in utilisation rates to 70% on average from historical average of 80% (2005-2011 ex 2009). However given the low cost of these mines, the utilization rate is expected to not have a significant effect on the operating margins. It also important to note that this new capacity will be driven by an oligopoly market with few existing major players which would not materially impact the "supply flexibility" for POT. Thus, new players will act as marginal suppliers in the potash trade market and thus will be price takers rather than price makers.
Valuation Currently cheap:
POT is an attractive value play with a current P/E of 13.16 trading at the lower end of its 7 Yr. avg. and between 3x to 27x over the past 5 years with an average of 16x. As a result, by applying a discounted 15x PE multiple to our 2013EPS estimate of $3.50, we derive a target price of $52.5 warranted by Pots’ industry leading potash
margins, low-cost potash business, oligopoly production capacity growth, and accelerated FCF (expected to double from 2012 to 2014) opening the window for a share Buyback program. Furthermore, the low valuation is not justified given strong growth outlook for the industry.
Potash Corp. NYSE: POT
Market Cap $37.09B
Shares Out. 859.27M
Last Closing Price $41.94
52 Week High $51.96
52 Week Low $36.73
Current P/E 13.01x
EV/EBITDA 8.00x
Source: Bloomberg
Potash Corp. Saskatchewan (POT) Buy Report Current Price: CAD $41.94
Estevan Carvajal Fund Manager, Technology and Media
Industry Thesis Approach .....................................................................................................................................3
Industry Macro Graphs Overview ........................................................................................................................4
Company Description ............................................................................................................................................6
Catalysts for the Stock ......................................................................................................................................... 24
Further Positive Factors for the Stock ............................................................................................................... 29
Investment Case ................................................................................................................................................... 34
*Please See Appendix to Grasp Fertilizer Overview Prior to Reading Report
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Industry Thesis Approach Looking into structural growth — Fertilizer shares
are usually traded on short-term demand and long-term supply estimates giving the opportunity to buy structural growth at an inexpensive valuation as 1) demand should rise progressively from 2013; 2) supply looks likely to remain rational in the mid term; 3) Imports in key markets have been deferred; and 4) valuations are very cheap. Growing Appetite for Demand - Acreage expansion
opportunities are limited so rising food demand has to be met by yield improvement. Increasing population and rising protein demand coupled with a grain stocks to use ratio well below needed minimum levels stress the need for optimal application of fertilizers, providing the bull case for K and P. Supportive Fundamentals— Elevated grain prices
have led to record profitability levels for farmers which provide strong incentive to increase productivity facilitating optimal use of all fertilizers. The current drought has also decimated corn crops to record levels which means a robust planting season will make 2013 very strong in order for crop planters to satisfy unmet demand which will support corn prices at +$6.50 until at least midterm. Supply is expected to remain rational — Attractive
return in fertilizers business has led company’s to think about capacity expansion. However, Greenfield expansion is extremely expensive and although majority of projects will go ahead, the market is controlled by few players who will balance the demand/supply equation in the medium term. Imports are deferred not vanished: India and China
have limited resource bases for K and P, while India is structurally short on N as well. Both countries are already facing significant food inflation; as such they can ill-afford to delay fertilizer demand for long unless it is at the expense of local agro economics. Brazil is a key agriculture powerhouse, which is on a rising import trend, especially for K and P, driven by its agriculture boom which is very positive for the fertilizer trade.
Global NPK Fertilizer Consumption (million metric tonnes)
Indian Imports – heavy reliance on foreign production (000 t/y)
While the industry’s valuation multiples are off their recent lows…. They remain well below their peaks during times of expansion
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Industry Macro Graphs Overview (Sources: USDA, FAO, UN, Ferticon, CitiReasearch)
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Nutrient Overview
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Company Description
A Diversified Giant with a Fortified Moat
Canadian based (PotashCorp) is one of the world’s largest fertilizer manufacturing enterprises involved in the
production of all 3 fertilizers nutrients with nitrogen, phosphate, and potash producing assets in Canada, the
United States, and Trinidad. Out of the 12 largest producers, it is the world’s largest manufacturer of potash
fertilizers with 20% global capacity, with 5 large, low-cost mines in Saskatchewan and one in New Brunswick. POT
is also the world’s 3rd largest producer of both nitrogen and phosphate. The company sells its products in more
than 50 countries, with half of its fertilizer sales volumes (predominantly potash and phosphate) sold internationally.
Over the past two decades, PotashCorp has undertaken a number of acquisitions, boosting its size and scale. These
acquisitions have included purchases in Chile, Jordan, Israel and China in line with its projection that much
of the anticipated potash growth will occur in emerging offshore markets. With regard to US manufacturing
facilities, the company has plants in Florida, Georgia, Louisiana, North Carolina and Ohio. The company’s
headquarters are in Saskatoon, Saskatchewan, and it has about 5,486 employees.
Source: Company Filings
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Corporate Overview & Management
Potash Strategy: Match production to market demand
POT has a two part strategy in its potash business segment. The 1st is to match its potash production to market
demand in order to minimize downside risk and conserve the long-term value of its resources. Approx.70% of the
company’s potash operating costs are variable, which provides production flexibility during periods of lower
demand.
The 2nd strategy is to build on its position as the world’s largest potash producer by completing Brownfield
expansions and debottlenecking projects at its existing mines and investing in other global potash-related
companies.
Source: PotashCorp
Phosphate Strategy: Increase earnings stability
PotashCorp’s phosphate strategy is to produce a diversified mix of phosphate products in order to maximize
returns and increase earnings stability. The company has enhanced its position in the phosphate feed and industrial
businesses, which have historically been more stable as there are fewer global producers vs. the fertilizer segment.
Source: PotashCorp
Nitrogen Strategy: Low cost producer
PotashCorp’s nitrogen strategy is to maximize gross margins and earnings stability by being a low-cost
nitrogen producer to the US nitrogen market. This is supplemented with an emphasis on sales to industrial
customers who value long-term, secure supply.
Source: PotashCorp
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PotashCorp Assets Potash Corp. Financial Summary
POT produces 3 primary crop nutrients: potash,
phosphate, and nitrogen. The company’s focus is on its
potash assets located in Saskatchewan and New
Brunswick, as well as strategic offshore investments in
potash-producing companies in Chile, Israel, Jordan, and
China. POT is the world’s largest potash producer with
almost 20% of global capacity. In 2011, potash
accounted for approx. 64% of the company’s gross
margin, compared to 15% for phosphate and 21% for
nitrogen. As seen below, the time period of 2008-09
showed a very quick reversal for Potash Corp where
revenues fell by nearly 60% y/y, gross margin by nearly
80%, and EBITDA by nearly 70%. Yet in contrast to so
many other companies in the commodities/materials
sector during that time, POT remained profitable – the
company earned $1.08 per diluted share for 2009.
As a result, Potash has been the primary contributor to the company’s financial results with leading gross margins
over the other 3 nutrient as illustrated in the graphs below.
POT Gross Margin by Nutrient ($billions) POT Sales by Nutrient ($ billions)
Source: Company Filings, Barclays
Potash Segment Lion’s Share of World Potash Reserves in POT’S Backyard Potash is a strategic asset with highly
concentrated production. Commercial
operations are currently located in 12
countries with approximately 90% of the
global potash reserves located in Canada,
Russia, and Belarus. The Canadian
province of Saskatchewan has almost
half of world reserves and 35% of global
capacity.
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As a result, the major offshore consuming
markets in Asia and Latin America which
have little or no indigenous production
capability rely primarily on imports to meet
their needs. This is an important difference
between the potash business and the
other major crop nutrients. Trade typically
accounts for approximately 80% of
demand for potash, which ensures a
globally diversified marketplace. The large
producing regions of Canada and the former
Soviet Union have small domestic
requirements and therefore are significant
exporters.
Worlds Largest Producer in an Oligopoly Market
As a result of Potash reserves being highly concentrated among few nations, POT is the worlds largest producer with
capacity highly consolidated among six big market players: PotashCorp (18%), Uralkali (18%), Mosaic (13%),
Belaruskali (12%), ICL (9%) and K+S (8%), together holding around 78% of world capacity.
World Potash Producer Profile Few Players: 2012 Plant Capacity
In addition, exports are even more consolidated with BPC (owned by two of the main players in the FSU,
Belaruskali and Uralkali) and Canpotex (Canadian marketing firm owned by three main producers of Canada –
PotashCorp, Mosaic and Agrium) controlling around 70% world’s traded potash. On the other hand, consumers
(farmers) are highly fragmented, so pricing power lies with the suppliers.
As such, these major players are able to keep prices artificially high and demand plays a more important role than
supply conditions. These characteristics define 2008 price run despite abundant supply at that time. Supply is
responsive to demand and while capacity expansions are underway market supply will still be driven by major players.
Canpotex: International Offshore Potash Marketing Partnership
Potash from POT’s Saskatchewan mines that is shipped to customers outside of North
America (66%) is sold through Canpotex, the marketing organization jointly owned by POT,
MOS, and AGU. Potash Corp., as the largest Saskatchewan producer by capacity, supplies
the largest share of Canpotex sales (53.6% of the total in 2011).
In 2011, Canpotex’s annual potash sales were 8.2 million tonnes, sold mainly to the
company’s top five markets: China, India, Brazil, Indonesia, and Malaysia. In 2011, China
began purchasing potash under six-month pricing contracts with minimum annual volume
commitments, a change from its historical annual pricing contracts. In India, potash is typically
purchased through annual volume and price contracts. Latin American customers tend to
purchase potash on the spot market.
POT Sales Volume by Region
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Canpotex Sales (2005 to 2011E)
Canpotex oversees a specialized fleet of
5,400 railcars, terminal facilities in
Vancouver and Portland and a fleet of
four ocean vessels. In preparation for the
Saskatchewan potash capacity
expansions underway, Canpotex is
investing in 11 additional ocean vessels
between 2011 and 2014 and a potential
third terminal in Price Rupert, BC on
Canada’s West Coast, which is expected
to add 11 million tonnes to its current
annual export capacity of 14MM tonnes.
Enormous Potash Mines & Still Growing
POT operates 6 potash mines in Canada: four conventional underground mines and one solution mine (Patience
Lake) in Saskatchewan and one underground mine in New Brunswick. Total “nameplate” or peak capacity was 13.3
MM tonnes as of the end of 2011, with estimated actual operational capacity of 11.3MM tonnes representing
~20% of total global potash capacity.
Potash Mine Capacity Total potash Volumes Shipped (K tonnes), 2007-12f
Source: Company Reports
The company’s potash reserves at the mines are vast, totalling 1.69 billion tons of recoverable ore as of the end
of 2011 – enough for 75 years of remaining operational life at its shortest-lived mine, Lanigan. Cory and New
Brunswick are both estimated to have over 100 years of mine life remaining.
Well Positioned to Significantly Grow Sales Volumes with Majority of Capex Behind
New potash supply will be required in coming years to
keep pace with rising demand. In 2003, POT began a
CDN $8.2 billion Brownfield Potash expansion
program designed to raise annual operational capability at
existing mines to 17.1 million tonnes by 2015. By mid
2011, 2/3 of the capex was already spent and five parts
of a nine-project program were completed, which
significantly reduces capex risk for the company and
leaves PotashCorp well positioned compared to its
competitors that have significant expenditures ahead
and face the risk of cost increases and timeline. In
addition, capex will be winding down from 2012-2014 as
the project nears completion allowing FCF to double.
Source: Company Reports
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The $8.1B Brownfield Potash Expansion is made up of the following initiatives:
Allan Potash Expansion: The first
of two expansion projects at the
Allan facility was completed in 2007
and brought an additional 400k
tonnes of previously idled potash
operational capacity back online.
The second expansion project,
which will increase operational
capacity by another 1MM tonnes, is
set to conclude in late 2012 with a
ramp up to full production by 2014.
It is currently forecasted to cost
approximately $980MM.
Cory Potash Expansion: The Cory facility is also undergoing a two-phase expansion, with the second phase
anticipated to finish by the end of 2012. The second phase encompasses the construction of a new mill that will
allow for an incremental 677,000 tonnes of operational capacity and require an anticipated total cost of $1.6B.
Rocanville Potash Expansion: The Rocanville mine expansion is also in its second phase and is one of the
largest growth initiatives. The second project will cost approximately $2.8B and involves the construction of a new
mill, a personnel and materials shaft, and a 500k tonne storage warehouse. Upon completion in 2014 and a ramp
up in 2015, approximately 2.7MM additional tonnes of operational capacity are anticipated.
New Brunswick Expansion: POT is developing a new mine (complete with two new shafts) together with a new
mill with greater compaction capacity, expansion of the existing mill, a new brine pipeline and other new
structures (resembles a Greenfield project). Completion is targeted for 2013, reaching 1.8MM tonnes of operating
capacity (up from 0.8MM today) by 2015. Total cost is expected at ~$2.2B, recently revised up from $1.7B.
Repercussion of lowered Capex = Increased Dividends & Share Buy Back Opportunity
With capex lowering down, POT announced, on September 13, 2012, a $0.07/share increase in its quarterly dividend;
which will now be $0.21/share ($0.84 annual), an increase of 50%, from $0.14/share previously. At its current price of
US$41.94 per share this equates to a yield of approximately 2.0%. The increase will raise PotashCorp’s annual
dividend payments by $241 million to $722 million with an estimated payout ratio for 2013 to rise to 22.2%, from
14.8% previously.
POT has raised its dividend twice in the last two years with the most recent increase highlighting PotashCorp’s strong
cash flow generation and the board's comfort with its financial outlook.
Source: Company Reports
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Potash-Related Investments Provide Increased Financial Value
The value of Potash Corp extends beyond individual operations and growth opportunities providing significant
financial and strategic value that may be overlooked in the current stock price. POT holds significant equity
investments in some of its global competitors: 28% of Arab Potash Company (APC), 32% of SQM of Chile, and 14%
of Israeli Chemicals Ltd (ICL) that together, on a
proportional basis, represent 2.1MM tonnes of
capacity (Note POT reports income from these
investments under the equity method). Like
PotashCorp, it is expected that these
strategic investments in producers like APC,
ICL and SQM are preparing to participate in
future demand growth by expanding their
existing operations. In addition, Sinofert,
China’s largest potash distributor is expected to
profit from increasing demand. As earnings in
these companies grow, POT can benefit
through higher dividends (ICL, Sinofert) and
greater equity earnings (APC, SQM).
As of the most recent market close, the total market value of POT’ investments are $8.9B, or $10 per POT share.
All together, these investments brought in $133MM in equity income and dividends in 2Q12 (and $396MM in
FY2011).
PotashCorps Offshore Investments provide additional Potash Leverage
23%
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Steep Barriers to Entry - Requires Significant Investment & Time
Entry into the potash business carries substantial risk because of the significant cost to build new supply while the
development timeline can take up to 8 years. Developing the necessary infrastructure outside the plant gate
(including rail capabilities, utility system and port facilities) and the potential purchase of a deposit could push the total
cost of developing a conventional 2-million-tonne Greenfield mine in Saskatchewan above CDN $6 billion. As a
result, the very high capital cost to develop Greenfield potash mines and mills will prevent smaller
exploration companies from transitioning into producers which will inevitably help maintain the tight market
structure and the pricing power enjoyed by the largest producers.
Estimated Greenfield Potash Capital Costs Greenfield Development Timeline
Capex for Greenfield vs. Existing Brownfield Expansion
Similarly, PotashCorp highlights the high level of capex
requirement for new Greenfield projects is 2.5 times higher than
a POT Brownfield expansion. In addition, new mines available
to new players are further below ground, driving both capex and
opex costs significantly above current production costs of major
players.
Production Strategy: Swing Producer - Operate mines to meet demand
PotashCorp and its Canpotex partners are viewed globally as swing producers, whereas other producers
generally try to maintain full operational capacity. As a result, POT’s production strategy for its potash assets is to
match market demand in an effort to minimize downside price risk and conserve the long-term value of its
potash resources. As a result, capacity utilization rates have historically ranged between 50% and 80%. In 2009,
as a result of the global economic crisis, the company’s capacity utilization rate dipped as low as 26%, before
rebounding in 2010 to 60% utilization.
Potash Capacity vs. Est. Operating Rate Total Free Cash Flow, 2008-15f ($billions)
Source: Company Reports, Barclays
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Pots’ large percentage of total global capacity (~20%) is also compounded when considered in context of Canpotex,
which currently controls around 40% of the global seaborne traded potash market. With low production costs
(approximately $148/tonne), a relatively high variable cost ratio (60-65% by the company’s estimates), and
influence over the majority of the world’s traded supply, the company is able to slow or curtail production,
take a slight hit on per-tonne costs, sell fewer shipments, but still hold the line on pricing and maintain
profitability even in highly challenging times.
Major Capacity addition will come from major 6 players (Source: Fertecon, Citi)
An increase in capacity would not undermine
POT's flexibility to adjust supply
One of the concerns of the market regarding
potash is the line up of huge capacity expansion
in next 5-7 years. This will pressurise utilisation
rates and then pricing as the capacity build up in
next 5-7 years will lead to a fall in utilisation
rates to 70% on average from historical average
of 80% (2005-2011 ex 2009).
However, most of this new capacity will be
driven by existing major players and this
additional capacity would not materially impact the
"supply flexibility" of these players including POT.
As mentioned before 65% of additional capacity
is set to come from Major 6 players with POT
contributing the most, 18% from China (from
various small players) and only 11% from other
players. Of these other players, EuroChem
Kotelnikovo's project accounts for 45% of addition
followed by Dekhanabad potash fertilizer facility
expansion by Uzbekistan government. (Thus,
these new players will act as marginal suppliers
in the potash trade market and thus will be
price takers rather than price makers.
Top Tier Gross Margin
While POT has long enjoyed a gross margin toward the top of the industry tables, Potash’s stated strategy for
years has been that the company has been positioning itself for the long term, expanding its operating
capacity even though it has been running below its maximum capability. As a result, management believes that
demand growth trends for potash fertilizers will lead to the eventual need for additional supply – supply that POT will
already have in place, ready to bring to market.
Total Potash Volumes by Company, 2008-12f (mn tonnes) Realized Potash Gross Margins by Company, 2008-12f
Source: Company Reports, Barclays
Global Production Capacity (000 t/y) 2005-16e
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As a result, POT has the flexibility, and the margin “space” to absorb fluctuations in operating rates – where the
potash division has run at capacity utilization as low as 32% in 2009 and as high as 82% in 2011. Although there is
the question to whether this will continue to be as effective as it has been in the past if potash demand growth remains
moderate and the incremental production capacity that has been in process for nearly a decade becomes available
over the next several years, POT is expected to continue as it has historically – increasing production
moderately but maintaining a level of supply supportive of prices (via a lower operating rate) while absorbing
slightly higher fixed costs on an absolute basis.
India’s Role for Potash Top World Potash Users 000mT of Potash
India, the 2nd largest potash user in the
world presents itself as a challenge and an
opportunity for the fertilizer industry. The cut
in government subsidies alongside this
year’s slow monsoon rain has worked
against India’s growing population and
demand for food. The Indian government
tries to walk the line between ensuring low
cost food is produced (by controlling rice
prices, for example) while seeking to
increase food production by agronomic education programmes and subsidizing fertilizer costs to encourage its use.
However, as part of its budget deficit reduction targets, it has changed its fertilizer subsidy regime such that
the price to farmers has almost doubled for K and P this year. In addition, according to the FAO: “The use of
plant nutrients per hectare is relatively low and imbalanced, and this is one of the major reasons for low crop
yields in India.”
Corn: Correlation between Fertilizer Application Rate & Yield India’s Growing Use of Fertilizer
Government Subsidies Indian Imports – heavy reliance on foreign production
The fall in the rupee and the worsening economic
situation led India to cut its fertilizer subsidy this year,
destroying demand by 25%, according to the FAI.
Its subsidy cutbacks will have an impact on the global
market given 45% of DAP trade and 15% of all potash
trade in 2011 were sales to India. This has led to a
period of price weakness for phosphate and relative
stability for potash. Higher prices and a falling rupee in the
world currency markets have seen DAP prices in India rise
by over 180% and MOP by over 100%, since the scheme
started this year versus the average price to farmers in
2011.
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The key issue is that India plays a major role in global fertilizer markets and the way its agricultural industry is
regulated and subsidized is unhelpful to stability of markets and the future of Indian agriculture. It needs to
substantially improve its use of fertilizers in order to boost grain output. India should be one of the key drivers of global
volume growth but its demand will decline this year.
Indian fertilizer demand is set to rise; it needs to increase in order to feed its growing population. Indian agriculture is
part of the solution to improving food production and is likely to be a key growth market. But these needed trends are
not going to be visible in 2012 although many expect a strong volume recovery in 2013 as the effects of the
changes to the fertilizer subsidies work through the system.
2013 Demand Outlook Positive
A reduction in global demand for Potash
this year is expected to be about 52m
tonnes of KCl equivalent from about 56m
tonnes in 2011. However, a strong
recovery in 2013 is expected.
The major factors to the demand
weakness, despite the high level of farm
profitability in most regions, are Indian
subsidy changes and destocking in Europe
as a result of the financial crisis. As a
result, it is believed that the market has
already factored in low level of demand
from India in 2012 and the current focus
of the market is potash demand from
Brazil, China and the US.
Farming is very profitable in geographies
that represent 75% of global import potash
demand (that is just about everywhere
except India). Even Potash at US$600-
700/tonne CFR would only slightly dent
profitability, which would still be at record
levels versus history. As such, a balanced
market is expected in 2012 and therefore
no softening in potash prices is expected.
BPC (potash alliance of Russia and
Belarus accounting for 35% of global
supply) expects all potash producers will
be able to achieve a US$550/tonne CFR
price by August in Brazil. Estimates for
year end price of $510/tonne looks conservative but from 2013 onwards, it will be difficult for India to contain its
potash demand unless it is at the expense of yield. It is expected that 4.5% growth in potash volumes for the next 3-4
years (2013+) will prevail while estimates are being conservative side.
Potash Prices holding Up despite all time high Potash inventories
Delays in Indian and Chinese contracts meant a historical build up in North American inventories this year. At the
beginning of the year, inventories were 32% higher than the 5 year average. Inventories kept on piling until March
and were seen 50% higher that 5 year levels. To tackle these conditions, several potash producers curtailed their
production. Planned shutdowns were brought forward, such as POT which announced that it will take down the
Lanigan mine for another month and will not restart the mine until mid-October. As such, North America producer
inventories dropped 462k mt during July to ~2.5mmt. However, stocks have remained flat or increased in the past
Indian fertilizer holiday for potash can last one to two years at most before all must be replenished
POT believes contracts in India will not be settled until late 3Q12 and that they will be at the lower end of previously estimated 3.5-4.5m tonnes.
Grain yields will be significantly impacted after 2 yeas of no use of Potash
India potash demand can hold until 2012
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three months in SE Asia, Brazil, China and India (accounting for 40% of global potash demand). Stock builds and
demand destruction is being caused by buyer caution and currency depreciation in major importing markets.
North American Producers Potash Ending Inventory Std. Vancouver Price vs. North American Producers Inventory
Interesting to consider in light of these conditions is potash price movement. Prices are up 14% YoY despite
51% build up in inventories over the same period. Part of the potash strength is attributable towards strong
farming conditions in 2011 and then the run up in commodity prices indicating strong demand elsewhere
even in the absence of Asian buying.
Indian demand is still elusive despite the pick up in monsoons, which are hurting current sentiments. Prices are still
below the 5-year average potash prices of $522/MT while operating costs have picked up due to expensive labour
and energy costs. In summary, it is believed prices will remain stable at the current levels for the rest of the year
and can rise further in 2013 as demand picks up on strong fundamentals.