Key benefits of integrated phosphate business and cost dynamics
The importance of integrated production
Having access to phosphoric rock is important because Morocco accounts for roughly 30% of the world’s rock exports. So for companies that don’t have their own mines, this can negatively affect profitability if there are several firms competing against each other for Morocco’s supply. As the value of a company isn’t just its earnings but also its assets, having reserves (especially those that are cheap to mine from) can increase the value of its stock.
Interested in POT? Don't miss the next report.
Receive e-mail alerts for new research on POT
Integrated producers enjoying lower cost
The chart shown above, taken from Potash Corp’s 2012 annual report, depicts the cost of producing DAP between integrated and non-integrated producers. There are two main takeaways from this picture. First, non-integrated producers’ costs are higher than integrated producers’. Second, the difference between the cost for non-integrated and integrated producers has widened since 2008. The widening between non-integrated and integrated producers is positive for fertilizer producers like CF Industries Holdings Inc. (CF), Mosaic Co. (MOS), and Potash Corp. (POT) that have their own mines, because the more expensive non-integrated producers could set the selling price for DAP, which means increased profitability and earnings for these stocks.
Costs of production are mostly similar geographically
As integrated producers’ mines in the United States are mostly concentrated in Florida and Utah, mining costs don’t differ too much, ranging from $400 to $550 in the United States. These metrics were calculated using companies’ COGS for the segment divided by the amount of phosphate products they’ve sold. Although CF Industries doesn’t ship as much as Mosaic or Potash, it’s the lowest-cost producer of the four companies. A lower cost of production reflects companies’ high profitability, but it doesn’t mean they’ll continue to enjoy lower costs in the future. Costs can come down in the future as companies use more mineral-rich deposits and require fewer capital expenditures, while costs can increase if the mines are nearing the end of their useful timeframe. These changes can have a positive or negative effect on companies’ earnings and share prices, including Agrium Inc. (AGU). The VanEck Vectors Agribusiness ETF (MOO) will be affected accordingly.