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Why investors should follow Potash Corp.'s earnings call

Part 2
Why investors should follow Potash Corp.'s earnings call (Part 2 of 5)

The must-know factors that drove Potash Corp.’s earnings lower

More factors contributing to lower earnings

Due to uncertainties related to the split, farmers have postponed purchases. China and India, which together make up more than 30% of the global potash trade, took a wait-and-see approach. India, for example, took the opportunity to renegotiate contracts with Canpotex as well as Uralkali as the country grapples with weaker currency, which makes imported goods much more expensive. A just-in-time mindset, which lowers the level of inventory held by farmers, and a late harvest in the US due to rain were factors that negatively impacted potash sales.

The must-know factors that drove Potash Corp.'s earnings lowerEnlarge Graph

Declines in potash prices and sales have negatively impacted gross margins by $326 million USD compared to the same period of last year. Because sales are seasonal, they’re most useful for investors to compare current-quarter figures to the same period last year.

While Potash Corp. (POT) primarily focuses on potash fertilizers, it was also negatively affected by weaker pricing in nitrogen- and phosphate-based fertilizers. An oversupplied market and weak demand had negatively impacted phosphate prices. A purchase slowdown in potash also negatively impacted the phosphate industry, which often moves together with potash. However, the company did mention that it was able to protect its downside more, as a larger portion of its phosphate sales go to industrial and feed industries that deliver higher profits.

The gross margin for its nitrogen business also fell, contributing to a $73 million decline in gross margin from last year. Lower prices, due to increased supply of the fertilizer from China, was a main factor that led to weaker margins. On the other hand, sales volume had increased compared to last year, likely due to capacity expansions. Lower production costs, driven by the restart of low-cost ammonia production at Geismar and an expansion at Augusta (completed in the fourth quarter of last year) had offset some of the decline.

Implications for peers’ earnings

Investors can expect earnings for fertilizer companies like Mosaic Co. (MOS), CF Industries Holdings Inc. (CF), and Agrium Inc. (AGU) to be negatively affected. The Market Vectors Agribusiness ETF (MOO) could also be negatively impacted if these factors aren’t priced in (which we’ll explore later in this series). For now, let’s focus on what managers expect for the future of the potash industry, since this is another major area that analysts focus on.

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