Potash Corp. sees a bottom in the fertilizer market

Part 2
Potash Corp. sees a bottom in the fertilizer market (Part 2 of 7)

Potash Corp.’s earnings were largely driven by nitrogen and potash

Price and shipments

Potash Corp.’s (POT) sales cover all three main types of fertilizers: potash, phosphate, and nitrogen. Its potash is mined in Saskatchewan, Canada, its phosphate in Florida and Carolina, and its nitrogen in Trinidad and the U.S. On a net sales basis, each fertilizer product makes up roughly a third of the company’s total sales. Prices of fertilizers and shipment volumes are two factors that drive sales.

net sales by fertilizer productEnlarge Graph

As fertilizers are essentially commodities with little differentiation, prices are generally the primary driver that affects share prices. Prices, in turn, are driven by industry supply and demand balance, operating rate, and competitive environment. Key drivers that affect industry supply and demand include operating capacity, government policies, currency exchange rates, global demand, crop prices, nutrient uptake, plantation acreage, fertilizer affordability, food consumption growth, economic growth, industry profitability, and marginal producers’ cost.

Gross margin breakdown

While each fertilizer makes up roughly an equal percentage of total sales, Potash Corp.’s (POT) profits are largely driven by highly profitable nitrogen and potash fertilizers. For fiscal year 2013, the company earned $1,573 million in gross profits from potash, $304 million from phosphate, and $913 million from nitrogen fertilizers—bringing the total to $2,790 million.

Gross Margin by Fertilizer ProductEnlarge Graph

Nitrogen fertilizer

The nitrogen fertilizer industry is fragmented, as natural gas or coal is widely available in many countries. The more fragmented an industry, the more competitive. But the high cost of transporting natural gas, and the wide differences in natural gas price globally, make it possible for Potash Corp. (POT) and other nitrogenous fertilizer producers to arbitrage cheap natural gas in countries such as Trinidad and the United States.

Potash fertilizer

The potash industry, however, is less fragmented and competitive–with large economical deposits only located in Canada, Belarus, and Russia. Because it takes substantial capital and time to open new mines, the threat of new entrants is low. So the majority of the world’s economical supply lies in the hands of a few large players. These companies also sell their products in the international market, through joint marketing firms Canpotex and BPC, for the most part. While approximately 45% of the world’s total imports go to China, the United States, and Brazil, demand is more widely dispersed. The relatively few suppliers compared to buyers allows potash companies to exert market and bargaining power, which allows them to earn high margins.

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