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Potash Corp. sees a bottom in the fertilizer market

Part 3
Potash Corp. sees a bottom in the fertilizer market (Part 3 of 7)

Why Potash Corp. faced challenging conditions in 4Q 2013

4Q 2013

Challenging market conditions continued to weigh down Potash Corp.’s (POT) fourth quarter 2013 performance. While costs improved and shipments rose, gross margin was more negatively affected by lower prices in all three fertilizer products—notably potash.

Potash Price and ShipmentsEnlarge Graph

Potash

Potash shipments rose in the fourth quarter, up 13% from the third quarter and 34% from the same quarter in 2012. Shipments to customers in North America rose from 0.6 million tonnes last year to 0.8 million tonnes, driven by the need to replenish soil nutrients after a record harvest, as farmers purchased their fall application needs. Offshore sales volumes improved from 0.7 million tonnes in 4Q12 (the fourth quarter of 2012) to 0.9 million tonnes in 4Q13. Keep in mind that the 4Q12 period was especially weak, driven by delayed purchases and an unfavorable shift in India’s government policies. Realized potash price (net of transportation costs), however, fell to $282 per tonne for the quarter, down from $307 per tonne in 3Q13 and $387 per tonne in 4Q12.

POT’s per-tonne costs of goods sold improved from last year’s fourth quarter due to higher production levels—as production rises, fixed costs spread out across larger quantities. A weaker Canadian dollar and the absence of higher-cost Esterhazy tonnes also contributed to a lower cost of goods sold per tonne.

Nitrogen Price and ShipmentsEnlarge Graph

Nitrogen

Shipments of nitrogenous fertilizer grew 19% from 2012 levels, to 5.9 million tonnes, as additional production commenced at Geismar facility in Louisiana. Cheap natural gas used at the Geismar facility also helped bring down production costs. But this met lower average realized prices for nitrogen products, dropping from $461 per tonne in 4Q12 to $326 per tonne in 4Q13.

While prices fell 30% year-over-year, nitrogenous fertilizers’ gross margin only fell $18 million from the $206 million earned in 4Q12. Aside from the start of the Geismar facility, Potash Corp. had benefited from lower natural gas prices in Trinidad, which are linked to ammonia prices. In this sense, Potash Corp. is able to protect itself from weakness in nitrogenous fertilizer market to an extent, unlike CF Industries Holdings Inc. (CF) and Terra Nitrogen Company LP. The total average cost of natural gas used to produce nitrogenous fertilizers fell 31%, to $4.83 per MMbtu,

Phosphate

Phosphate shipments also recovered from a tight rock supply that had negatively affected sales in 4Q12. For 4Q13, shipments rose to 0.9 million tonnes, up 11% from 4Q12. Due to weaker global demand and increased competition, average realized price also fell, falling from $577 per tonne in 4Q12 to $455 per tonne in the latest quarter. Although not enough to offset the lower prices, Potash Corp. had benefited from lower inputs costs for sulfur and ammonia, which were 13% lower than in 4Q12.

Discussions on the future outlook of potash industry will be released on Feb 14, 2014. To learn more about investing in the fertilizer industry, see the Market Realist series Intrepid Potash: An investor’s guide to the American producer.

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