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PotashCorp: an investor's guide to the fertilizer giant

Part 5
PotashCorp: an investor's guide to the fertilizer giant (Part 5 of 9)

The Nitrogen business of PotashCorp

Nitrogen represents roughly a third of PotashCorp’s (POT) gross profits. The company produces 5 types of nitrogen fertilizers: ammonia, urea solids, nitrogen solutions, nitric acid, and ammonium nitrate solids, ammonia and urea being the most important. In the American market, CF Industries (CF) is the largest nitrogen producer with capacity of around 14.2 million tonnes, followed by Potash Corp (POT) with around 9 million tonnes  and Agrium (AGU) with 6 million tonnes of capacity.

 

PotashCorp Nitrogen Segment 2013Enlarge Graph

A different end market provides PotashCorp with less risk

Unlike potash and phosphate, most of PotashCorp’s nitrogen goes to industrials as instead of the fertilizer market. While 80% of the world’s nitrogen production goes into fertilizers, almost 70% of PotashCorp’s nitrogen products go to industrials.

This provides PotashCorp with a more diversified end market. Furthermore industrial markets tend to be more stable than crops in both, volume and prices. Investors should keep in mind that this also means that PotashCorp would not benefit as much as other nitrogen companies if the crop industry were to perform positively.

Nitrogen prices are more volatile than other fertilizers

Unlike the potash industry, the nitrogen market is much more fragmented and competitive–the 10 largest nitrogen producers account for only 27% of worldwide production. For this reason, it is much more difficult for companies to have influence on prices through supply cuts.  For more information on the nitrogen industry, please see Nitrogen Fertilizer Business Guide 2014 series.

Ammonia and Urea, together, represent 80% of PotashCorp’s nitrogen sales. Prices for these two fertilizers started to fall beginning in 2012, but have shown some recovery during 2014.

Ammonia is used to produce phosphate (the third type fertilizer).  During 2013, weak phosphate demand and additional ammonia supply caused ammonia’s price to fell. On the other side, Urea fell due to increased global capacity and record urea exports from China.

Lastly, transportation costs, which are subtracted from sales to get net sales, tend to be very high due to the product characteristics. Proximity to clients is a key factor for nitrogen producers.

 

POT Nitrogen ProfitabilityEnlarge Graph

Gross margin of 42% of net sales gives nitrogen costs of production high importance

Unlike potash and phosphate, nitrogen is not mined; it is processed from natural gas. Natural gas is the basis of nitrogen production. It can represent between 70% and 85% of the cash cost of producing nitrogen fertilizers. Furthermore, transportation costs, which are subtracted from sales to get to net sales, are usually high for nitrogen products. PotashCorp faces a disadvantage because it needs to ship the nitrogen products from Trinidad.

Note: Production capacity numbers were changed due to incorrect data (April 5th, 2014)

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