PotashCorp: an investor's guide to the fertilizer giant

Part 6
PotashCorp: an investor's guide to the fertilizer giant (Part 6 of 9)

The Phophate segment of PotashCorp

The phosphate segment generates 11% of PotashCorp’s gross profits. PotashCorp categorized phosphate sales in two segments: fertilizer, and feed and industrial. The company manufactures and sells solid (DAP & MAP) and liquid (MGA and SPA) phosphate fertilizers, as well as phosphate feed and industrial acid, which are sold to the feed and industrial segment.

The largest producer of phosphate is Mosaic (MOS), with annual capacity of around 4 thousand tonnes. Potash Corp follows Mosaic with about 2 thousand tonnes of annual capacity. CF Industries (CF) and Agrium (AGU) also produce phosphate at a similar scale of that of Potash Corps.

Phosphate Price and Volume by SegmentEnlarge Graph

Diversified end-market provides PotashCorp with an edge

Most of the phosphate in the world is sold as fertilizer, but PotashCorp shows a more diversified end market. 59% of phosphate sales are done in the fertilizer market while the remaining 41% goes to feed and industrial market, where it is used for multiple activities that range from the treatment of potable water to polish aluminium.

During 2013 phosphate gross profits decreased by more than half; 93% of this decrease was attributed to sales to the fertilizer market, while gross profit for the feeds and industrial market slightly increased. While average net sale price per tonne for phosphate products sold in the fertilizer market have decreased at a CAGR (compound annual growth rate) of 9.02% over the last three years, the net sale price for the feed and industrial sector has remained constant. We encounter a similar scenario for volume sales.

Phosphate products have lower profitability

The phosphate segment has a gross margin of net sales of 16%, the lowest of all three segments. This is due the high costs attached to phosphate production. There are three main ingredients in the making of phosphate products: phosphate rock, sulfur, and ammonia. PotashCorp mines almost all of its phosphate rock, but imports sulfur and ammonia. The largest expense however is the processing of these products in the chemical plant.

Sulfur PriceEnlarge Graph

Sulfur is used for the production of all phosphate products and accounts for approximately a fourth of all phosphate expenses, making it the single largest important supply. Although sulfur prices decreased by around 26% during 2013, they have shown some recover since the beginning of the year. Ammonia, on the other hand, is only used for the production of phosphate fertilizer and accounts around 12% of all phosphate related costs.

Furthermore freight costs are also the highest of all three segments. For every dollar of phosphate sales, PotashCorp pays $0.10 for transportation; and $0.09 and $0.04 for potash and nitrogen sales respectively. These costs, however, are not part of COGS since they are deducted from sales to get to net sales.

India drives phosphate trade

India imports approximately 20% of global solid phosphate fertilizer sales and 45% of global liquid phosphate fertilizer sales. Events in this country, such as political actions, can dramatically affect the price of phosphate. 32% of PotashCorp’s phosphate sales are made offshore, mostly in India and Latin America is sold. Even though most of the sales are made in North America, lower international prices can definitely set pressures on local prices.

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