A source of growth
In 2013, Agrium’s Potash segment contributed 14% of its profits. But this ratio will dramatically rise in 2014 and 2015 as the Vanscoy mine project finishes. Agrium’s operating capacity is now 1.9 million tonnes of potash a year. Analysts expect the $1.8 billion expansion project to add 1 million tonnes of capacity.
The potash industry is highly concentrated among a few players that control most production. Some of the largest Potash producers in the world are Uralkali, PotashCorp (POT), Mosaic (MOS), and Israel Chemicals (ICL).
The Vanscoy expansion project will increase Potash segment operating capacity by 52.6%. It should also decrease overall production costs by $20 per tonne. That’s 10.4% less than 2013 Potash cost per tonne. The project should come online by late 2014. Costs are already low due to location advantages in Saskatchewan. But a further decrease will make Agrium’s productions costs even more competitive globally.
Higher operating rates guarantee success in Vanscoy’s expansion
Agrium has one of the highest operating rates in the industry. Lower operating capacities help Agrium achieve higher operating rates. But the main reason is the company can move product into its Retail business. Of all the fertilizer companies in the Market Vectors Agribusiness ETF (MOO), Agrium is the only one that can combine a wholesale business with a retail portion. This increases operating rates.
With much higher production from the Vanscoy expansion, Agrium doesn’t have to worry too much about wasted capacity. Retail is expected to keep operating rates high.
Conclusion: increased volume will more than offset lower prices
The potash industry is highly driven by potash prices. Lately, the industry has experienced significant drawbacks due to lower prices. Many analysts believe prices will remain low and even decrease further. But Agrium will still be able to grow due to massive volume growth thanks to its capacity expansions.
© 2013 Market Realist, Inc.
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