Cost of goods sold
The cost of goods sold (or COGS) includes all that’s needed to produce a product to be sold. Some of these costs for MOS are wages (6.19%) and depreciation expenses (4.19%). However, the three main components are the inputs to produce phosphate, the inputs to produce potash, and distribution costs.
The main raw material used phosphate production is phosphate rock. Mosaic produces 15.4 million tonnes of phosphate rock, and it requires between 1.6 and 1.7 tonnes to produce one ton of DAP (a common phosphate fertilizer). As the world’s second largest phosphate rock miner, Mosaic mines enough of this raw material to cover all of its phosphate production, which makes Mosaic one of the lowest-cost phosphate fertilizer producers.
Sulfur and ammonia
Another important component in phosphate production is sulfur. One ton of DAP requires 0.4 long tons of sulfur. Contrary to phosphate rock, Mosaic purchased most of its sulfur (3.5 million long tons). This increases the company’s vulnerability to sulfur price volatility. Mosaic also owns and operates sulfur terminals.
Plus, Mosaic consumed 1.4 million tonnes of ammonia during FY2013. Production of one ton of DAP requires 0.23 tonnes of ammonia. Mosaic buys this input from offshore producers, making it susceptible to changes in price. The company already produces some ammonia, expecting to one day satisfy all its internal needs. To produce ammonia, Mosaic purchases natural gas at index-based prices.
Because of all the necessary inputs, and a more fragmented market compared to potash, the profitability of phosphate is significantly lower than the profitability of potash. While phosphate fertilizers make up 65% of the company’s revenue, they only represent 38% of MOS’s profits compared to the 62% generated by potash.
What about potash?
After potash is mined, natural gas is used as a fuel to produce steam and dry potash products. As we saw earlier, MOS buys natural gas from external suppliers. There are no other relevant elements in potash mining that could significantly affect the company’s cost of production. The cost of production is significantly less than the sale price of the product, making potash a profitable product.