Lowering the cost
PotashCorp (POT) and Agrium (AGU) will combine to form a company that will dominate the global potash space by production capacity. Potash fertilizer prices have fallen significantly over the years. This put pressure on producers (XLB) in the fertilizer industry to find ways to reduce the cost of production in an attempt to maintain margins.
Largest company by capacity
When PotashCorp (POT) and Agrium (AGU) merger, the new company will be the largest NPK (nitrogen, phosphorous, and potassium) fertilizer producer by capacity measured in million Mtpa (metric tons per annum). PotashCorp was already the top potash producer by capacity. After it combines with Agrium, the total combined potash capacity will stand at 19 million Mtpa. Also, there’s more capacity designated to come online—it’s represented by the orange dashed lines in the above chart.
How the merger will help PotashCorp
PotashCorp is already the lowest-cost producer of potash fertilizer. The above chart plots the cost of potash per ton[1. Potash segment cost of goods sold, including shipping, handling, and other costs in 2Q16 over total potash tons shipped in 2Q16] to each of the four companies. PotashCorp sits on the far left of the chart. It has the lowest cost per ton at $127 of potash produced during its recent quarter. The addition of new capacity through Agrium will help it gain more economy of scale and reduce the cost from synergies.
Nitrogen and phosphate segments
The new company will also have a nitrogen capacity of 8 million Mtpa and a phosphate capacity of 3 million Mtpa. In the above chart, Mosaic (MOS) has the largest phosphate capacity globally. CF Industries (CF) has the largest nitrogen capacity. The new PotashCorp-Agrium company will be third-largest globally in terms of capacity for phosphate and nitrogen fertilizers, respectively.