In the previous part, we mentioned that fertilizer prices may fall further in the next four quarters. If this does happen, revenue for PotashCorp could fall, but gross margins likely won’t see a large impact.
Wall Street analysts estimate PotashCorp’s gross margin as a percentage of total sales will contract slightly in the next four quarters from 22.2% to 21.9%. The softer impact on the company’s gross margins appears to stem from a decline in cost of goods.
PotashCorp (POT) holds a position that’s enviable to some of its competitors, at least as far as the potash segment goes. The company is the lowest cost producer (IYM) of potash globally, and that makes a good case for it being able to sustain margins if prices decline.
Falling cost of production
In 2017, the company anticipates its per ton potash cash cost to average about ~$45 to $50. This has significantly come down over the years and helped the company maintain its market position. PotashCorp’s lower cost of production is primarily driven by ramping up lower cost mines such as Rocanville recently.
For nitrogen, lower input costs such as natural gas have helped lower costs as well. However, nitrogen is a highly fragmented industry, and the lower cost of natural gas benefits all companies such as CF Industries (CF), Agrium (AGU), and Terra Nitrogen (TNH).