In recent years, agricultural fertilizer companies like PotashCorp (POT), Agrium (AGU), Israel Chemicals (ICL), and CF Industries (CF) have incurred higher capital expenditures resulting from the expansion of their production capacities. As a result, the fertilizer market currently has more capacity than it can absorb. So, prices have seen significant downward pressure coming from the supply side (NANR).
The capital expenditures for fertilizer producers (or usually any manufacturer) consist of a maintenance portion and an expansion portion. As the name suggests, the maintenance portion includes the capital expenditure that is required for the maintenance and upkeep of the production facilities. The expansion portion is required for the expansion of existing or new projects.
Analysts estimate PotashCorp’s capital expenditure in fiscal 2017 to stand at $633 million compared to $893 million in fiscal 2017. The chart above shows that PotashCorp’s capital expenditure in 2017 is estimated to decline from what it was in 2016. The company’s capital expenditure will likely remain steady through all four quarters in fiscal 2017.
This might suggest that the capital expenditure projection primarily includes maintenance capital expenditure. More importantly, this may suggest little or no capital expenditure for expansion, which may make sense, as the industry is already suffering from overcapacity, and investing in new projects may not be suitable for companies when prices are at all-time lows.
Next, we’ll discuss free cash flow growth estimates for PotashCorp.