By Leia Toovey- Exclusive to Potash Investing News
Despite doubling earnings, last week’s quarterly earnings statement by Potash Corporation of Saskatchewan (NYSE:POT) resulted in some negative sentiment regarding the future of the fertilizer market. The Saskatchewan-based company reported gross profits of $1.2 billion, more than double the $550 million for the year-on-year period. The company’s potash gross margin rose by $700 million, the second-highest third-quarter total in the company’s history.
Higher prices of phosphate resulted in third-quarter phosphate gross margin rising to $169 million, well above the $96 million earned in the same period last year. The company expects 2011 earnings of between $3.40 and $3.80 a share. Analysts, on average, had forecast earnings of $3.75, according to Thomson Reuters. Despite the strong earnings report, investors were a little concerned over the company’s modest year-end projections.
Potash prices have recovered dramatically from their recession lows, with producers now settling contracts around the $490 per tonne range, however, prices are still around half of their record high. At the current price point, at least according to Potash Corp CEO Bill Doyle, new demand should be met through expansions at already operating mines. In the earnings call Doyle claimed that the current price of potash “does not justify” the construction of new mines.
Potash Corp and other fertilizer producers around the world are acting prudently to expand capacity. “We believe most producers have been operating at or near their full capabilities in an attempt to keep pace,” commented Potash Corp. The company plans to raise capacity at existing mines to 17.1 million tonnes by 2015 from an estimated 11.3 million this year. The first major expansion will come on line next year, when Potash Corp. will begin phasing in production from its expanded Cory mine.
In a company statement released on October 25, Russian fertilizer producer Uralkali (LON:URKA) announced plans to spend $5.8 billion to raise annual production capacity by about 80 percent to19 million metric tonnes by 2021. “Output will climb to 13 million tonnes in 2012 from about 11 million this year,“ according to Uralkali Chief Executive Officer Vladislav Baumgertner. Mosaic Company (NYSE:MOS) is bringing on about 200,000 tonnes of extra capacity at its Colonsay and Esterhazy mines in Saskatchewan, according to company spokesman Rob Litt.
Some analysts are already cautioning that the rapid ramp-up in supply may flood the market and cause a price correction. “We are concerned that the rate of new capacity additions between 2010 and 2020 may outpace the rate of demand growth,” Adam Schatzker, a Toronto-based analyst at RBC, said in an October 26 note. “The future price of potash will be highly dependent on the management of operating rates to match demand.” Uralkali CEO Baumgertner said new entrants to the potash industry will help determine the shape of the market “There’s a question mark how many Greenfield projects will be completed in the coming 10 years,” added Baumgertner.
With the piqued interest in the potash sector by the world’s major miners, there could be a great deal of new Greenfield projects on the horizon. In the beginning of October, BHP Billiton (NYSE:BHP) CEO Marius Kloppers was in Saskatchewan, checking up on the progress of the feasibility study on the company’s Jansen Project. At this point, BHP is on track for a two-million-tonne production capacity when it opens in 2015, and could ramp up to eight million tonnes within 10 years, according to BMO Nesbitt Burns analyst Joel Jackson. Earlier this year, BHP announced that it also has hopes of developing its later-stage Melville, Boulder and Young sites nearby. In September, Rio Tinto (NYSE:RIO) re-entered the potash sector when it formed a joint venture with North Atlantic Potash, a subsidiary of Russia’s JSC Acron. The JV gives Rio access to North Atlantic’s extensive potash exploration permits in Saskatchewan.
Securities Disclosure: I, Leia Toovey, hold equity interests in Potash Corporation of Saskatchewan and BHP Billiton