PotashCorp Holds the Line

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While pondering the existence of a fertilizer bubble back in September, I concluded that a potash price crash was improbable.

We've seen a lot of improbable events occur since then, but potash prices have indeed held the line. A good deal of credit certainly owes to PotashCorp (NYSE: POT), which just reported fourth-quarter earnings results.

This company is a big believer in pricing to replacement cost. Even with the soaring sales price of its namesake mineral fertilizer, PotashCorp still views greenfield (aka brand-spanking new) mine construction as sub-economic. Thus, the company sees prices headed higher and refuses to cut.

This might seem stubborn, but we've seen what price-cutting has done for the nitrogen and phosphate players. Demand response was negligible, and Mosaic (NYSE: MOS), Terra Industries (NYSE: TRA), and others have mo' problems as a result. Ever the straight shooter, CEO Bill Doyle noted on the call that these other fertilizer firms have "just screwed up their businesses."

The difference in performance between Potash's three segments is striking. Potash gross margin -- in dollar terms, not as a percentage of revenue -- hit $745 million, up 190% year over year. Phosphate gross margin fell 22%, while nitrogen margin all but evaporated.

As we've discussed before, the reason PotashCorp and its potash-slinging peers can be so disciplined with prices is that this is an oligopoly market. There were even some cartel allegations against PotashCorp, Agrium (NYSE: AGU), and others in the past year. So it's not just sheer willpower on the part of PotashCorp.

Can the company afford to withstand the present demand slump? The situation does look scary: Quarterly North American potash volumes just dropped 54% year over year, and first-quarter demand is forecast to be slow as well.

There are a few reasons shareholders don't need to sweat. First, this firm is well-capitalized with strong borrowing capacity. Second, full-year potash gross margin is seen headed much higher this year, with a roughly $5 billion contribution compared to $3.1 billion last year. This is in part due to higher anticipated Chinese demand, as well as expected price increases with both China and India -- PotashCorp's top two contract markets. This segment should go a long way toward offsetting softness in the other lines of business.