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PotashCorp (NYSE: POT ) is making substantial cuts to its North American workforce in response to sluggish growth. Substantial drops in the price of potash over the past five years, along with a more recent price dip since this summer, are creating troublesome conditions not only for PotashCorp, but also for other major potash producers including Mosaic (NYSE: MOS ) and Intrepid Potash (NYSE: IPI ) . PotashCorp's move to cut its workforce is the first of what will likely be several moves by industry players to compensate for declining potash-based profits.
Deep cuts versus minor scrapes
PotashCorp's cutting of over 1,000 jobs is huge, as it makes up approximately 18% of its overall workforce. The bigger and scarier worry for investors should be whether this move is big enough. Third quarter earnings for PotashCorp were hit hard, and the move to cut such a substantial portion of its workforce is a clear sign that the company does not foresee a quick turnaround in potash prices or sales volumes. PotashCorp's CEO Bill Doyle tried to justify the poor third quarter earnings as a response by customers delaying major purchases in hopes that prices would continue to drop based on uncertainty from international producers, but actions in the form of workforce cuts speak volumes louder than words.
On the other hand, the cuts and declining sales need to be put in a slightly broader perspective. In spite of harsh third quarter results, PotashCorp's 2013 nine-month potash sales volumes were up from 2012. While there are significant concerns about volumes moving forward, year-to-date declines are nonexistent.
A sign of what's to come
Oversupply has been the story for potash for a long time as prices have steadily declined and demand has slowed over the past decade. PotashCorp is giving the signal that it believes these trends will continue by making necessary and revealing changes in operations. The operational changes are a response to not only declining potash sales, but reflect the overall downturn in the fertilizer industry seen most notably in third quarter earnings of phosphate and nitrogen producers as well as companies more vested in potash.
There is good reason to be worried about the fertilizer industry in the short run with prices that have remained low beyond the original projections, and that may remain low as it seems PotashCorp is projecting. However, a closer look at PotashCorp's operational changes reveals more of a restructuring to emphasize lower cost operations rather than a full suspension of production activities. Workforce reductions seen in both its potash and its phosphate operations are expected to be at least partially offset by complimentary expansions and increased operating rates at other plants.
The effects on investors
The workforce reductions being made by PotashCorp are a necessary response to market conditions. In the press release, PotashCorp reminded investors that the decisions were being made to "protect the long-term interests of all our stakeholders." While the generic statement does little to ease the minds of those directly affected by the cuts, it should serve as a reminder to investors that PotashCorp is actively adapting to changes in the business environment. If operational efficiency can be increased without significantly affecting overall production, the business will be better off over the long run.
While this is no reason to be buying PotashCorp today, it is also not a time to be selling as the worst of the fertilizer price storm may have already passed. Mosaic and Intrepid Potash are undoubtedly feeling the same pinch as PotashCorp but are yet to make a decisive move in response to market conditions. Investors should not set lofty expectations for the short-term unless these companies are willing to make the same difficult decisions as the industry leader.
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