Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Mosaic (NYSE:MOS)
Q3 2020 Earnings Call
Nov 03, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen. And welcome to the Mosaic,s Company's third-quarter 2020 earnings fireside chat. [Operator instructions]. After the company completes their prepared remarks, the lines will be open to taking your questions. Your host for today's call is Laura Gagnon, vice president, investor relations of the Mosaic Company.

Ms. Gagnon, you may begin.

Laura Gagnon -- Vice President, Investor Relations

Thank you, and welcome to our third-quarter 2020 earnings call. Presenting today will be Joc O'Rourke, president and chief executive officer; Clint Freeland, senior vice president and chief financial officer; and Rick McLellan, senior vice president, commercial. We will host a prepared question-and-answer session addressing the questions received last night, followed by a short live Q&A session, time permitting. All of our earnings materials released yesterday after market close are available on our website at mosaicco.com.

We will be making forward-looking statements during this conference call. The statements include, but are not limited to, statements about future financial and operating results. They are based on management's beliefs and expectations as of today's date and are subject to significant risks and uncertainties. Actual results may differ materially from projected results.

Factors that could cause actual results to differ materially from those in the forward-looking statements are included in our press release issued yesterday and in our reports filed with the Securities and Exchange Commission. We will also be presenting certain non-GAAP financial measures. Our third-quarter press release and performance data attached as exhibits to yesterday's Form 8-K filing, as well as our commentary on the quarter posted to our website, also contain information important on these non-GAAP measures. Now, I'd like to turn the call over to Joc.

Joc O'Rourke -- President and Chief Executive Officer

Thanks for joining us today for our quarter three 2020 question-and-answer session. Before we get started, I would like to emphasize our key points from our quarterly earnings report: First, we are realizing the benefits of our extensive cost transformation more, gross margin for the quarter was up 27% compared with a year ago despite essentially flat fertilizer prices; secondly, agriculture and fertilizer markets around the globe were strong and improving; phosphate prices are up substantially while potash prices are stable, we expect global supply and demand to remain tight in all of 2021; and third, our balance sheet continues to strengthen, we have repaid all the short-term debt we borrowed to be prepared from COVID impacts and the business is generating substantial cash. Now, we'll get to your questions. Laura?

Laura Gagnon -- Vice President, Investor Relations

Joc, I'm going to try to go through the most frequently asked questions fairly rapidly to allow time for follow up questions after. The largest number of questions we received last night related to phosphates markets and the countervailing duty petition. PJ Juvekar from Citi; Joel Jackson from BMO; and Adam Samuelson from Goldman Sachs are all asking about the impact of trade flows shifts. How much premium has been built into the U.S.

phosphate prices from the absence of Moroccan and Russian imports? And how will the reduction in the NOLA global parity premium affect your margins? In other words, what would the $50.00 price increase you expect to realize in the fourth quarter be if the U.S. was at parity today?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. Prices are up globally. Our realizations reflect India prices up over 20%, and Brazil prices up 30% despite increasing imports in both those jurisdictions from Morocco and Russia. While global parity may be less than where NOLA is trading today, it would be significantly higher than where it was trading in June.

Now, there seems to be an increasingly common misconception that somehow the CVD petition is impacting global supply. Market prices are driven by strong supply and demand, not the CVD which is expected to trade change trade flows not to the overall market. Our petition was aimed at leveling the playing field for all producers selling in the U.S. not to eliminate competition.

Moroccan and Russian producers chose to pull back completely from the U.S. market likely leaving their customers short of products, and they did it to make a political point and express their dissatisfaction over this being considered at all. We are doing all we can to best serve our customers. We have even begun importing tons from modern simply to meet our customer's needs.

Longer-term it is not our intention to replace Moroccan and Russian tonnes with products from Saudi. For several reasons, not the least of which is from a global logistics perspective. It makes more sense for us to send their product into Asia rather than bring it here. But we're doing that to help our customers.

Longer-term, we would expect NOLA to trade a global parity recognizes the global parity prices today are significantly above where they were in June.

Laura Gagnon -- Vice President, Investor Relations

Another trade for a question comes from PJ if exports from Morocco and Russia are ending up in India and Brazil, why are prices up there.

Joc O'Rourke -- President and Chief Executive Officer

Thank you. The global supply and demand is stronger than many realized a few months ago. Economic tightness in the market is driving global prices up. Supply has tightened.

China exports are down, and we started 2020 with curtailments, including COVID-driven outages. On the demand side, the agricultural economy globally is strong. Food security has become a great priority around the world, and fertilizers are very affordable.

Laura Gagnon -- Vice President, Investor Relations

We have a question from Ben Isaacson from Scotia, and John Roberts from UBS. They're both asking about phosphate pricing momentum. September realized prices improve 11% from August. Did that momentum continue, and how much more upside does you see for the positive market.

Joc O'Rourke -- President and Chief Executive Officer

Thank you. We've continued to see prices increase into October and November, and seeing good demand as we move into 2021. We expect to end this fall with very low inventories which bode well for the spring season and winter sales. We are seeing a normal seasonal slowdown, but we expect strong markets to continue into 2021.

And as we mentioned in our written remarks, we expect prices in the fourth quarter to be up to $50.00 per ton over the third quarter.

Laura Gagnon -- Vice President, Investor Relations

Joc, both Chris Parkinson of Credit Suisse and Joel Jackson of BMO and others asking for potential impacts following the ITC, DLC determinations. In particular, how will know, low, and high duties impact our strategy? And who will fill the void of U.S. imports?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. Remember, the November determination is simply if there are subsidies. In the first quarter, the decision is the determination of harm, and the identification of duty if anything. If it is determined that there is going to be a high duty, we would expect the trade flows to change to account for that.

As such, we would expect the Russians and the Moroccans to continue to ship to other markets like India and Brazil. If there is no subsidy, we would expect the trade flows to return to what they were pre-CVD filing. Remember, the Russians and the Moroccans made the decision to pull out of these markets altogether when the petition was filed. So we will continue to serve our customers if there is more product required for Brazil and India.

We will redirect funds to those markets. If we continue to see a deficiency in the North American market, we will divert tons to that market.

Laura Gagnon -- Vice President, Investor Relations

Joc, we've received a number of questions related to the broader phosphate market supply and demand. In particular with respect to the Chinese phosphate industry. PJ Juvekar from Citi asks, what are your estimates of phosphate exports out of China in 2020.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, PJ. We've said and we continue to believe the Chinese exports will be down by more than 500,000 tonnes this year. Our latest estimate is that they will actually be down by more like 700,000 tonnes. From January to September, exports were down by nearly a million tonnes.

Now, it's important to remember that DAP, MAP production in China continues to trend lower. Quarter 1 to Quarter 3 was down by about 1.4 million tonnes, while domestic demand now appears to be stabilizing. That means Chinese exports are going to be constrained in the future.

Laura Gagnon -- Vice President, Investor Relations

Jonas Oxgaard asks, how confident are you that the three facilities closed in China are permanently closed.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Jonas. For the three facilities closed in 2019, we are confident they are not coming back to DAP, MAP production. One was permanently closed. One was in the process of relocation to a different place and is planned to be built as a water-soluble fertilizer production facility, and the third shifted its production to industrial-grade purified phosphoric acid.

Purified phosphoric acid from the wet process is replacing the highly polluting thermal process which is also the outcome of the stringent environmental protection measurements and is ongoing. According to China Phosphate Industry Association, 5 million tonnes of DAP, MAP production capacity has been lots of the Environmental Protection measures have been implemented this includes; permanent closure, relocation for different products, and strategic production shifts to higher-value products like purified phosphoric acid.

Laura Gagnon -- Vice President, Investor Relations

Joc in a related question, Chris Parkinson would also like an update on the projections for Chinese production comps.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Chris. The estimation to a typical Southwest phosphate producers production cost is still around $300.00 per metric ton, X-Plant, and probably enough will be equivalent to $335.00 per metric ton out of Chinese export port.

Laura Gagnon -- Vice President, Investor Relations

Joc, the second most popular area of questions with Mosaic Fertilazantes. Mark Connelly specifically addresses this question to you. After you acquired Fertilizantes, you told us that there were no really big cost production projects, but rather a large number of small midsized projects many of which were suggested by local employees. Are the sort of projects you are doing today materially different in expected returns.

And among these has the transfer of best practices between and among your Brazil plants proceeded as well as the early projects did.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Mark. Let me say, we continue to see a number of small to medium-sized high benefit projects and transformation continues to drive benefits with very little capital and very high returns for Mosaic Fertilizantes. Now, as we go forward, some of these will require incremental growth capital. Mostly technology-related and much of that is way our next-gen mining investment in Florida.

Now, what I would ask is, we're going to go in-depth about this and our transformation growth objectives for Mosaic Fertilizantes next Monday, November 9. So please stay tuned then and we'll give you a lot more detail of where we believe this business is going, and the potential for our growth in South America.

Laura Gagnon -- Vice President, Investor Relations

Adam Samuelson from Goldman Sachs and Andrew Wong from RBC both asked about the demand outlook. How do the interplay of current farmer economics and La Niña weather forecast impact the Brazilian demand outlook? And did the very high Q3 phosphates demand-pull volumes from Q4.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, both. But current farmer economics are very strong particularly in Brazil and are expected to push Brazilian demand growth higher again in 2021. Probably in the 2% to 3% year over year. This is the fundamental driver.

As for La Niña, it's not something that we're overly concerned with unless it were persistent through mid-2021. The reason for this is the strong growth signals from La Niña for Argentina, and Southern Brazil is typical from June to August. And what we saw in recent months could have been a signal persisting a bit longer than is typical, or it may have been simply dry weather patterns in South Americas at large. Importantly for Brazil though the rains have improved and planting is progressing.

The delays were only a couple of weeks, so we do expect to see no impact on total demand. Demand is expected to remain very strongly aligned with good farmer profitability. In terms of your question of moving Q3 phosphates from Q4, we do expect to see continued strong demand in Q4 as the season has been extended by the dry weather that we've already seen.

Laura Gagnon -- Vice President, Investor Relations

Joc, Steve Byrne of Bank of America asks. There's been significant productivity extracted from the legacy valley assets, are the earnings growth drivers longer-term going to be from geographic expansion. Corn production capacity expansions in phosphate and potash, also, new products and services such as selling their crop inputs.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Steve. Yes. The quick answer is, yes. We see great potential in all three of those areas.

We are and have a very strong first-mover advantage. We have a great platform in Brazil, and we hope over time to take greater advantage of that. Now today, our primary focus for growth in Mosaic Fertilizantes is organic. We continue to see transformation opportunities.

We see increases in coal product sales and benefits from the deployment of technology. To our geographic areas where we feel we have a smaller distribution footprint than we would like, but we also have room to grow with our current distribution assets that we have. So in summary, we see all areas having potential. We do think that both distribution and production will grow, and we'll continue to strive for our first-mover advantage in that great growing region.

Laura Gagnon -- Vice President, Investor Relations

Joel Jackson from BMO is asking about Fertilizantes per ton margins. Should we expect these margins to hold, expand, or contract in 2021. And what are the main drivers of these?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Joel. When we're thinking about our curtail margins, we really have to consider two components. First, production where the price of finished goods raw materials, and cost to produce drive gross margins. Here we continue deriving production costs down and through transformation continuing to improve that business.

In distribution where we earn a margin that is impacted by volume, economies of scale, and pricing trends, we continue as well as transformation and continued improvements in our performance product sales. That's really how we're going to drive long-term value. So in distribution, we do see that holding up well, as well as in production. So on both sides, we expect we can not only hold those margins but expand them, and as time goes by.

Laura Gagnon -- Vice President, Investor Relations

Joc, we also got a large number of questions at our phosphate segment. Steve Byrne and PJ Juvekar are both asking about the near-term performance and the expected profitability improvement into the fourth quarter. What portion of the phosphate fourth quarter volumes are already locked in. And will this impact your ability to realize the $50.00 per tonne price increase? So, are we looking at a much better fourth quarter in phosphate?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. As expected, a good portion of the tons we expect to recognize in the fourth quarter has already been sold and priced. We don't expect our price realization increase to be below the $50.00 per ton in any scenario. We have assessed the impact on a potential announcement and CVD in November, and our expectation is the impacts will only be a minor change to late December shipments if that goes against us.

Laura Gagnon -- Vice President, Investor Relations

PJ Juvekar from Citi and Adam Samuelson of Goldman Sachs both asked about the ARO reserve increase. Can you elaborate on the drivers for the ARO increase, and the remediation liability? What is the timing of the increased cash outlays?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. I'm going to hand this one straight over to Clint, to answer. I think he has the details of our ARO that we just booked.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Thanks, Joc. As many of you may recall, the third quarter of each year is typically when we update and refresh the estimates of future work-related ARO activity. And I would say that quite a bit of the amount that we booked this quarter is related to Plant City as we've learned more about that site over the last year. Our ARO spend is typically spread out over an extended period of time, 40 years to 50 years during the large facilities that jump back so on and so forth.

So a very extended type of spend profile, but also recall that against our existing ARO, we also have about a $700 million escrow account that will offset at least a portion of that spend in future years. And related to the environmental reserve that we booked this quarter that's really related to some subsurface work that we need to do at some of our facilities around some of our gypstacks, And I would say specific to that, that spend is probably going to be made over the next two to four years.

Laura Gagnon -- Vice President, Investor Relations

Adam Samuelson from Goldman Sachs and Seth Goldstein from Morningstar are both asking about fourth-quarter fossil volumes. Is it reasonable to expect a notable tick in volumes? As we move into 2021, should we expect higher year-over-year volumes, or will you keep production lower to support higher prices?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, gentlemen. As we look at the fourth quarter, we see great demand in all our markets right now. And so with that, we do expect to have relatively good sales through the quarter, and then low inventories as we enter next year. As we look to 2021, we do expect to see a good demand scenario and we would expect to see good utilization of our assets particularly if you remember the first quarter to 2020 we had barter down for almost three months.

So now, we expect that to come back, and our facilities to run very much closer to full production in 2021.

Laura Gagnon -- Vice President, Investor Relations

Joc, last one. I'd like to end with a couple of questions on our potash segment. Ben Isaacson from Scotia asks how we think about clients, and do we believe there may be a need for those tons in the market in the future.

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Ben. Yes, we definitely look at Fertilizantes as something we would bring back if our customers needed the tons. And if the price is justified restarting it. This industry is ripe with examples of sudden but permanent supply disruptions.

And in that case, this tonnage could be very valuable to us. And as our customers demand grows, Fertilizantes will be significantly cheaper to bring back than any greenfield operation.

Laura Gagnon -- Vice President, Investor Relations

The last question comes from Seth Goldstein at Morningstar. How much potash is coming out of K3 now, and how does that change as we move to 2022. is the long-term plan to grow K3 production in line with potash demand growth, or will you try to increase market share?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Seth. In 2020, K3 is forecasted to produce about 4.4 million tonnes, or the equivalent of about 1.5 million tonnes of the finished product which amounts to about 15%, 20% of our total production potash in Canada. In June 2022, K3 or Esterhazy will be providing the ore for approximately 6 million tonnes of finished goods production and this will completely replace K1 and K2 mines. So our expectation is, we will not necessarily grow production, but rather replace K1 and K2.

Longer-term, our goal is to match production with demand while also lowering our cost profile. K3 has already proven to lower our overall costs. Now with our remaining time, I'd like to open it up for follow-up questions from our audience. Thank you.

Questions & Answers:


Operator

Thank you. [Operator instructions]. We have our first question from the line of Steve Byrne from Bank of America. Your line is open.

Please, go ahead.

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

I'd like to draw a little more on this phosphate supply and demand outlook that seems to be highly contested today. So you have a fair amount of information in your deck on the demand outlook for' 21, somewhere between flat with 2020, or maybe up 2 million tonnes. But if you look at your supply outlook and you have a breakdown of what you see as potentially the delta in supply from 21 to 20 there are a few fairly large items in there. And I just would like to hear your view as to know the up and downside risks to some of those -- the big ones being in inventory build.

Is expected by the producers.The ramp-up at OCP, and then the recovery in supply given the 2020 outages. Those three or that there is a fairly large line item. Is there a potential risk that those are much bigger than that?

Joc O'Rourke -- President and Chief Executive Officer

Thank you, Steve. Well let me start by saying as we look into 2021, we do believe that the phosphate S&D is quite tight. So first of all, we'll end this year with relatively low inventories. And that's relatively low inventory throughout the channel.

Our proxy indicates U.S. inventory will be down about 35% which represents somewhere in that 600,00 tons mark. India will be down as much as 1.3 million tonnes and China down as much as 700,000 tons. So as we look at how we enter this year, we do believe that some of the production will have to go into rebuilding distribution stocks to fully service this market.

And then, if we look at the increases there's a couple of things that are important. First of all, with that level of inventory at the end of the year, we do expect that the -- will be higher utilization of assets which is where we have a million tonnes of recovered production if you will. So if we look at those two, they relatively offset themselves that we need to increase inventory just to supply basic needs and have a normal balanced market. But we also will have the opportunity to run our assets harder.

In terms of the go forward, we've heard from OCP publicly that they will be relatively slower in bringing on new production. They've announced that publicly. So we see modest increases to new productions coming from improvements in modern as they continue to move their [Inaudible]l operation up to full production over the next year or two. And then modest increases from OCP, and I think the rest are fairly minor in nature.

So I wouldn't really worry too much about those one way or another. But overall, we do see a tightening market for next year.

Operator

Moving to our next question comes from the line of Jonas Oxgaard from Bernstein. Your line is open. Please, go ahead.

Jonas Oxgaard -- Bernstein -- Analyst

Hi. Thank you. I was wondering if you could touch a little bit on the phosphate rock supply demand as well. Basically, the same analysis you did for phosphate supply demand what does it look like on the rock side.

Joc O'Rourke -- President and Chief Executive Officer

Yes. Ok, We don't. Sorry. Thanks.

Thanks, Jonas. We don't really look at Phosphate supply and demand, the rocks supply and demand for the reason that we're not really involved in that market. Overall where we get and where that comes about is domestic production in some of the non-integrated markets like India and whatnot. In terms of our Miski Mayo operation which we do have an outside production for rock is really for our own use.

So we don't -- again we look at it from that perspective we assume that really what matters is overall phosphoric acid usage in the global market, and that really drives us. So when we talk about our DAP MAP really, it breaks down to what is produced from that rock and what we produce from our own rock. So we don't really look at it as a separate market.

Operator

Our next question comes from the line of Chris Parkinson from Credit Suisse. Your line is open. Please, go ahead. quickly on the potash runs.

Chris Parkinson -- Credit Suisse -- Analyst

Quickly on the potash runs. It appears that certain markets ex-China really beginning to turn throughout Asia, and it's you and some of your peers seem confident a rebound in the Chinese market as well. So just overall in you're now heading into the next two years, and of course, you're hitting on coarse, grain oilseed, and even F&V. What are your thoughts on potential upside coming from the Asian market.

And then also, if you could hit on the potential optionality from our biodiesel. That would be incredibly helpful as well. Thank you very much.

Joc O'Rourke -- President and Chief Executive Officer

Ok.Thanks. Thanks, Chris. Look, what we see today and I think what we saw through the year is not unlike what we've talked about previously which is, when the price in 2016 went low, we quickly saw a rebound in demand. And we're seeing that this year as we predicted earlier in the year.

So first of all, I would say there's been a relative rebound in demand as was expected. Some of the highlights so I would like to put out as you mentioned, China has been a really good highlight as has India. In both of those markets for reasons of food security and probably trying to make sure that they produce as much in-country as they can. Demand for Potash has been strong in both of those jurisdictions.

And then in the rest of Asia, the big thing there of course is Indonesia, Malaysia and the demand for palm oil which has really bumped up. And just to touch on your piece there, biodiesel has been a part of that because where biodiesel is going to play a role in fuel as we go forward. And I would like to highlight that in markets like India and China basic ethanol will also play a role in the demand for commodities in those jurisdictions as well. So yes, we do look at these playing a role in demand increase over time, and we are expecting good demand from Asia, India, China in the next year.

Operator

Our next question comes from the line of PJ Juvekar from Citigroup. Your line is open. Please, go ahead.

PJ Juvekar -- Citi -- Analyst

Yes. Hi. Good morning, Joc. Thanks for your comments.

Potash volumes year to date is up 6% while phosphates are up 21%. What is -- why is there a difference. And then secondly, if China Ag markets are really robust I think that will continue into 2021. What are your expectations from the country in terms of imports of potash, and exports of phosphates?

Joc O'Rourke -- President and Chief Executive Officer

Ok. Let me hit your first question first PJ, thank you for that. The big difference I think between potash and phosphate volumes in terms of deliveries has probably been more than anything, just inventory moves. If you remember we had a very big buildup of inventory as we moved into this year in phosphates, and for that reason, I think that was had to be consumed first and was consumed in the first quarter before you really got into starting to get real demand, or real demand pull from production.

So I think that's probably the reason for that. In terms, I'm gotta get the second question. PJ, can we ask PJ to reask his second question. Sorry operator I.

Operator

[Operator instructions]

Joc O'Rourke -- President and Chief Executive Officer

Ok, hold it. Oh, I'm sorry, yes. Sorry. The question I think from PJ was Chinese imports of potash and Chinese exports of phosphates next year.

And so look, our expectation in China in potash PJ is that there's going to be continued focus and we see this in the five-year plan in China. But there's continued focus on food security and ensuring that they have a robust agricultural industry to ensure that less reliance on outside places. So for doing that, we expect that actually, potash demand will increase internally because the corn demand is so strong. But also the other one is their own internal production at Qinghai Lake is reaching its capacity, and possibly even going down.

So we do expect China to be a let's call it a growth engine for next year. In terms of phosphate exports, I think as I said there's a couple of closures. So there has been some structural changes in the phosphate market in China, and that coupled with what we believe is flat to increasing Chinese consumption of phosphates, means that our expectation is Chinese exports will be down maybe not year over year because COVID had a big impact on the start of this year, but certainly down from the 2019 levels.

Operator

Our next question comes from the line of Adam Davidson from Goldman Sachs. Your line is open. Please, go ahead.

Adam Samuelson -- Goldman Sachs -- Analyst

Hi, it's Adam Samuelson. So good morning. I guess there's been a lot of details today on the phosphate on a market outlook. And your own expectations of your own performance in the market yet.

Joc, your stock down 15%, and so clearly the market takes us to take a different view. What do you think the market's getting along today as it relates to your own market outlook or the strategy or the operating performance that is where you think the GAAP in understanding is.

Joc O'Rourke -- President and Chief Executive Officer

Well, I'm going to have to be fairly direct on this answer Adam. And let me start by saying, I suspect the market has been impacted by statements made by one of our competitors and the impairment of their phosphate business. So let me be relatively direct with this. First of all, an impairment needs to be driven by a triggering event at least that's my understanding of general accounting practices or IFRS.

When I look at the potential triggering events, the one thing I can say is that phosphate prices are up significantly quarter over quarter. And if I look at the outside consultants that we use like CRU their long-term estimates are also off. So it is very difficult for me to see how the long-term phosphate outlook was the triggering event for this writedown. So as such, you asked me what I did and what we're getting wrong, I think people are taking the idea that the triggering event was the phosphate market where clearly it had to be something different than that.

And they're assuming that means we have a par of 4 outlooks. Now, what I will say is, if you compare the two businesses, we are very difficult to compare them with one from one. First of all, we're very different scales. But we also sell very different products.

They sell purified phosphoric acid which is being highly impacted in the industrial sector by two things; One, the economy is slowing down, and the other by external competition. Now if I look compare that fertilizers, fertilizers are actually quite the opposite. We've seen an increase in demand. We've seen an increase in pricing, and we see a very good outlook.

So I don't think you can compare the two businesses, and I certainly don't think phosphate demand and supply at least for fertilizers is a factor in that.

Operator

Our next question comes from the line of Andrew Wong from RBC Capital Markets. Your line is open. Please, go ahead.

Andrew Wong -- RBC Capital Markets -- Analyst

Hi, thanks for having me on the call, and good morning. So I mean there's been a lot of discussion on the CVD impacts, and we've covered that a lot. But I do want to ask another one. So like you said, it's mostly about the trade flows but really -- that's not really what's driving the S&D.

But in terms of like on Mosaic, So Mosaic sells a lot of phosphate in both Brazil and the U.S., and if anything it seems like Brazil's is getting up there in terms of volume. So I understand that if their trade flows are reversed maybe at U.S. premium comes down. But I guess what's the actual impact on the company because when you would see less trade flows going to the [Inaudible] in Brazil.

I'd just be curious to hear your thoughts on that. Thank you.

Joc O'Rourke -- President and Chief Executive Officer

Yes. Thank you, Andrew. Look, you're absolutely right. This is about trade flows not overall supply and demand.

So today, what the Russians and the Moroccans have done is they have redirected tons that would have otherwise come to the U.S. to either Brazil, India, or in some cases eastern Canada. So they have moved a number of tonnes to different markets. They have not sold a significantly different number of tonnes globally than they have in any other year.

So, we know that their overall supply and demand balance in the world has been very similar. So where they pulled tonnes out of the US, we've had to bring more tonnes into the U.S. to serve it. But you're also seeing tonnes come from places that haven't historically sent tonnes to the U.S.

like Australia, and Mexico, or significant tonnage in terms of that. So you do see a difference in trade flows. So what would happen if that reversed. My expectation is the reversal would create exactly the opposite.

We would see more tonnes going from Mosaic to our Brazilian business. We would see more tonnes going to India from our Saudi tonnage, etc. And there would be other imports coming into the US. So overall, we don't think that this is going to make a huge difference.

The big difference today is demand is up. Chinese exports are down, and we're seeing a growing market and a good demand scenario around the world.

Operator

Our next question comes from the line of Michael Piken from Cleveland Research. Your line is open. Please, go ahead.

Michael Piken -- Cleveland Research -- Analyst

Yes. Hi. I just wanted to get a sense of Fertilizantes of how much the real, the movement in the real has been a tailwind this year. And basically, if the real work to stabilize let's say from this point forward.

And then, we hold all your other forecasts that you talked about in terms of Brazilian market growth constant. What type of impact will that have on your margins. So basically, just trying to get a sense of how we should be thinking about that and if the real were to reverse itself a little bit and start to strengthen at some point next year. What that might do to margins.

Thanks.

Joc O'Rourke -- President and Chief Executive Officer

Yes. Thank you, Michael. Look, let me address two pieces of the business. First is, our Production business and the other piece is our Distribution business.

First of all, let me say the weakening real, it's had the biggest impact it has been on the profitability of the Brazilian farmer. So that has really been what's driving a great demand picture in Brazil. So, the Brazilian farmer is doing very well. If you look at it in terms of our business, what we would expect is our Distribution business is relatively independent of the real pricing.

And the reason for that is we buy in U.S. dollars. We sell, we then hedge that and convert to a book Brazilian real number. So really it doesn't have a huge effect on our overall margins.

What does is it makes a difference to the actual demand. In terms of our production business. So obviously, on the shorter term wages and everything else Brazil real base costs go down fairly quickly. So, we do see an improvement in costs and a better margin for our Production business.

What I will say though is if I look at the last couple of quarters the Brazilian real has been essentially flat. If I look at our statistics for the last two quarters, we're 5.37 real versus this quarter of 5.38 real. So essentially they've been perfectly flat. So you can assume or surmise from that, but the improvements we're seeing are actual solid improvements and how we're running the business as opposed to benefit from an exchange rate.

Operator

The next question comes from the line of Joel Jackson from BMO Capital Markets. Your line is open. Please, go ahead. says in these global Hi.

Joel Jackson -- BMO Capital Markets -- Analyst

Hi.Good morning, Joc. Joc, one of the larger, a large factory buyer is part of the countervailing duties investigation. A large U.S. phosphate buyer publicly stated that OCP offers different specs than what Mosaic can offer.

They made -- they mention things like solubility. Is this fact fiction or something in between, and what can you do about it if it's fact.

Joc O'Rourke -- President and Chief Executive Officer

Sorry. This is the second time I've had to be relatively direct. No. Quality is absolutely not an issue between the two commodity products.

We do have very small differences in terms of some of the things that are in our product because of what's in the ore. But recognize this is a manufactured product that takes phosphoric acid, adds ammonia to form diammonium phosphate and monoammonium phosphate these are chemically produced. We have been selling this commodity in the United States for over 50 years. In that whole time, we have seen the great response on the field and frankly, solubility isn't even one of the specs that are measured for quality.

So, it is simply a distraction. It is simply a way of taking the focus away from the real issue here and trying to turn a commodity into a specialty product. It just doesn't work unless you're doing with something like MicroEssentials in which case the actual agronomic aspects of it are significantly better than the agronomic aspects of the commodity product. So with that, I'll leave it there.

Operator

[Operator instructions] We have our next question comes from the line of Vincent Andrews from Morgan Stanley. Your line is open. Please go ahead.

Vincent Andrews -- Morgan Stanley -- Analyst

Hi. Thank you. I just wanted to follow up on the ARO and the environmental charge. I don't think I caught it earlier.

I'm not sure if you mentioned it, but I know it was non-cash in the quarter and you talked about it would be some cash liability in the future and you gave some dates. But could you actually quantify the amount of cash liability that you actually have to pay out in the future? Thanks

Joc O'Rourke -- President and Chief Executive Officer

I'll hand it over to Clint. Let me just let me look. Sorry. Muted microphone.

Thanks, Vincent. I'm going to hand it over to Clint. But let me just give you a little bit of a summary of this. First which is, we do once a year.

We do are all it is over a 50-year period where we look at the overall asset retirement obligations that we would have to do. If we look at the asset retirement obligations themselves their long-term water treatment at particularly Plant City seems to be the biggest one here. In terms of the rest, It is work around our other gyp stacks which Clint can talk a little more about. But just say, these are long- term aspects of the business that we look at.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Hi, Vincent. And so as we look at the ARO number in particular. First, recall that this is a typical process that we go through in the third quarter of every year, and we make adjustments based on the levels of work that we see. And part of that amount is just changing things like an assumed inflation rate.

Assumed interest rates and things like that. It actually brings that ARO back to current dollars but on the balance sheet. I'd say the one notable item that's embedded in that number is a reverse osmosis investment that will need to make it one of the facilities in the future. I mean, I don't think it's imminent.

Well, that's something that's been added as we've done more work on the other work that needs to be done, and part of the refinement of our future plans in order of magnitude that's probably about a $40 million investment when it needs to be made. Otherwise, I think a lot of the adjustment is if some of those assumptions that I mentioned a little bit earlier. And then, I think on the environmental remediation, I think the ultimate cash cost is going to be right around the $35 million marks. But again that'll be over multiple years based on the assessments today.

Operator

We have our next question comes from the line of Jeff Zekauskas from JP Morgan. Your line is open. Please, go ahead.

Jeff Zekauskas -- J.P. Morgan -- Analyst

Thanks, very much. Your quarterly capex in potash is about $110 million and your depreciation is about $70 million. So, there's about $40 million per quarter above DD&A in $160 million per year. Does that incremental $160 million go away and your capex go to depreciation when you're K3 project is done.

Joc O'Rourke -- President and Chief Executive Officer

Thanks, Jeff. Let me hand that straight to Clint. I'm not sure exactly.

Clint Freeland -- Senior Vice President and Chief Financial Officer

Yes. Hi good morning, Jeff. So typically outside of our K3 spend. The typical sustaining capex level can vary each year.

But it's in $100 million to $200 million per year midpoint of about $150 million. And generally, as an example what we're seeing this year from a sustaining level, it's about $150 million. So I think that's what we would expect as we go forward. And obviously, we'll be migrating from K2 and K1 over to K3.

We would expect that sustaining spend to migrate with it. And so, I think the longer term you will see more alignment between sustaining capex spend and depreciation and potash.

Operator

Your next question comes from the line of Jeff Kleinberg from Kleinberg Investments. Your line is open. Please, go ahead.

Jeff Kleinberg -- Kleinberg Investments -- Analyst

Thank you very much. Good morning. I just want to make sure that I understand the big picture here with all the variables we're talking about. When you talk about the $50.00 a tonne in the fourth quarter, off of the base that we just reported it looks like we're talking about a run rate of half a billion dollars of EBITDA right it puts and takes.

But am I understanding this dynamic correct, and if so, do we have growth for that next year that run rate of $2 billion is what makes him understand these variables were describing here.

Joc O'Rourke -- President and Chief Executive Officer

Thanks, Jeff. Let me just do a quick in my head here. I think you're saying is, if I'm getting your question right is a $50.00 increase in Q4 going to lead to approximately a $50 million or $500 million quarter for EBITDA. And let me just do quick math.

I think we sell some $2.2 million, 2 to 2.2 million tonnes a quarter. If you multiply that by 50 that would add $100 million to our EBITDA for the quarter. So if you took out today's number and added a $100 million, I guess you'd be pretty close to reasonable guess. Although you do have to take into account, Mosaic Fertilizantes isn't a seasonality.

And whatnot. And quarter over quarter there. But yes, I think that's not unreasonable. The starting point is the sensitivity would be about $100million.

Jeff Kleinberg -- Kleinberg Investments -- Analyst

Perfect. I mean it seems to be a lot of skepticism on the sustainability of this. But that $2 billion run rate it sounds like given the end market's rising demand is a very conservative approach to next year. Well, I think just my understanding that would be the best message being put to it.

Joc O'Rourke -- President and Chief Executive Officer

Again, if the price holds for 2021, you would again be saying much the same thing. You're looking at 9-ish million tons at $50.00 over today. Again, the calculations much the same. It would add half a billion dollars.

Operator

We have our next question comes from the line of John Roberts from UBS. Your line is open. Please go ahead.

John Roberts -- UBS -- Analyst

Thank you. Maybe back to the capital spending question you got earlier. Are we late enough in the year to have an outlook on 2021 at this point? And how many years do you think it keeps your overall capex relatively near the current level.

Joc O'Rourke -- President and Chief Executive Officer

Thanks, John. I'm going to hand it over to Clint for some clarification on this. But I guess overall, look here's our big picture. Our longer-term in 2021 is no exception.

Our longer-term is, we would have $600 million to $700 million of sustaining capital. And then today what we're seeing is other improvement capitals and whatnot. But the big one that starts dropping off after 2022 is of course the $300 million or so. So we're spending on Esterhazy K3.

So that capital spending comes down. But there are other areas of improvement and high return projects that maybe we may want to put in there. So how long can we maintain it flat? I think certainly it will go down over time. How much it goes down depends on the opportunity.

Operator

We're getting one question.

Joc O'Rourke -- President and Chief Executive Officer

Look, I think we've come to a close now. And before I close, I'd like to invite you all to enjoy -- join us on November 9 at 9 a.m. for our in-depth presentation on Mosaic Fertilizantes and our South American strategy. So with that, I want to wrap up today's call.

Mosaic continues to execute extremely well. We are increasing our global competitiveness by driving costs down, and we're managing well through the challenges of COVID-19. With the tailwinds we're seeing today from improving fertilizer and agricultural markets, we expect strong results to continue through the end of the year and well into 2021. So thank you for joining us.

And again, come back next week for our South American detail.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Laura Gagnon -- Vice President, Investor Relations

Joc O'Rourke -- President and Chief Executive Officer

Clint Freeland -- Senior Vice President and Chief Financial Officer

Steve Byrne -- Bank of America Merrill Lynch -- Analyst

Jonas Oxgaard -- Bernstein -- Analyst

Chris Parkinson -- Credit Suisse -- Analyst

PJ Juvekar -- Citi -- Analyst

Adam Samuelson -- Goldman Sachs -- Analyst

Andrew Wong -- RBC Capital Markets -- Analyst

Michael Piken -- Cleveland Research -- Analyst

Joel Jackson -- BMO Capital Markets -- Analyst

Vincent Andrews -- Morgan Stanley -- Analyst

Jeff Zekauskas -- J.P. Morgan -- Analyst

Jeff Kleinberg -- Kleinberg Investments -- Analyst

John Roberts -- UBS -- Analyst

More MOS analysis

All earnings call transcripts

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.