As you might have heard, the potash market was experiencing great volatility since July of last year due to Uralkali's breakup with its former partner Belaruskali. The former cartel between the world's largest potash maker and Belaruskali virtually controlled prices for potash, and after the breakup prices suffered a strong correction.
Well, now it seems that normality is coming back. Uralkali's announcement of a new potash contract with China for deliveries in the first half of 2014 will serve as a basis for global prices. The new contract is priced at $305 per metric ton, 24% less than the company's last contract with China.
Given this new outlook, let's see how these three fertilizer producers should perform.
Lower earnings forecasts
First, let's look at the world's largest potash fertilizer producer by production capacity, PotashCorp. (POT).
The company, also known as PotashCorp, suffered a 46% year-over-year drop in profits in the fourth quarter. As a result, the company lowered its earnings forecasts for this year even below analysts' expectations.
PotashCorp took some action to return to profitability, slashing 18% of its work force in December and reducing production to lower expenses. These moves might not be enough to gain back investor confidence, however. Let's not forget that potash accounted for nearly 60% of gross profit in 2012.
Some fundamentals are on the company's side, though. Its mines sit at the low end of the cost curve and should generate profits even if prices drop to marginal costs of production. PotashCorp's capacity is expected to reach 17 million metric tons by next year after spending $8 billion to expand it.
Benefitted by devaluation
Next let's examine Chemical and Mining Company of Chile (SQM 3.55%), a Chilean producer of specialty plant nutrients and chemicals commodities. It operates as a low-cost producer with top market share positions in specialty fertilizers, lithium, and iodine.
The case for this company is a bit different, as potash represents no more than 28% of total revenue. The company holds two prized mineral possessions: caliche ore and salar brines from which it gets fertilizers, iodine, lithium, and industrial chemicals. Chile's caliche ore is the only source in the world of commercially exploitable natural nitrates, and comparable salt brines are only found in Chile, the United States, and China.
In addition, the 5.5% drop of the Chilean peso this month will result in goods news for Chemical and Mining Company of Chile, considering that it exports pretty much all of its production. In this scenario, the company manages to get hard currency for its exports while its costs are mostly denominated in Chilean pesos.
Record retail operations
Finally, there's Agrium (NYSE: AGU), a leading global wholesale producer of all three major agricultural nutrients.
The news coming from Agrium isn't the best. Very recently, the company said that it expects its fourth quarter 2013 earnings from continuing operations to be at the bottom of its previously released guidance range of $0.80 to $1.25 per diluted share.
Third quarter 2013 was disappointing as well. Net earnings dropped from $129 million to $76 million in one year, driven by delays in crop nutrient purchases produced by a late growing season in North America and uncertainty in the fertilizer market. Gross profits fell 13.2% year over year, pushed down by lower pricing and production outages.
The outlook is not very positive for Agrium. Phosphate prices are expected to remain soft, and demand in India, a key market, is expected to remain weak as well. However, Agrium's retail operations are expected to achieve record results for the fourth quarter and for the 2013 year. This segment was able to offset lower nutrient prices and a compressed fall season in America by achieving higher margins for nutrients, seed, services, and other product lines.
More certainty over potash pricing will certainly help demand return to more normal levels this year, helping the whole industry find equilibrium. However, it will be key for producers to become more competitive as buyers demand lower prices for the crop nutrient.
PotashCorp is in good position to profit from better demand and better pricing. It has lower costs than its peers and a spectacular production capacity.
In the short and mid term, the drop of the Chilean peso along with the stabilization of the potash market will secure profitability for Chemical and Mining Company of Chile. Longer term profitability will rely on pricing and overall demand.
Agrium is still feeling the pricing pressure, and despite its good momentum in the retail segment, wholesale needs to make major improvements.