Fertilizer producer Potash Corp. of Saskatchewan (POT) has had to deal with tough conditions in the commodities markets for a long time, as the company has wrestled with plunging prices for potash and other fertilizers as well as challenges within its industry among fellow global suppliers. Yet even with those challenges, PotashCorp has worked to reduce its production costs and pursue interesting strategic directions with its overall business, and earlier this week, CEO Jochen Tilk gave a presentation at the 28th Annual Basic Materials Conference that highlighted some key points. Let's look at some of what Tilk had to say for insight on where PotashCorp is likely to focus its efforts in the future.
1. "We are predominantly a potash producer. ... Potash is very abundant [in Saskatchewan], so it allows us to be a low-cost producer. It's also a politically stable environment, so having those assets there is a great benefit to us."
With potash prices having fallen so far, PotashCorp has unquestionably benefited from being able to enjoy such low production costs to make potash-based fertilizers. Potash hasn't gone through the same crash that some other commodities have endured, and as Tilk points out, "People got to eat, dynamics are different, farmers need fertilizers." Nevertheless, even as demand hasn't dried up entirely, pricing pressure among suppliers has made it more important than ever for PotashCorp to be able to focus on cutting expenses to outcompete its rivals.
2. "We consider our nitrogen [and] our phosphate assets [to be] world class."
In addition to PotashCorp's potash exposure, the company also makes other types of fertilizers, with assets in the U.S. and in Trinidad and Tobago. Tilk notes that these products tend to stabilize profits, with strength in the nitrogen market often helping to offset depressed potash prices. Nevertheless, potash remains PotashCorp's key product, and so investors can't expect other fertilizers to make up for poor conditions in potash entirely.
3. "The reason we make these investments [in outside companies] is mostly strategic. We want to be a partner in some of these companies. ... In some instances, we are looking at whether or not these are all core assets or whether or not we would divest them in the future."
PotashCorp holds interests in several fertilizer companies around the world, including Israel Chemicals, Chemical & Mining Co. of Chile, Arab Potash,and China's Sinofert. These companies offer at least limited amounts of geographical diversification, and as Tilk said, they've opened the door to potentially deeper relationships over time. Nevertheless, with the industry currently suffering, PotashCorp is looking at whether its outside holdings still make sense, and selling off non-core assets would allow the company to focus more on its own key projects going forward.
4. "The next five years will be somewhat challenging in terms of supply and demand. There's no question about it because we know what's coming on. ... Having said that, we're positioning ourselves the best we can."
PotashCorp understands that as a big player in the fertilizer market, its decisions have an impact on the entire industry. As a result, moves to expand production might be good for the company, but they can also affect supply industrywide in a way that keeps prices from rising as high as they would if supplies stayed stable. Of course, competitors also play a role in that dynamic, and the company hopes that its growth rates and cost advantages will add up to higher profits.
5. "In Canpotex as well, we make significant investments almong all of us in the infrastructure. ... We make these investments so we become and remain most competitive, setting ourselves up for the possibility of any market condition."
At the same time that PotashCorp deals with its competitors, it also works with them through the Canpotex marketing group. PotashCorp sees Canpotex as a huge asset, positioning it favorably against overseas competitors and avoiding some of the strife that other groups of fertilizer suppliers have seen in recent years. By making sure it can serve demand around the world, PotashCorp uses its position in Canpotex to bolster its own long-term performance.
6. "We think K+S is a wonderful company that has achieved some good diversity in specialty products, and that's something that we'd be interested in."
Tilk saved comments about the proposed K+S acquisition for last, pointing to the potential synergies in North America as well as expansion opportunities elsewhere. At the same time, PotashCorp has been relatively quiet about the deal, hoping that the benefits will speak for themselves and encourage K+S shareholders to take action. As negotiations continue, PotashCorp hopes it can find a good price point at which to move forward with the acquisition and reap its growth potential.
PotashCorp still faces big challenges, but it's working hard to overcome them. With management focused on these key areas, PotashCorp is putting itself in a position to benefit when the fertilizer industry starts to recover.