Potash fertilizer specialist Potash Corp. of Saskatchewan (NYSE:POT) has had to deal with extremely adverse conditions in the commodity markets that have both stifled demand and reduced prices for its fertilizer products. Yet even as it and peer Mosaic Company (NYSE:MOS) have seen their stock prices under pressure for a long time, PotashCorp has started to find ways to move toward a recovery, and CEO Jochen Tilk is optimistic about the company's long-term prospects. Let's look at five comments from PotashCorp's leaders about what's ahead for the potash producer in the future.
"While potash demand held up relatively well in the face of emerging market uncertainty, prices have been less resilient."
-- CEO Jochen Tilk
For a long time, PotashCorp had to deal with the combination of both weak pricing and poor demand. Now at least, demand is starting to pick up somewhat. The problem, though, is that there's plenty of supply to meet that demand, and so prices aren't likely to rise in the near term. Over the long run, companies like PotashCorp and Mosaic will make adjustments to production to adapt to new market conditions. For now, though, PotashCorp will have to keep slogging through a poor pricing environment and do what it can to keep costs down.
"We think that consumption in China this year is going to be around 14 million tonnes, which is an all-time high, and we have observed momentum there over the last couple of years."
-- Stephen Dowdle, head of sales
PotashCorp benefits from its lead role in the Canpotex marketing group, which also includes Mosaic and peer Agrium and which primarily works on key contracts for sales to areas like China and elsewhere around the world. Under Canpotex contracts, buyers usually agree to minimum and maximum amounts for shipments, and Dowdle expects that Chinese buyers will reach toward maximum volumes allowed under the contracts. If that continues, it could set the stage for better pricing when contracts get renegotiated next year.
"We believe at this point in time that the dividend program provides better value for our shareholders. ... Protecting our balance sheet is our key priority."
PotashCorp's yield has climbed above 7%, making some investors nervous that the dividend is unsustainable. Indeed, the annual payout is approaching what the company has earned over the past 12 months, which is one measure that many investors look to in assessing sustainability. Nevertheless, Tilk thinks that the dividend program is a useful element of the company's overall investment strategy, and while he emphasized that ensuring PotashCorp's financial stability is essential, whatever PotashCorp does with its capital has to be meaningful to make sense, and PotashCorp thinks it can support the dividend at current levels.
"Looking into 2016, despite a more modest outlook on GDP growth and currency challenges in recent months, we remain positive on the outlook for potash."
It's easy to get downbeat about a tough fertilizer market, but Tilk is still optimistic about the future. He sees nutrient requirement to sustain increased global crop production and farm economics continuing to support future growth and demand for fertilizers. As long as those demographics are in place -- and they should be for years and even decades to come -- PotashCorp should enjoy favorable fundamentals that can support its stock.
"Our portfolio of phosphate products is diverse and has a lot of value and perceived value. We're proud of it and we will continue to offer that to our customers."
Some analysts believe that PotashCorp might be better off divesting its phosphate business, ceding the space to Mosaic Company and concentrating instead on its advantages in the potash market. Yet Dowdle argued that phosphates are important for PotashCorp, and the inherent diversification as well as the value in serving multiple needs of customers justifies keeping the unit. That might not always be the case, but for now, investors should expect PotashCorp to maintain the status quo.
PotashCorp hasn't completely emerged from the toughest conditions of the past few years, but there are some signs of life in the industry. In time, PotashCorp could rebound sharply if the business cycle in agriculture finally starts heading back upward.