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Potash Corp. of Saskatchewan Inc. (NYSE:POT)

Q3 2009 Earnings Call

October 22, 2009; 01:00pm ET

Executives

Bill Doyle - President & CEO

Wayne Brownley - Executive Vice President & Chief Financial Officer

Jim Deeds - Executive Vice President & Chief Operating Officer

Joe Podwika - Senior Vice President & General Counsel

Garth Moore - President of PCS Potash

Tom Reagan - President of PCS Potash

Tom Reagan - President of PCS Nitrogen and Phosphate

David Delaney - President of PCS sales

Denita Stann - Senior Director Investor Relations

Analysts

Vincent Andrews - Morgan Stanley

Steve Byrne of Banc - America Merrill Lynch

Jacob Bout - CIBC

Fai Lee - RBC Capital Markets

Don Carson - UBS

Pj Juvekar - Citigroup

Jeff Zekauskas - JP Morgan

Bob Koort - Goldman Sachs

Edlain Rodriguez - Broadpoint Securities

Paul D’Amico - TD Newcrest

Michael Piken - Cleveland Research

Elaine Yip - Credit Suisse

Horst Hueniken - Thomas Weisel Partners

Mark Connelly - Sterne, Agee

Hari Sambasivam - National Bank Financial

Operator

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the Potash Corp third Quarter Earnings Conference Call. At this time all call-in participants are in a listen-only-mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions)

I will like to turn the conference to Denita Stann, Senior Director, Investor Relations. Please go ahead.

Denita Stann

Thanks Brock. Good afternoon, thank you for joining us and welcome to our third quarter earnings call. In the room with us today, we have Bill Doyle, our President and CEO; Wayne Brownley, our Executive Vice President and Chief Financial Officer; Jim Deeds, Executive Vice President and Chief Operating Officer; Joe Podwika Senior Vice President and General Counsel; Garth Moore President of PCS Potash; Tom Reagan, President of PCS Potash, Tom Reagan, President of PCS Nitrogen and Phosphate; and David Delaney, President of PCS sales. I would like to welcome the media who are listening in, and remind people that we are live on our website.

I would also like to remind everyone that today’s call may include forward-looking statements. Such forward-looking statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were applied in the formulation of such statements and actual results could differ materially.

For additional information with respect to forward-looking statements, factors and assumptions, we direct you to our news release and our most recent Form 10-K, also today’s news release which is posted on our website includes the reconciliation of certain non-GAAP financial measures to their most directly comparable GAAP measures. I will now turn this over to Bill Doyle for some comments and then we will go to questions.

William J. Doyle

All right Denita. Thank you and good afternoon everyone and thank you for joining us for Potash Corp’s third quarter conference call. Although the unprecedented challenges of 2009 continued this quarter, we see encouraging signs of our return to a more normal environment and we appreciate this opportunity to share our views with you.

The conditions we faced in the third quarter can be traced back to the onset of the global economic crisis. Initial collapse in commodity markets had a negative impact on both crop and nutrient prices. This severity disrupted normal market activities and caused fertilizer dealers and farmers to become very cautious with their capital. The agricultural industry has not yet broken free of this uncertainty. Farmers in the Northern hemisphere relied heavily on nutrients stored in the soil to feed this year’s crops, while south of the equator they appeared to be under applying in their current planning season.

Fertilizer dealers around the world emptied their warehouses and avoided the inventory risk that led to previous write downs and losses largely associated with nitrogen and phosphate. As a result, our sales volumes for all three nutrients most notably in potash were significantly lower on a quarter-over quarter basis.

Prices for our three nutrients were also lower compared to last year’s third quarter, not to a much greater degree in phosphate and nitrogen. We reported third quarter earnings of $0.82 per share, which compared to $3.93 per share in the same quarter last year. Gross margin of $346.2 million was down from a record $1.7 billion quarter-over-quarter.

Potash delivered 73% of our gross margin this quarter, demonstrating once again that it can deliver stronger and more stable gross margin than our other nutrients. Earnings before interest taxes depreciation and amortization and cash flow prior to working capital changes were both considerably lower on a quarter-over-quarter basis.

In general, this quarter showed the gap between the more normal buying conditions in last year’s third quarter and the extreme caution prevalent this year. Our company has seen choppy waters in the past and we know how to navigate through that. When the Soviet Union collapsed and potash producers from that region flooded offshore markets to raise higher currency, people wondered whether our industry would ever recover.

At Potash Corp, we did what was necessary to get through more than a decade of tough conditions and opportunistically invested in other global potash businesses along the way. While the current deferral of demand has none of the long term characteristics of the FSU collapse, our handling of that situation should provide assurance that we have faced tougher and far longer lasting challenges in the past and turned them to our advantage.

Admittedly this trough has cut deeper and lasted longer than we initially anticipated. The under application of fertilizer however is not ergonomically sustainable. We have always stated that Potash is a long term business and encouraged our stakeholders to take that view as well. We operate with strategy design to optimize volatility in turbulent times and maximize growth when demand is high. We match our potash production to meet market demand, something we have done for more than 20 years. And the benefit is evident in our potash gross margin in this quarter.

Our track record on producing to meet market conditions is clear. This quarter we cut production by nearly two thirds and saw sales volumes reduced to almost half the total the same quarter last year, but we maintained strong per ton gross margin.

Executing this strategy is not easy, but it is logical. Core bodies are finite resources and we won’t de-value our resources by running fallout and the market doesn’t want that. This protects the value of our potash assets both for the long term needs of our customers and for the owners of our company. We stand by this approach and if you look at the factors expected to drive potash demand it is easy to understand why we remain so positive about the future.

The first is to step back from the past year which we will state with confidence is an anomaly. And look at long-term trends in food production in the macro economics of global development. The past two decades the world’s population has grown by 28% from 5.3 billion people to 6.8 billion. Much of that growth has and will continue to occur in Asia and Latin America, regions that have become economic forces.

Even with the challenges in the past year, the International Monetary Fund is projecting the economies of China and India will grow by 9% and 6.4% respectively in 2010. In those countries the first priority is to improve the quality of life now with luxury items but with better food.

For many people it is the first time they can afford a balanced diet, with protein from animal sources and more fruits and vegetables that puts pressure on the world’s farmers to produce more food essentially from a fixed base of agricultural land. To achieve this they need to consistently improve their agricultural factors as including their fertilization programs. Over the past few decades the word made significant strides in this area especially in potash use.

The impact was evident in steadily improving crop yields with farmers producing record harvest in the majority of years over the past decade. Those big production numbers, however hide in underlying the entity. Record crops draw more nutrients out of the soil and if you take more out you need to put more back just to maintain productivity.

This combined with continuing growth in global food demand make it clear that more fertilizer will be needed. In the past 10 years global grain consumption increased by roughly 320 million tons equivalent to the size of the entire US corn crop. In the next decade we are expecting that the world demand is going to grow by further 350 million more tons of grain.

The ability to increase food production by increasing the amount of land anywhere in the world is extremely limited. To meet this growing food demand it will be imperative to replenish nutrients in the soil and maximize yields. Farmers know this and they will start feeding their soil again. The question is not if it will happen, but when the rebound will begin. Everyone would like to know the date or the event that will signal the return to more normal market conditions.

We believe that India’s potash settlement in July would be the catalyst, establishing a benchmark price and easing the uncertainty of fertilizer buyers that did not happen. Many fertilizer dealers and farmers are currently weary of fertilizer pricing and with the precipitous drop at phosphate and nitrogen prices late last year their cautious approach is understandable. So, without a compelling reason to immediately rebuild their own stock piles many continue to wait.

Most Northern Hemisphere farmers are between planting seasons and the late US harvest is expected to cut into their fall applications. Buyers see higher produces inventories and have a perception that supply will be readily available when the spring rush begins.

A few things are likely to lift farmers and fertilizer dealers out of their malaise. The first is that support of crop prices must be maintained to encourage farmers to get back to applying enough fertilizer and maximizing yields. There’s less than perfect growing conditions in some parts of the world in recent months, crop prices have returned to healthy levels.

Second, a spring season will soon be a pause. The process of moving fertilizer into position for the Northern Hemisphere spring planning season will have to start early in 2010. The logistics of moving significant volumes across continents and oceans takes time. There are limited number of trains and ships to wait until March to begin refilling the supply chain would create an immense logistical challenge.

The third factor is time. Many buyers have been watching for contract settlement. As some of you, China’s deals bell weather for potash prices in the past. A contract would trigger renewed demand elsewhere, but in China the more pressing issue is food production. There is evidence that China’s crop yields are beginning to suffer and its government does not want to increase its reliance on foreign food producers.

Over recent months China’s domestic prices for grains, fruits and vegetables have continued to rice. Last week the Chinese government set higher minimum prices for wheat and announced plans do the same for rice. It recognizes the need to encourage production, and it is taking steps to motivate farmers to plant more and maximize yields.

Fertilizers especially potash are part of that equation. Agronomic science firmly states that farmers have to replenish nutrients in the soil because food production is too important to put at risk. At potash Corp, we’ve always been a patient company and we are preparing for demand growth knowing it inevitably returns. Over the past five years, the potash industry completed its transformation from one defined by excess capacity to one that is likely to operate add or nearest productive capacity for years to come. That is not lost on potash buyers who are an allocation for the better part of two years.

At potash Corp, we’re continuing to work on ground field capacity expansions in Saskatchewan and New Brunswick. These projects allow us to build capacity in more quickly and cost effectively than anyone can bring on a green field mine. We expect to raise our annual operating capacity from about 12 million tons in 2010 to a net of 18 million tons when these projects are fully ramped up by the middle of the next decade.

We do know that factors driving potash demand are very powerful. Growth never follows a straight upward line, but the need for more potash in the future is undeniable. Others have taken notice of this as well, which is why there is lot of noise about potential new players or green field projects in the industry. It seems the speculation change is almost daily on who will be starting a new project tomorrow.

We understand why this business is attractive, but we also know the hurdles that continue to keep speculators from putting stubbles in the ground. We estimate that a new 2 million ton green field mine in Saskatchewan would cost over $4 billion when you factor any infrastructure cost outside the plant gate.

More importantly, it would take at least seven years to bring a new mine to production. That is the large and long term commitment. If someone is looking for a fast return, this is not their industry. With PotashCorp, our investment is already in place. If demand is slow, we’ve proven strategies to whether the storm and still capture value for our assets.

When demand growth returns to its normal trend line, our company with our new capacity is going to be in a very strong position. As others have said before the future belongs to those who prepare for it today. We look ahead to 2010 and beyond knowing we will once again have the opportunity to show the full potential of our operations.

I would like to thank you for your interest in PotashCorp and I’m joined today by other members of our executive management team and we’d be pleased to answer your questions.

Question-And-Answer Session

Operator

(Operator Instructions) You first question comes from Vincent Andrews - Morgan Stanley.

Vincent Andrews - Morgan Stanley

Wondering if you could make some comments about the U.S. corn curve has moved up about $0.60 in the last six weeks alone and I’m just wondering if there’s been any sawing from a demand perspective or anything you are hearing in the channel as a function of those higher corn prices?

Bill Doyle

Vincent, thank you and I will turn that question over to David for an answer.

David Delaney

Vincent, we’re in the midst of the slowest harvest since 1985, as of October 18, 17% of the crop have been harvested versus the five year average of 46%. The crop is only 83% mature and right now certain consultants believe with the freeze that we had earlier this month that are around 215 million bushels have been lost, maybe up to a billion bushels have been affected. So we’ll wait to see how that turns out.

In terms of the corn price, December corn was 304 in early September, $4 yesterday. So the major contribution impacted the farmer as he harvested his crop here this fall. We have seen some interest from the fall application standpoint. We’re having reports from across the board that farmers are coming back and using normal fertility for their fall applications. At random we’ve enough to a late start. We’re going to have a narrow window, so on year-on-year comparison, it’s going to felt us down, but we’re seeing a much better attitude in the field today.

Bill Doyle

Vincent, what I would say is, we never really expected much out of this fall just because of what David said. We get off to such a late planting start. We knew it’s going to be a late harvest and then you had this, while it was an ideal growing season it hasn’t been a great fall for drying down the crop. It’s a highly moisture content crop, which is going to take some cost to either led it dry naturally, because you’re losing a little bit of the yield or you’re going to spend it on gas to drive down that crop, so both of those things have been taken into account.

I just think the window is going to be so short by the time you get it out in course of the psychological cutoff date is U.S. Thanksgiving. We’re just not going to have much of the fall, which is going to put even more pressure on the spring than we’re accustomed to because we just won’t have the usual split between fall and spring application, which combined with some of the other factors as I talked about with our international business looking brighter. We’re just going to see more pressure beginning in early 2010.

Operator

Your next question comes from Steve Byrne - Banc of America/Merrill Lynch

Steve Byrne - Banc of America/Merrill Lynch

A couple of accounting questions on the Potash business, with respect to the net realized prices. How much did the least railcars and warehousing fixed cost, which were absorbed by fewer tonnes impact those net realized prices in both the domestic and export markets and then on the cost side your costs have varied all over the place as the function of operating rates, when you ramp backup to the 2 million to 2.5 million tonnes a quarter operating rates, do you expect your unit cash cost to fallback down into that $70 to $80 a tonne range or our labor rates higher now, which would affect that?

Bill Doyle

Steve, I want to ask Garth Moore to comment on your operating cost question first and then we’ll move onto the second question.

Garth Moore

Steve, we know that the operating costs will fallback down to the normal values once we get backup into our normal operating rates. What’s happening now as you know with the low production and the unit cost are just kind of bouncing around on us and, but once we get to the continued production again they’ll be back down to normal rates and possibly a little bit lower than they been, because of higher capabilities.

Bill Doyle

David, will you comment on the least cost impacting us?

David Delaney

Steve from the Canpotex standpoint the railcar and terminal costs are $20 above last year and also we have freight management contracts that are at a higher level than spot market that are above market by around $60 million year-to-date. So that will worsen as the year goes on, but in terms of 2010 those freight management contracts are in much better shape. Domestically, I don’t have the number today, but I’m assuming it’s around $10 from a T&T standpoint from additional cost from railcars and terminals.

Bill Doyle

Steve, what I say, you look at operating cost, lease cost, transportation and distribution cost, all of that combined, which is much higher than it would be normally and yet we still are able to maintain Potash as a tremendous gross margin business during the worst possible conditions you could imagine. So I think that really is just as a lot about the Potash business.

Operator

Your next question comes from Jacob Bout - CIBC.

Jacob Bout - CIBC

Just on your global potash demand estimated 15 million tonnes and you’ve taken that down now, I think back in May you were kind of 55 to 60 and then you dropped down. So I think 55, in September now down to 50. I’m just wondering, what are some of the moving parts that you’re looking at here? What’s embedded as far as Chinese, U.S., Brazil demand and then estimate and what was the moving part from revision downward?

Bill Doyle

I think, Jacob that you look at what’s transpired here over those months from May till now. I talked about the Indian settlement in July and we though that was going to be a catalyst and clearly, we missed it and I would tell you that I personally done a horrible job of forecasting this year.

We’re seeing situation like never before, there’s some interesting numbers out of the IFA. If you look at the first half of 2009, exports of Potash globally, January through June of 2009 are down 72%. That is by far in a way to pervious all time record for any six month period was down 27%, so down 72%.

The second half of 2008, last year’s second half was down 21%. So putting these phenomenon numbers back-to-back in terms of decline and exports and so I would say some of our thinking has been moderated by just those numbers and when you look at where we think we’re going to end up this year in terms of total shipments, we think that number is going to be around 30 million tonnes and that’s down from 52 million tonnes last year and 56 million tonnes in 2007.

So we think the best number that we have right now is 50 and the way we get there is we think that the pressure is going to be on for various markets to move here in early 2010. If it’s later in 2010 if it comes in March, that number will below 50. It could be above 50 as well as we recover because the agronomic demand is certainly there and as we see these grain prices kick up around the world.

I’m not just taking about our focus in North America and corn, wheat, and soybeans, but we’re seeing improvements in palm oil, we’re seeing a phenomenal situation in sugar. These are big Potash consuming crops and so as we see that the pressure on agricultural prices, these agricultural commodities raise you will see the incentive for farmers to get back at it.

So there’s a lot of different calls, we think 50 is the right number at the moment and we think this is a multiple year recovery by the way, it wont be covered off in 2010. You’re going to see 2010, ‘11, ‘12 because it just takes time to get back to trend line to start refilling that soil base that been so severely depleted.

Operator

Your next question comes from Fai Lee - RBC Capital Markets.

Fai Lee - RBC Capital Markets

Bill, I’m just wondering if you would care to comment on perhaps your expectation is regarding the Chinese potash contract, particularly with respect to timing and the risk of a price decline.

Bill Doyle

This is one of the areas that really, when you talk about forecasting, I fell on my face on this one. I will tell you that we get our information from our partner, Sinofert and I told our partner that he’s helped me to look like jerk the whole year long and he said a very difficult time forecasting as well and I would tell you around the world.

In Brazil, we’ve got people that are long time in this business that have tremendous expertise, who all say to me, “I’ve never seen anything like this before.” It’s true. So the Chinese contract, we’re going to wait for it to finish. I do know this, when you get to $2 million tonnes of inventory they’ll buy and we think right now that will be before the end of the year and we certainly know that after two years of utilizing all the nutrients in the soil.

I’ll you what, I asked Stephen Dowdle, who is head of our Fertilizer Sales on a global basis reports to David. Stephen for your guidance is probably one of the real experts in China. Stephen has lived in China, he speaks fluent Mandarin, he is a Ph.D. agronomist, he headed up the Potash and Phosphate Institute to market development program in China in the ‘80s and worked for Canpotex for about 10 years and all that time focused on China.

Steve, why don’t you just talk a little bit about China from an agronomic point of view and your thoughts?

Stephen Dowdle

Domesticated agriculture in China traced us back 7700 years and due to a shortage in arable land, Chinese agriculture is very intensive. Farmers grow two and even three crops per year over wide areas. Due to this long intensive history, the Chinese soils, is compared to Northern Hemisphere new world soils, are lower in organic matter content and caution exchange capacity. Both properties influence the inherent ability of the soil to supply actions such as potassium to growing crops and if the soil cannot supply potassium, Potash must be added as fertilizer.

There’s modern agriculture spread in China starting with the green revolution technologies in the 60s. Widespread fertilizer applications became necessary as yield potential increased with the introduction of modern high yield varieties and China started with nitrogen fertilizer in the 60s, because they could build nitrogen plants and followed the phosphates in the 70s and Potash in the 80s and soil scientists learned from experience that lack of phosphate and potash was limiting yields.

The scientists in China today are still aware and promoting more potash consumption as there is not a proper balance of fertilizer use in China. China uses two little potash relative to the nitrogen and phosphate consumption. In China yields of many crops such as corn and soybeans are far below comparable yields in the U.S. for example, and China will need to continue to increase potash consumption to close this yield gap.

Bill Doyle

I think Steven, as a result we know they need it, they know they need it and Chinese farmer has just been like any other farmer around the world. They were scared to death to with this crisis coming. I do find it interesting that GDP growth in China this last quarter 8.9%, it looks like the recovery is going to be led by China and we know that also going to put more pressure on food production. So our partners says, they’re going to need more next year, we know they’re going to be more next year, we just think it’s a matter of time here, but it wont be long now, fine.

Operator

Your next question comes from Don Carson - UBS.

Don Carson - UBS

Question Bill, you talked a bit before about shipments and your outlook there maybe Dave Delaney, can address the whole issue of consumption, because it would appear pure that two years ago shipments were well above end market consumption, I think you’ve talked about consumption being down 30%, 35% for potash in the 2009 crop year obviously, shipments were down more or so. How do you see consumption? What’s your final number for the last year, where you see it going this year both in the U.S. and globally? How do you see shipments rebounding, we’re hearing that the pipeline inventories are pretty low?

Dave Delaney

In terms of fertilizer consumption in North America, or I guess in the United States, we’re calling nitrogen in ‘08, ‘09 Fert Year, the one we just finished at 11.6 versus 12.8. Now, in this current Fert Year ‘09, 2010 we’re seeing this going to rebound about 5% to 10% to 12.5%. Phosphate was down last year to 3.3%, we’re seeing that’s going to rebound this year 20% to 25% to $4 million nutrient tones.

Potash hit a low of $3 million tones in ‘08 and ‘09 we’ve said, that will rebound 25% to 30% up to 3.8 million tons. Globally, shipments are down as Bill indicated around 30 million tons. We know the pipeline has emptied around the world. I would say, potash consumption is probably around 35 million maybe as much as 38 million tons of KCL.

We do think inventories in every country are extremely low, if you look at Brazil for example, they began the this year with 1.8 million tons and we think this year it will be less than 500,000 or may be 300,000 to 400,000, so extremely lower going into the first quarter. Malaysia and Indonesia, off that high stocks, they’re up to-date, so really if you go around the world, it’s the same scenario.

Operator

Your next question comes from PJ Juvekar - Citi

PJ Juvekar - Citi

Bill, you mentioned in the press release that, you do some labor contracts; you may build some potash inventory in the fourth quarter. I was just wondering, if you can elaborate on that?

Bill Doyle

We do have different labor agreements at individual mines, I’m going to let Garth just speak to that a little bit.

Garth Moore

Our labor agreements work as for various lengths over the inventory control shutdown, we required to get various notice periods to under the different contracts and it varies anywhere from two weeks notice, for two weeks shutdown to eight weeks notice for indefinite shutdown or any, up to any length of shut down. So they vary according to the contracts and as we evaluate our needs and our market demands for the various products and our product mixes, we make our plans accordingly and give the notice that’s required.

Sometimes that’s why we’ve been up and down with our production so much as here, because we were waiting for the market to open up and it’s been slow coming. So we’ve had to take some shorter shutdowns as we go along and then it will continue through the fourth quarter and somewhat into the first quarter as well as we work the inventories down at our plant sites.

Bill Doyle

The people part of this equation, we talk about being a logical choice, this potash strategy that we follow, but the people part of the equation is the most difficult, because we know we’re impacting families, and there’s just a lot of folks involved that are really terrific employees of this company. So there is a lot of sacrifice in that. Potash Corporation has sacrificed tremendously here during this period of time and I know that some of you may not appreciate the human part but it’s real.

Operator

Your next question comes from Jeff Zekauskas - JP Morgan.

Jeff Zekauskas - JP Morgan

Do you expect there to be very little change in your global average potash prices until the Chinese contract is settled?

Bill Doyle

Alright, we’ll let David try that one, Jeff.

David Delaney

We reduced our price July 1, for example FOB St. Louis to 525 and the market has been under pressure of India’s settlement coming in July. That price has trended down to about 460 a short tonne. So, we’re holding stable layer today, people are buying. We’re seeing more and more activities. So I think our fourth quarter number will be similar to the third quarter may be down a little bit, just depends on our T&D cost, where we’re shipping to product mix that type of thing.

Operator

Your next question comes from Bob Koort - Goldman Sachs.

Bob Koort - Goldman Sachs

Bill, just wonder if you could help me maybe focus on something a little less short term on and that is the concept of mass balance around our crop production and then the need to replace nutrients. I guess when I was looking at the U.S. industry over the last 20 years I think production yields got up something like 40%, yet potash applications excluding rough this year’s anomaly aren’t any higher maybe even a touch lower, so what is the science behind that would allows increased production, but not increased application overtime?

Bill Doyle

If you look at what’s happened since - really almost going back to 1985 in the U.S. The U.S., of course, keep in mind is the most developed market of them all in terms of agronomic practices, but just the efficiency of cropping systems are so much improved, this is one of the things that a certain people who have talk about the environmental degradation of potash, or nitrogen, or phosphate, or GMCs on this whole scare tactic about food productions around the world.

They don’t realize how efficient we have become and when you talk about site-specific application of fertilizers, we’re banning fertilizer right into the root zone. The addition of no-till low-till agriculture what that has done the crop population, spacing, the genetic improvements of having corn use, the lease of corn plants pointed to sky and allow sunlight to come in at the root systems. Just so many things that have occurred that have allowed us to become a super efficient industry and when I look at other industries they should model themselves after agriculture, because we have really shown the world how to be efficient.

Operator

Your next question comes from Edlain Rodriguez - Broadpoint Securities.

Edlain Rodriguez - Broadpoint Securities

A quick question on phosphate, can you tell us what you are seeing there? I mean, it seems like almost two or three weeks ago most it will suggesting that volume seem to be returned into near normal levels, but recently of announcements by you don’t seem to indicate a return to near normal levels. Can you give us some color on the phosphate market?

Bill Doyle

I’ll ask David to respond to that one.

David Delaney

The phosphate market has been pretty difficult this year too, really supported primarily by NDS importation of DAP and phosphoric acid. We’ve seen a lot of caution really around the world most countries buying hand to mouth Pakistan did come back in this year, but again in Brazil, Argentina they’ve been extremely cautious, their imports year-over-year are down.

So, the market I think hit a low of 270 metric tonne, Edlain, this summer, then went up to 320 and November, December look fairly slow right now. India is back in way from the market, and the market has declined to 295, and believe me, that hurts because ammonium prices are $355, up from the low of around $185 in July, so our input cost have increased while prices have gone down. So we need some demand to kick back in.

We do think there will be a bit of a recovery in 2010 for dry phosphate market probably increasing from a global trade standpoint by about two million ton. So, I think once we get through this fourth quarter, the first quarter should prove to be much better backed up by low inventories around the world and people realizing they got to get product in place.

Bill Doyle

I’d just follow on that Edlain and say that in phosphate business, we find one of the most frustrating businesses, because it should be so much better than it is, as Dave was talking about the supply/demand balance is really in good shape. Inventories are low and we had a very good demand and when you look at those numbers, 5.5 million to 6 million tonnes of DAP imported and growing demand there and yet they would also say you have raw material increases with sulfur and ammonia.

So the margin pressure is increasing and people don’t talk about phosphate rock cost, but phosphate rock cost are also clearly going up around the world as we get farther and farther away from some of these chemical plants with rock mines, and just the transportation cost and lower quality ore and the higher impurities and so, all the beneficiation cost that you have there.

So, when you think about it, it just should be so much better, but clearly the underlying problem with phosphate is the lack of production discipline, there is just too much production.

Operator

Your next question comes from Paul D’Amico - TD Newcrest

Paul D’Amico - TD Newcrest

Just not to beat dead horse, but just on China you mentioned about the 2 million tonnes expected by 2009 year end, just wanted to gauge where you see inventories currently and whether or not you believe it’s being assessed better now versus before if that’s possible? Specifically, what I’m looking for is, the expected China import demand and consumption that you got in the 2010, 50 million tonne forecast?

Second question, you mentioned about the restock and supply chain logistical challenges and you expect that would be the problem if they look towards March 2010. To clarify, are you expecting normalized inventories on the wholesale level prior to March 2010 or thereabouts?

Bill Doyle

I’m going to let David speak to that question and I’ll speak to China.

David Delaney

If you look at the beginning inventory July 1 in the North American system, outside of producer hands it was extremely low probably less than 500,000 tonnes. Third quarter sales, the industry sought I believe 850,000 tons, and if we consume this fall 2.5 to 3, that means we began January 1 empty, and even if the consumption is lower than the number of 2.5 to 3, if they are going to be extremely tight, if we’re going to use $7 million tons in this fertilizer year, which is down from the ‘07, ‘08 peak, that means we have to move in place 4.5 million tonnes January really through April.

So that’s lot of volume to get in place. So that’s why I think the pressure is on really in North America starting at the beginning of the year, I mean right now people are just buying to put it on the ground. So, there will be a rush here I think in the first half of the year.

Bill Doyle

Paul on the China question, we think the inventories right now are between 2 and 3 million. As I said, when they get down 2 million that’s when they buy, that’s the magic number. When exactly that is, I said we believe it will before the end of the year, it might be in November. There has been public press on DPC being close on agreement with them, I don’t know any more than that, but I do know the Chinese, we’re almost through 2009 year. So to go through a whole year without having any Chinese business is that’s good part of the storm that we’ve been going through.

In terms of where we see them in the 50 million equation we think that China is going to be between to 8 to 9 million next year out of the 15million.

Operator

Your next question comes from Michael Piken - Cleveland Research.

Michael Piken - Cleveland Research

Couple of quick questions, do you have any sense for kind of where we are globally and I guess specifically in terms of the Russian producers and some of the Middle Eastern producers in terms of where they are in terms of potash inventories? Obviously, you’ve done quite a bit work in terms of increasing your size. You have the capacity of 12 million., but what are you sort of thinking in terms of your share, let’s say you are right on the 50 million, like what would be the PotashCorp share, given that presumably there is a lot of producer inventories in other parts of the world as well?

Bill Doyle

You just asked an impossible question, because I can’t give an answer to that. You’re asking me to absolutely predict the future and I can’t do that. What I would say to you is that, producers around the world, one thing about Potash is you can’t store it outside. With one exception, which would be the Dead Sea, we can store it outside because it doesn’t rain there.

So, there is some inventory there that normally wouldn’t be there, but the rest of it have to put it under a roof, because you don’t you just it’s soluble and it tends to do some other than its intended purpose. So, that does limit production and that’s why you have had the shutdowns around the world and you start thinking about where we’re going to end up this year.

Potash Corporation it will take the lion share of the global shutdowns, but there is substantial somewhere between 20 million and 25 million tonnes of production is going to be taken out this year in a market that is normal well last year it was 52 million, and we are saying 50 million for 2009. So that’s a lot of production taken out and that’s also is one of the reasons why we think that Potash recovers quicker than these other nutrients.

Operator

Your next question comes from Elaine Yipp - Credit Suisse.

Elaine Yip - Credit Suisse

In the U.S. the farmers are in good shape and current grain prices are certainly supportive of that, but what are you views on farmer economics in other regions such as Brazil. I mean you mentioned that Brazil and Argentina are little bit more cautious with the fertilizer purchases, what are the drivers of that?

David Delaney

In Brazil and Argentina, one thing we know their USDA forecast for both countries is to harvest 114 million tonnes of soybeans. Last year they harvested 89, so that’s a big increase and the world is going to be watching how well they do and even with that big crop their carryover stock stay fairly low.

The economics, the return is still good even with the stronger Real in Brazil, but there has just been so much caution due to last year and the write-down of the nitrogen and phosphate inventory that I wonder if Brazil will truly get through 20 million to 21 million tonnes of NPK consumption based on lower Potash imports phosphate, nitrogen everything has been extremely slow so, for them to yield to harvest a big crop like they are predicting I think maybe a challenge, but in terms of return on the current prices it’s very good, still very good.

Operator

Your next question comes from Horst Hueniken - Thomas Weisel Partners.

Horst Hueniken - Thomas Weisel Partners

In today’s press release it’s disclosed that in the phosphate business you incurred that negative gross margins for both solid and liquid fertilizers. Is there anything that you plan on doing in order to eliminate this drag on earnings or is the plan to continue operating as is in the expectation of a cyclical upturn?

Bill Doyle

I’m going to ask Tom Regan to, he is head of our phosphate and nitrogen business. I’m going to ask Tom just to comment generally how he sees things and add on here.

Tom Regan

I think that one of our strength is our diversity with our phosphate division. Now, we have a capability to supply the liquid fertilizer. So we also had capability in animal feed and we have capability in purified acid. So with respect to that we expect operations say in the fourth quarter to be better than what they were in the third and we will continue to operate at rate consistent with the market demand.

Now, we have taken some steps when we announced White Springs where we had a reduction force and that was really due to the philosophy of just operating the market demand and our projection based on what that market demand may look like for some period of time. So, from the class perspective we pay attention to what each site does and based on that take suitable actions.

Bill Doyle

What I said is, if you look at DAP the dry phosphate that’s the problem area. We’ve been operating at very low level of capacity because we feel that we ought to match supply to demand. Problem is we’re not big enough in dry phosphate to carry the day, because in Potash we certainly are and we really can make a difference there and you know it’s part of, as I said earlier, part of the frustration that I have with phosphate, because really it should be a terrific business right now and it’s not and we’re hoping that change.

Operator

Your next question comes from Mark Connelly - Sterne Agee.

Mark Connelly - Sterne Agee

I’m listening to the comments about potential pressure in getting the product out in the spring and dealers buying as need and I’m wondering, is this maybe going to be the new reality going forward given how weak the distributors are after some of the big write-downs and what they got stuff holding and if that is a possibility would that suggest that we are going to see a restructuring of the distribution system for Potash. You think about in terms of how we are moving forward, our distributors are really going to be willing to carry between season.

Bill Doyle

I think that, as I said, we believe that this year is an anomaly and we think that you are going to see this market turn, you are going to see demand comeback in the system. When you go from 52 million tonnes down to 30 million tonnes you get all sorts of crazy things going on and people get real nervous and even some of you guys get nervous and you got to think about the long term fundamentals of our business and it’s going to comeback and the confidence levels will comeback and you’re going to see the demand for food increase and all the fundamental things.

That I think when I read a lot of reports and just like throw the baby out with the bath water and I don’t understand that and it doesn’t seem to be very powerful to me when the fundamentals are so clearly obvious and if you look at it from any perspective and I had criticized sometimes for not appreciating the fact that some of you folks are judged on a shorter time periods than I am and I do appreciate that you have got quarterly requirements that you are judged by, but sure heck don’t want to run our company that way.

Operator

Your final question comes from Hari Sambasivam - National Bank Financial

Hari Sambasivam - National Bank Financial

I just wanted to ask a little bit about industrial demand for nitrogen and phosphate. I know the phosphate demand was down by about 20% this quarter, how would you sort of characterize the outlook for this and I’m just wondering is it just simply an economic up tick sort of a related issue or do you see other factors that affect industrial demand.

So that’s the first question, and the second question relates to price leadership and in that question I wanted to ask was particularly for the Indian contract and now the Chinese contract, both these countries are negotiating with someone other than Can products and I’m just wondering under that scenario what kind of leverage does Can products have to sort of set prices going forward. I know you have the ability to sort of takedown volumes, but how do you influence price when your key costumers are negotiating with other players, presumably weaker players, in the Potash marketplace?

David Delaney

The industrial ammonia demand year-over-year is going to be down about 2 million tonnes and that’s primarily related obviously to low operating rates of Acrylonitrile Caprolactam business, polyurethane business, DAP operating rates earlier in the year were down. We are seeing an up tick here in the second half. DAP operating rates around the world have increased.

We are seeing higher industrial output in Europe and Asia and also slow ramp up here in the United States. A lot of our industrial customers are indicating higher run rates here in the second half and improvement in 2010. Our purified acid business has been slow this year also we have seen a lot of competition from imported Chinese process that we have refused to compete with. So, part of it is the market in phosphate, part of it is cheaper Chinese phosphoric acid.

Bill Doyle

I terms of price leadership, in a weak market like we had this last what’s almost 15 months now, you get a lot as I said earlier a lot of silly things happening, and so, it’s hard to see price leadership, but there are subtle things that I would point out to, if you think it’s just our operating philosophy and the way we have taken hit for a lot of our customer earlier in the year and they were taking write-downs for nitrogen and phosphate because there is disastrous happenings in those prices.

We had lot of customers come to us and asked us what our approach is going to be and they were literally, in certain cases begging us not to lower the Potash price because they are going to have to take big write-downs, and we sit back and so, we took the hit for and, I can tell you many, many people have told me that if we hadn’t done that they would have gone under because they couldn’t take the nitrogen and phosphate write-downs plus Potash.

So, there is a little bit of leadership there and again, our operating philosophy, we didn’t operate the way we do, I can tell you that any price levels that are being discussed out there in the global market place by BPC or anybody else wouldn’t be even close to where they are today. Canpotex is clearly the leader in the international community, the fact that they pick other players like BPC or someone else to negotiate with should tell you how strong Canpotex is as a marketing organization.

I just think they do a superb job, great management, very knowledgeable and is the most reliable supply source, if you take Agrium and Mosaic and Potash Corp combined in Canpotex and you see there are joint capability, the reliability that we have, the long term contracts that more people willing to tie up with us for years out into the future because they know we are all solid companies and strongly in support of Canpotex, there is just no doubt we are a leader.

In times of weakness and short term issues like we have had over the last year, you will see some things that might lead you to think otherwise, but the truth is something entirely different.

Denita Stann

Thank you everybody. If you have any further questions today please don’t hesitate to give us a call at the office and have a great day.

Operator

Ladies and gentlemen this concludes the conference call for today, thank you for participating. Please disconnect your line.

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Source: Potash Corporation of Saskatchewan Inc. Q3 2009 Earnings Call Transcript
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