By G C Mays
Less than a week after I penned a report entitled, "Potash And Phosphate Inventories Still Above Year Ago Levels Despite Falling Prices", Potash Corp. (POT) has decided to take another step to cut costs by laying off workers at both its phosphate chemical plants and at select Potash mines. I would not be surprised to see Mosaic (MOS) announce something similar over the coming weeks. What were the cuts and how will they affect each operating segment?
The company is suspending production at one of the two mills at the Lanigan facility by the end of 2013; they plan to continue the upkeep of the mine so they can bring it back online when demand picks up. The company is also reducing production at the company's Cory facility by year-end. The Lanigan and Cory facilities represent 6 million tons, or fewer than 50% of Potash Corp's 2013 operational production capacity of 12.4 million tons. In 2014, the company expects production and inventory to supply more than 10 million tons. As figure 1 below illustrates, the company has not sold more than 9.04 million tons in a year over the last 3 years.
The company is also eliminating 570 permanent jobs in its potash operations, with 440 jobs cut at its mining operations in Saskatchewan from the Lanigan and Cory facilities and the remaining 130 jobs at the smaller mine in New Brunswick. These jobs represent part of the fixed cost of producing potash. The more tons produced while incurring these fixed costs, the lower the cost per ton. Figure 1 illustrates potash production and sales volumes over the last few years as well as the change in gross margins over the same period.
Between December 2010 and December 2012, the total number of workers employed by Potash Corp. in its potash operations increased from 2,328 to 2,759, a total increase of 18.5 percent. Reducing the workforce by 570 should cut cost of goods sold per metric ton to the 2011 levels shown in figure 1, or perhaps even below, assuming production levels similar to 2011.
Potash Corp. is closing one of its two phosphate chemical facilities in White Springs, FL in the second half of 2014. The move will affect about 350 jobs, according to the company. The company expects to lose 215,000 tons of phosphate production beginning in 2015, which represents about 11 percent of the company's 2012 production of 1.98 million tons. The Aurora, NC facility will lose about 85 jobs. Unlike the company's potash operations, which had grown its number of employees between December 2010 and December 2012, the phosphate segment has already shed about 125 employees over the same period. Figure 2 below illustrates the 24 percent or $40 per ton drop in gross margins during the company's 2012 operating year.
The company's phosphate operations begin 2012 with 1,975 employees and ended the year with 1,792, decline of almost 10 percent during the year. Had the company not made those cuts during the year gross margin per metric ton would have tumbled even lower than $124 per ton. Ammonia prices also remained stubbornly high while prices for sulfuric acid have come down modestly between January 2011 and October 2013. It takes 0.2 metric tons of ammonia and 0.4 metric tons of sulfuric acid to produce 1 metric ton of phosphoric acid, or phosphate fertilizer.
Mosaic enjoys a significant cost advantage over Potash Corp. in producing phosphate. They have earned a gross margin in excess of $300 per metric ton between their 2011 and 2013 fiscal years, which ended on May 31 of each year. The future will allow us to make direct comparisons as Mosaic has switched to a calendar year beginning in 2014.
These moves seek to regain some degree control of over company margins for the near future. However, price and sales volumes are far bigger determinants of profitability than production adjustments. In my opinion, with farmers facing uncertain crop incomes for the near future as crop prices continue to adjust to the new supply, a little more flexibility on fertilizer price will be necessary to get inventories moving again.