Potash of Saskatchewan's CEO Discusses Q1 2012 Results - Earnings Call Transcript

 |  About: Potash Corporation of Saskatchewan Inc. (POT)
by: SA Transcripts


Good day, ladies and gentlemen. Thank you for standing by. Welcome to the PotashCorp First Quarter Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Thursday, April 26 at 1:00 p.m. Eastern.

I will now turn the conference over to Denita Stann, Vice President, Investor and Public Relations. Please go ahead.

Denita C. Stann

Thank you, Brock. Good afternoon. Thank you for joining us, and welcome to our first quarter earnings call. In the room with us today, we have Bill Doyle, our President and CEO; Wayne Brownlee, our Executive Vice President and Chief Financial Officer; David Delaney, Executive Vice President and Chief Operating Officer; Joe Podwika, Senior Vice President and General Counsel; Garth Moore, President of PCS Potash; Brent Heimann, President of PCS Phosphate and PCS Nitrogen; and Stephen Dowdle, President of PCS Sales.

I'd like to welcome the media, who are listening in and remind people that we are live on our website. This morning, we posted an investor presentation on our website. And during Bill's remarks, we will be highlighting some information from this presentation.

I would also like to remind everyone that today's call may include forward-looking statements. Such 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 a reconciliation of certain non-IFRS financial measures to their most directly comparable IFRS measures.

I'll now turn the call over to Bill Doyle for some comments, and then we'll go to questions.

William J. Doyle

All right. Thank you, Denita, and good afternoon, everyone. And thank you for joining us for this discussion of PotashCorp's first quarter results and our outlook for the remainder of 2012.

Despite a slow start to the year, fertilizer markets have now fully engaged. We appreciate this opportunity to share our views on how this transition will shape our performance in the months ahead.

We came into the year facing the same challenging conditions we saw at the close of 2011 with fertilizer buyers around the world moving cautiously, choosing to defer purchases rather than positioning inventory. While we anticipated this delay as we entered the quarter, we did not expect it would take until near the very end of the quarter for potash and phosphate demand to increase.

North American dealers worked down inventories and purchased only to meet immediate needs of farmers, who delayed their own buying decisions to the last possible minute before the planting season arrived. First half potash contracts with China were not settled until late in the quarter. As a result, Canpotex shipped minimal quantities to this important offshore market other than industrial grade products.

In India, reduced potash subsidy levels and higher retail pricing slowed demand. As a result, customers deferred shipments for most of the remaining tonnage on existing contracts into the second quarter. Even in markets like Latin America and Southeast Asia, where potash consumption remained very strong, dealers met demand by drawing down inventories built in 2011.

Our average realized potash price increased slightly from the trailing quarter as a lower percentage of sales were delivered to offshore contract markets. Given the gains made in 2011, potash prices for the quarter were up 19% from the same period last year.

Nitrogen buyers purchased more aggressively. And product pricing strengthened as the quarter progressed. Combined with lower natural gas costs, we generated record first quarter gross margin in our Nitrogen segment. Still our first quarter earnings of $0.56 per share were at the low end of our guidance range, largely because of the reduction in potash sales volumes and higher per tonne costs that came with much lower production levels.

Despite some bumps on the road over recent months, the reality of our business is that a void created today must be filled tomorrow. Dealers who defer purchases must eventually restock to meet the needs of their customers.

That reality began to take hold late in the first quarter and has carried into the second quarter as demand in all major markets has increased. Farmers are planting more acres this season, and crop prices remains supportive. So the agronomic need and economic incentive to apply fertilizer is there.

As illustrated on Slide 6 of the presentation posted on our website, record global potash fertilizer consumption is projected in 2012. Nowhere is this strength more evident than in Latin America and Southeast Asia.

In Brazil, farmers are striving to increase their production of corn, soybeans and sugar and are applying more fertilizer to feed their nutrient-deficient soils. Fertilizer deliveries, to the end user, were up 7% in the first quarter, and we expect Brazil's fertilizer consumption for the year will exceed the record level of 2011. Customers in this market began purchasing large volumes in April, and we expect strong shipments of potash and phosphate through the second and third quarters.

In Southeast Asia, potash demand slowed in the first quarter due to inventories built in 2011. As a result, shipments may be slightly lower in 2012 compared to the record levels achieved last year. But like Brazil, farmers in this region continued to address the needs of potash-intensive crops like oil palm, sugarcane, fruits and vegetables. The strength of this ongoing consumption combined with the reduction in inventory levels, during the first quarter, is supporting increased demand in this market.

With new potash contracts settled late in the first quarter and higher projected consumption in spring, China's volumes for the second quarter are expected to exceed levels of the same period in 2011. In contrast, India's near-term demand continues to have a measure of uncertainty even though there's no question of its agronomic need for potash. Attempts by the government to reduce its subsidy bill have resulted in higher retail prices and are creating hesitancy at the farm level. As a result, we have lowered our potash demand expectations for this market to between 3.5 million and 4.5 million tonnes for 2012. Canpotex is expected to complete deliveries under existing contracts with Indian customers by the end of June.

We view the situation in India as a short-term issue, as the medium to long-term consequences on food production of under applying potash and phosphate are too significant. Given India's projecting consumption levels for 2012, the nitrogen to potash ratio is expected to fall back to 6-parts nitrogen to 1-part potash. A level its own agronomists recognized as inadequate to improve on lagging crop productivity and meet the future food needs of its increasing population. Even with a reduced outlook for demand in India, we expect record offshore sales volumes for the remaining 3 quarters of this year.

In North America, spring applications are in full swing, and we believe previously positioned inventory has moved through the supply chain. That has triggered an increase in demand from producer warehouses since the end of the first quarter.

Despite this recent strength, we expect North American dealers will attempt to end this spring season with empty bins. This is likely to result in reduced domestic sales volumes in the second quarter compared to last year when dealers moved earlier to begin restocking for the fall.

We believe the deficit this spring will extend beyond dealer warehouses. Based on USDA forecast for acreage and yields, we estimate potassium removal by corn and soybeans in the U.S. could be up approximately 10% this year. Although consumption is expected to be strong this spring, it is unlikely to match the significant increase in projected nutrient removal. Simply put, a debt is being built and must be repaid over time to maintain the productivity of the soil.

This is an issue highlighted by soil test data published by the International Plant Nutrition Institute, which shows soil potassium levels declining in major U.S. Corn Belt states since 2005. We don't expect this will be rectified in one application season, but it is a trend that we believe must be reversed over time.

With minimal inventory carried in the second half and a potential for a large nutrient drawdown in the soil, we anticipate a significant increase in domestic demand during the second half of the calendar year.

Based on a delayed start to the year and more cautious outlook for India, we have revised our outlook for global potash demand to 53 million to 56 million tonnes and estimate our full year sales volumes to be in the range of 8.8 million to 9.2 million tonnes. We expect to run at relatively high operating rates through the remainder of 2012, allowing for summer maintenance downtime, as well as expansion-related work at Allan.

In phosphate, demand conditions are improving, and pricing for solid fertilizers has moved higher in recent weeks. Feed and industrial markets, which are historically more stable are expected to remain a source of strength for our diversified phosphate business.

In nitrogen, we continue to benefit from favorable U.S. natural gas prices and expect to see the recent increase in nitrogen prices reflected in our realizations during the second quarter. As witnessed over the past 6 months, nitrogen pricing can be volatile, and that is likely to continue following the spring season.

Based on our outlook for all 3 nutrients, we now expect 2012 earnings of $3.20 to $3.60 per share, including the potential for record or near-record earnings of $0.90 to $1.10 per share for the second quarter. Even though variables, like the timing of restocking or government policies are difficult to predict, the certainties of our business do not change. People need to eat. Farmers need to grow crops, and fertilizer is essential to maintaining healthy, productive soils. That is consistent from country to country and crop to crop.

Agricultural fundamentals are strong, and the economic opportunity for growers remains very attractive. We recognize the potential this holds for our company for the remainder of 2012 and for the years to come. We will continue to make decisions based on the long-term value we can create for all of our stakeholders.

This has consistently been our approach through quarters of fluctuating demand as we witnessed at the start of 2012 and in periods of significant opportunity like we see in the months and years ahead.

I'm now joined by our senior management team, and we would be happy to answer any of your questions.

Question-and-Answer Session


[Operator Instructions] Our first question today comes from Jacob Bout of CIBC.

Jacob Bout - CIBC World Markets Inc., Research Division

I had a question on the global potash guidance of 53 million to 56 million tonnes. It's lower than what some of your competitors are talking about, but also this is a second quarter where we've seen this downward revision. So, maybe if you could just help us out, tell us what happened in this past quarter. I know you talked about India. Was that 100% of the reason why you took down your guidance? And then maybe talk a little bit about your thoughts in when we're going to get back to a tight market for potash.

William J. Doyle

Okay, Jacob. I'll let Stephen Dowdle have the first crack at that.

Stephen Francis Dowdle

Yes, Jacob, looking at the global potash situation, the main factor that has resulted in our downward revision to demand estimate of 53 to 56 is really due to the inventory carryover that took place. There was inventory that accumulated during the fourth quarter. As you recall, the world became very preoccupied with the headlines of European economic crisis and Greece and just people pulled in their horns a little bit. And we saw some inventory that accumulated, particularly in Southeast Asia. We also saw slightly higher shipments in the fourth quarter in Brazil, which resulted in some carryout in Brazil in the fourth quarter. And we did see the effects of some demand destruction in India, which resulted in inventory build in the fourth quarter. So as we came into the first quarter, we've witnessed that these inventories have been drawn down during the first quarter. And that's -- it has allowed us to reevaluate what the demand prospects are for the calendar year, and hence, we've revised our estimate to 53 to 56.

William J. Doyle

Jacob, what I'd add is that I think the important thing to realize is that consumption for potash in 2012 will be an all-time record. And that's our firm belief, and just what you see, I think, at the -- on -- with application rates, in what's going to the field, very, very important to realize that consumption will be a record. You ask when we're going to see tight potash markets. I think you're going to see tightening potash markets as we move throughout this year. And then if you look at one market like India, India has been down -- will be down 2 years in a row after being at the level over 6 million tonnes of potash in 2010. It's going to be about 2 million tonnes per year less in 2011 and 2012. And when you start looking at what that means for yields, and people will wonder whether yields are being impacted in India now, and India is seeing reduced yields quite substantially in cereals, rice, maize, corn and wheat. You're seeing big reductions in yields here in 2012. And so India, already, if you look at the International Food Policy Research Institute says it's the country 14th from the bottom in terms of food security. And we talked about it in my formal remarks that it has now gone back after going to an N to K ratio of under 5. They were 4.8 to 1. They are now going back up over 6.6 parts nitrogen to 1 part potash. A number of the agronomists that I talked to, that cover India, including Indian agronomists, say that this is an agronomic tragedy. And when you look at the food inflation in India, through March over the last 3 years, food inflation is running at 45% for those 3 years. That has a very detrimental effect on the rural poor of India. So it's a human tragedy, not only an agronomic tragedy. And that has to be redressed. And so you're going to see this tightening market. And I firmly believe that 213 -- 2013 is going to be a very strong potash year because you've got to pay this debt that we just talked about in my remarks.


The next question comes from Vincent Andrew (sic) [Andrews] of Morgan Stanley.

Vincent Andrews - Morgan Stanley, Research Division

Maybe I'll follow-up on that, and I've long been a fan of India being a growth story and betting that they'll come back to the market and so forth. But it feels like something's different this time around, economically speaking, with their budget and with the rupee and so forth. So it's hard to disagree that they need to be using more product and the demands are there. But the question I keep getting asked, "How are they going to pay for it?" So what thoughts do you have on that, Bill?

William J. Doyle

Well, you have to have government policy aligned with your needs. And a big part of the problem in India has been government policy not being in sync with food requirements. And of course, you're in a political situation, the government, the current government's trying to stay in power and they're trying to cut their deficit. But food priority with that size population has got to be near the top, and so I don't dispute the need to reduce subsidy. It's the way that it's been done because you're still subsidizing nitrogen, 70% of the subsidy is going to nitrogen, which is the nutrient in greatest supply. And they're removing the subsidy from P&K, which is the nutrients in least supply, which is a backward approach to crop production because they need to lower that N to K ratio from 6:1 down to, if they can get to 4, that would be great or more commonly, 3, which is regarded as a good ratio, 3:1. And so it's just sort of a backwards approach to food production, and so this is a prime issue. And I think if they had the subsidy right, where you would de-emphasize the nutrient in greater supply and emphasize the nutrients that you need the most, that they'd make more progress and they'd find a way to pay for it. And by the way, even with the current prices for potash and the market prices for grains, they -- it's still affordable, Potash is still affordable, but the policies that have been set have made it very difficult to reach the farmer.


The next question comes from Mark Connelly of CLSA.

Mark W. Connelly - Credit Agricole Securities (USA) Inc., Research Division

Bill, can you talk about how inventories are being held in the system and whether you think that we're seeing a permanent or semi-permanent shift? We hear a lot more talk about consignment now. We're hearing a lot more over the last couple of years about dealers simply not wanting to carry between season. Do you see that as a permanent shift? And are we going to be seeing these numbers show up on income statements differently?

William J. Doyle

I don't see it as a permanent shift. I see it as a situation, which coming off this last 6-month period, which is now behind us. And this risk aversion, the whole fear of Europe exploding again and the conservatism that's out there in the farm community, and of course, our dealers are talking to those folks all the time, our dealer customers. I don't see this as a permanent situation. As a matter of fact, I see this momentum coming back. Now we're going to have a very good second quarter, if not a record second quarter. As I see this momentum coming back and the product tightening, we're going to be looking at price increases here not too far out, and that will get people going again on inventories. So I don't see that. And consignments, that's a dirty word, in my book. I just think that's nuts, and so I've never ever in my whole career ever believed in consignments. So I don't see that Mark as being an issue for our industry because it's a real dumb way to do business.


The next question from comes from Edlain Rodriguez of Lazard Capital Markets.

Edlain Rodriguez - Lazard Capital Markets LLC, Research Division

Bill, just a quick follow-up on the pricing comment you made. Like when you look at prices going forward, like how do you see it developing over the course of the year, like in the different regions? Because I know the producers are trying to get a price increase in Brazil. Like, can you talk about like how that's going, and how do you see that happen over the next couple of months or so?

William J. Doyle

Edlain, as you -- if look at Brazil, I think we're going to have a $30 increase in Brazil by -- in place by the end of the quarter or beginning of the -- very beginning of the second quarter. You're just going to see that. So that price will move up to the $5.50 range. You're going to see Malaysia and Indonesia with price increases coming here before the end of the second quarter. So it's just this market, it tightens up so quickly and, of course, we took considerable amount of production out during the first quarter. So I think most folks realize that we were -- we produced just a little over 40% of capacity in the first quarter, and of course, our sales were about 45% of what they were in first quarter of 2011. So I mean, it shouldn't come as any surprise that we were slow in the first quarter. But this is picking up now, and I think we balanced -- I think we took the shutdowns that kept the market stable during an uncertain period of time. And now it's just reengaged. I think we have some real momentum building. I think you're going to see these markets improve pricewise, including the U.S.


The next question comes from Joel Jackson of BMO Capital Markets.

Joel Jackson - BMO Capital Markets Canada

Bill, it seems that there's a lot of foreign product on the lower river right now in the U.S. And it doesn't seem like prices are going to be rising in the U.S. anytime soon. So maybe you could talk about what is the urgency for the channel to restock potash in the third quarter?

William J. Doyle

I'll let Stephen speak to the inventory foreign potash in the lower river. Stephen? And then I'll maybe comment.

Stephen Francis Dowdle

Sure, Bill. During last year, we saw something quite unusual and in terms of the imported potash into the U.S. between April and November, we saw about 1.1 million tonnes imported. Typical yearly calendar year imports are on the order of 700,000 to 800,000 tonnes. So, the timing of this to start arriving in April, it missed the season, it missed the spring season. There is an important market in the lower river in the Texas area. That was impacted by a very serious drought, so that geography could not absorb the material. And then we also saw in the Eastern Corn Belt, particularly in Ohio and Indiana, where normally we have a good fall demand, good fall application that did not take place due to very, very unusual wet conditions. So this product did not get absorbed by the market during calendar year, last year, during the third and the fourth quarter, it carried over into the first quarter. And we have seen during this first quarter that kind of priority of people, who are holding inventory, has been to de-stock and get -- and sell that inventory, and we've seen that happen. And right now, we see the psychology in the market that people definitely want to end this season with no inventory. I should also point out that when that occurs, when we see the product coming in and then it moves down deep into the supply chain, that inventory becomes very difficult for us to quantify because people who are deep in the supply chain, whether they be retailers, even growers or dealers, when they are carrying inventory, certainly they don't want to advertise that. And it becomes less visible and very hard to track. But what we've seen during this first quarter, as the season has gotten under way, we've seen that de-stocking take place. We've seen the psychology to end this season with very, very empty bins. And so our expectation here is as we get into a summer fill kind of a season and looking forward to a fall, we're expecting very, very good strong demand in the fall, that we will see a very much eagerness on the part of our customers to begin restocking the supply chain.

William J. Doyle

Joel, you can only empty the cupboard once, and as we know what's going on here with people wanting to go out with empty bins here at the end of June and then Stephen talked about our expectations for a very strong domestic second half. We feel that, that is going to combine with the offshore, move. Keep in mind, all these things work together, but you've got Brazil incredibly strong demand for granular potash. Of course, the U.S. is a granular potash market. So there's competition out there for that granular supply, and we think that will allow a increase for the fall season in the U.S. So where these things -- these things change quickly. You saw it on the downside from -- we went so strong for 3 quarters during 2011 and then boy, we came to a screeching halt in the fourth quarter of 2011, the first quarter of 2012. Boy, this thing starts going again. And you see this momentum building, and I wouldn't be surprised as I said to see an increase even in domestic pricing here before the end of the year.


The next question comes from Kevin McCarthy of Bank of America.

Kevin W. McCarthy - BofA Merrill Lynch, Research Division

Bill, you made a comment earlier that you'd anticipate all-time record consumption, and so as it relates to North America, I'm wondering if you have observed or anticipate any changes in consumption in terms of pounds applied on the ground or is it the case that the 1 million tonne cut that you made in forecasted demand is entirely a function of inventory management among dealers?

William J. Doyle

I'm going to let Stephen, who keeps track application rates, talk about -- talk about that, Kevin.

Stephen Francis Dowdle

Yes, Kevin. We've certainly been keeping our eye on that. It's probably the most important question. It's what our actual application rates that really is demand. And from what our field sales people are telling us is that demand application rates are normal and even slightly above normal, reflecting the good crop economics. Obviously, in certain geographies, there are certain specific situations. But overall, there certainly does not appear to be any hesitancy to use normal application rates for potash.

William J. Doyle

And Kevin, yes, we cut actually 1.6 million tonnes during the first quarter. And of course, you know our long-standing approach is to produce to meet market demand. So when the product wasn't needed, people weren't taking it and we didn't produce it. People tend to want it, including some of the offshore might, if India comes in a little bit earlier, you never know. I kind of watch what they do, because you never know exactly what's posturing, what isn't. But if they do need more, then we'll crank it up. The good news for us is we have this growth potential because we have more productive capability right now that we can bring onstream. So we'll just see where it goes. We think that, as I said, very, very strong consumption record predicted for 2012, and that bodes well for resupplying the system.


The next question comes from Michael Picken of Cleveland Research.

Michael Picken - Cleveland Research Company

I was just wondering if you could talk a little bit about kind of the disparity between why the nitrogen markets have rallied so much and to some extent, the phosphate markets, and yet, we haven't seen much traction on potash in terms of pricing here in the domestic markets. Is there still a structural change in sort of the ways that some of those other products are bought that creates more volatility or anything that you could provide some color and then sort of where you see the prices maybe in the outlook for nitrogen and phosphate over the rest of the year.

William J. Doyle

All right. Well, what I'd say is you didn't have much nitrogen imported into the U.S. over the winter months, and people waited, I think, too long on nitrogen. And so that's why it moves very quickly. As you know, nitrogen's the most volatile of all the nutrients, and so the movements are -- can be exaggerated both ways, both up and down. And we think overall that you might see a little bit of a correction in nitrogen. In terms of the urea pricing, you've got just very high levels, and we don't think that, that is sustainable over the medium to long term. We think ammonia is going to tighten up here. As you start looking at competitive producers of ammonia around the world, the Russian situation, Ukrainian gas, the impact of Russian gas in Europe, you've got very high costs, nitrogen comparing to what's going on in North America because we're blessed with shale. And so I don't think you're going to see a lot of imported nitrogen coming into the U.S., much like you saw during these last few months. So the nitrogen market is, we think, over the short term, going to be pretty good, but not as ecstatic as it was here during the 1-month or 6-week period that urea went through the roof. In the phosphate business, maybe a little bit better than what people think. Ma'aden, probably will be half of its productive capability in 2012. They've had some ramp-up problems. These, too, are typical of what we've seen, what we see in all these big projects whether it's potash or phosphate, even delays in nitrogen plants. These things always take longer than people think they're going to take. And so, we see some pretty good demand coming. Phosphate, of course, is more dependent on India. So if India reengages in phosphate, which we think they will, we think that phosphate business will be pretty good. And a big pressure you got in phosphate is rock, the raw material. And you've seen some of these permitting problems in Central Florida, which we're blessed not to have at Potash Corporation because we have a life-of-mine permit in Florida, and we've got a 30-year permit in North Carolina. So we don't have these issues. But I guarantee you these new mines, that are going to come out, are going to have big permitting issues. And so you're going to have higher-priced raw material and for people, who are not vertically integrated into their own rock, I just, boy, they've had a tough row to hoe, they're going to have a tougher row to hoe and that represents a significant part of phosphate production. And I think you're going to see some people fall by the wayside there. So phosphate, I think, is going to be a little bit better in the medium term.


The next question comes from Jeff Zekauskas of JPMorgan.

Jeffrey J. Zekauskas - JP Morgan Chase & Co, Research Division

What actually was your potash production in the quarter? And how much capacity do you think will be added to the global potash industry outside of Canpotex in 2012 and 2013?

William J. Doyle

I'll just ask David to tell a little bit about the potash production, and then I'll comment on greenfield and brownfield.

David Delaney

Yes, Jeff, our production in the first quarter with our operations was 1.3 million tonnes, and then when you throw Esterhazy on top of that, we were 1.75 million tonnes for the quarter.

William J. Doyle

As I said earlier, we took off 1.6 million. Keep in mind, you see in the numbers 1 million tonnes less than first quarter of last year, but we have expanded capacity. So actually 1.6 million is what we took off. In terms of what I see coming on the brownfield, not the greenfield, nothing. There's just -- the numbers don't work, continue to don't work. People continue to look. There's a lot of promoters out there, continue to promote, hoping people like us buy them, which is not going to happen. So I don't see anything at all in greenfield for at least the next 5 years. Brownfield, again, slower to come about. We see some pronouncements about 2015 for some brownfield expansion. Those will take longer also than people think they will. So not a whole lot of new capacity coming on. And just we're -- having done this now for 9 years, we started our expansions 2003, no one has built more potash capacity in the last 9 years than Potash Corporation. We know a little bit about what we're talking here. It's just much more difficult than people think, and I just don't see much coming on in the brownfield arena in the next couple of years.


The next question comes from Paul D'Amico of TD Securities.

Paul D'Amico - TD Securities Equity Research

Bill, just working backwards. One clarification, one question. When you're talking about the Brazil pricing to $5.50, you said Q -- by the period of Q2, I think you meant Q3, so if you can clarify that. My question is with respect to, you mentioned earlier, expect high operating rates for the remainder of the year. So Q1 was 82%. I'm just wondering what kind of operating are you expecting for the remainder of the year? And how do you frame that with the sales volume guidance that you gave.

William J. Doyle

Now you're confused. That 80% number is phosphate. Potash, we operate it at 46% in the first quarter. So just to clarify that, Paul. In terms of Brazilian pricing, I said by the end of the second quarter beginning of the third quarter. So end June, beginning July.


The next question comes from P.J. Juvekar of Citi.

P.J. Juvekar - Citigroup Inc, Research Division

Bill, a question on nitrogen. Can you talk about what was the reason for the Geismar delay? And then you had that natural gas contract in Trinidad expire. Is there an update on that? And then sort of more long term, do you expect to see more nitrogen plants in the U.S. getting built?

William J. Doyle

All right. I'm going to ask Brent Heimann, who's head of our phosphate nitrogen operations to answer the question about Geismar, and then I'm going to have David Delaney, who's in charge of the natural gas negotiations in Trinidad to comment on that one. So, Brent, please give us an update on Geismar.

Brent E. Heimann

P.J., let me start by saying that safety is our top priority at PotashCorp. And we have found as we've got into this Geismar restart that the condition of the plant is not as good as we thought, in particular the infrastructure. So we're going to take some extra time and get it right and have a safe and reliable plant. And we plan to be restarting at the end of the year.

William J. Doyle

David, you want to talk about Trinidad?

David Delaney

P.J., regarding Trinidad, as you know, the negotiation revolves around our '03 plant, which is our smallest ammonia plant in Trinidad. That contract expired in May of '11. We've been operating under an extension. We were hoping to get something resolved here by the end of the first quarter. That did not happen. There is a new president of the NGC. He just came on board in February. So we're expecting to conclude something here by the end of the second quarter, hopefully here in April or May, but that's kind of what we're anticipating. We do think at the end of the day, that the Tampa, the ammonia price or the gas price will be indexed to Tampa ammonia as it has been historically.

William J. Doyle

And the last question you asked about the U.S., new plants in the U.S. being built. Two hurdles there: one is the regulatory process, which is an enormous burden in the U.S.; and the second issue is long-term gas contract, which is difficult to acquire. But I'm not saying it's impossible, and you would think on the face of gas prices where they are at this moment with shale being so productive, that this would be an easier thing to do. But believe me, the regulatory environment is an enormous burden, and you just -- it's very difficult to find anyone who will tie up to $2 gas for a long period of time.


The next question comes from Lindsay Drucker Mann of Goldman Sachs.

Lindsay Drucker Mann - Goldman Sachs Group Inc., Research Division

Just a quick one on North America because it seems as if that's one delta versus expectations is that shipments for North America are looking lighter than when you had originally laid out these numbers. So first of all, I'm just trying to understand if the reduction is a reflection of secularly weaker kind of underlying demand because, to your point, given robust crop economics, it is kind of surprising to see that farmers might be laying down less potash than you would have originally anticipated. So is the reduced shipment to North America a function of, we actually shipped more than we thought through 2011 with this inventory build, perhaps with some of the international product you're referencing? So did you actually revise North American shipments higher for 2011 and this is kind of the give back? And/or are you actually reducing sort of end demand expectations for North America? And then secondly, as I think about some of this Russian product or potash imports that came into U.S., it still doesn't totally explain why North American producer inventory levels have stayed so high. So I mean, are we actually looking at inventories, which are both the producer level plus whatever was imported and brought into the supply chain? Just some clarification around those points would be great.

William J. Doyle

Okay, I'm going to ask Stephen to comment on the first part of your question, and then I'll try to get at the second part of your question. Very good question, Lindsay, and very -- we're just trying to remember all of it. So, Stephen, go ahead.

Stephen Francis Dowdle

I think the delta, Lindsay, that you're referring to has to do with the, basically, with the imports and the inventory. Those are 2 things. There's a combination of factors I alluded to, that cautious nature of some weather issues and also the visibility of the inventory. If we had perfect visibility of inventory levels, there'd be very, very small deltas as we project what has happened or what will happen. But that's not the case. And in fact, that's a very big challenge for us as a company and also as an industry to really understand inventories. The supply chain goes very wide and very deep, and it's very much of a challenge to keep on top of that. But I think what -- aside from inventories, what we're also very, very much aware of and do try and keep good track of and that is what actual demand is. And we don't really see any significant delta in what we feel consumption levels are or demand levels. It's just related to timing, timing of shipments and how the supply chain is stocked at any given moment.

William J. Doyle

And, Lindsay, as we said earlier, the application rates are good in North America. And we expect consumption to be record globally for potash in 2012. In terms of the inventories, you're going to see those inventories come down real quick, here in the second quarter. And the problem in the first quarter is we didn't sell anything. So I mean, if you don't have much to sell, and that's industry wide, you're going to build some inventory. But it's nothing that is problematic, and you're going to see a rapid decline in inventories here in the second quarter because you're going to have record exports. And we could have an all-time record second quarter. So these things change quickly too.


The next question comes from Don Carson of Susquehanna Financial.

Donald Carson - Susquehanna Financial Group, LLLP, Research Division

Bill, question on pricing. We've seen an erosion of the gap between offshore and domestic, although it's by domestic coming in somewhat. And you talked about mining the soil in North America. So I'm just wondering is potash price elasticity greater than you originally anticipated? And do you think that North American prices are capped until you can get some of these offshore prices up because otherwise, you're going to track too many imports in the U.S. And just a quick clarification. Your Q1 domestic North America -- or domestic pricing, quite low relative to your peers, where there's some usual freight and distribution costs. And then also if you can comment on the production cost outlook for the rest of the year.

William J. Doyle

All right, I'll ask Stephen to address your second question after I comment on the delta between offshore and North America. We had a move from $100 differential to $91. So these will tighten, but when you say North American prices are capped, I wouldn't say that. As I said in my remarks, we expect an increase in domestic market before fall starts up all applications. But what I would say is that export prices are going to go up faster. And so do I see this gap narrowing? I do, but it's going to be because you have export pricing move up more quickly than domestic. Stephen, you have any answer for the second part of the question?

Stephen Francis Dowdle

Yes, as far as our quarter domestic price realizations, they were down about $17 from -- compared to the fourth quarter of 2011. That was a reflection really of the softness in the market that we've been talking about. They were up significantly over the same quarter in 2011, over the first quarter of 2011. As far as comparing them to our peers, that's difficult for us to do that. Our peers, they report all flavors of potash, and the quarters don't always line up. So it's a little bit difficult. But, as Bill had indicated, our expectations here on a go-forward basis is that we will see prices trending higher rather than lower.


The next question comes from Ben Isaacson of Scotiabank.

Dean Groff

This is actually Dean stepping in for Ben. There's a very quick question that's on pricing for volumes to India. Could you clarify whether the price that you're shipping your Q1 volumes this current quarter is going to still be at that $5.30 per tonne level?

William J. Doyle

It is. Yes, they're fulfilling their contract, and it'll be at $5.30.


The next question comes from David Begleiter of Deutsche Bank.

David L. Begleiter - Deutsche Bank AG, Research Division

Bill, just on your offshore investments. As their value increases and becomes a bigger portion of your share price, how do you think about trying to create or get better value or more clarity in those investments into your own share price?

William J. Doyle

I'll have Wayne comment on that, David.

Wayne R. Brownlee

Well, I think we're getting pretty good value coming out of Arab Potash and SQM because of the -- we account for those earnings on an equity basis. So I -- and continually trying to make sure that investors are aware of the value added there when they view the valuation of the company. A measure where we have been, have an application into try and increase our ownership. That's the 14% threshold in Israel Chemicals. And I think that, to really demonstrate the valuation of that equity holding, that will have to be something that will be part of whether or not we get the green line to start proceed on that basis or not, and deal with it.


The last question comes from Mark Gulley of Gulley & Associates.

Mark R. Gulley - Gulley & Associates LLC

Bill, you talked about the possibility of raising prices in North America. And I'm wondering if you're concerned about your ability to do that because of the fact that the futures price for corn, the Good-ese [ph] 12 contract is so far below, about $0.80 or thereabouts, current cash prices for corn. So I'm wondering if you see a headwind in your ability to raise prices due to -- falling corn prices.

William J. Doyle

No, I don't because that's really good price, too, Mark. Anytime you're over $5 for corn, you're in, I would say, tall corn as opposed to tall cotton. I mean, it's a real good situation to be in. And, Mark, the other thing is that the demand for corn is going to be quite strong. And if you think last week, the report I had this morning is in China, bought 1 million tonnes of corn last week. Everybody wonders what's going on. And how these are identified sales, but the fact is that you're going to see increasing pressure on U.S. corn in terms of the export need for that corn. There's just a lot of demand for it around the world, and we don't -- we haven't gotten into this on this call, but I would be very surprised if we had 96 million acres of corn planted. I don't think you're going to get there. And if you look at the movement of corn prices versus beans since the beginning of this year, corn price is down about 7%, beans up over 20%. The profitability of beans has improved tremendously. You don't have to put nitrogen on beans. So we're going to see some acreage switching here, and that also will put a little bit of upward pressure on corn prices. So it's going to be very profitable for, for not only U.S. farmers, but global farmers to plant and produce crops this year and next. And we see a very, very good farm profitability, U.S. forecasted to be second all-time year, record year this year, after very good performance the last few years. So we see the farmers being pretty flush. And the ones that I talk to are still not happy, I mean, they don't have smiles on their faces. But I've never met one yet that has a smile on his face. So they just talk to their bankers and drive new combines. But they do cry all the way there every time you see them. But believe me when it comes down to application and moving fertilizer, it's a different story.

Denita C. Stann

Thank you, everyone. If you have any further questions, please don't hesitate to give us a call at the office today. Have a great day.


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

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