Potash Corporation of Saskatchewan Inc. (NYSE:POT)
Q2 2008 Earnings Call
July 24, 2008 1:00 pm ET
William Doyle – President, Chief Executive Officer
Wayne Brownlee – Executive Vice President, Chief Financial Officer
Joseph Podwika – Senior Vice President, General Counsel, Secretary
James Dietz – Executive Vice President, Chief Operating Officer
G. David Delaney – President, PCS Sales
Garth Moore – President, PCS Potash
Thomas Regan – President, PCS Phosphate and PCS Nitrogen
Denita Stann – Director, Investor Relations
Jacob Bout - CIBC World Markets
Don Carson - Merrill Lynch
Chris Willis - Impala Asset Management
Fai Lee - RBC Capital Markets
Mark Connelly - Credit Suisse
Edlain Rodriguez - Goldman Sachs
Michael Piken - Cleveland Research
David Silver - JP Morgan
Brian Yu - Citigroup
Mark Gulley - Soleil Securities
Charlie Rentschler - Wall Street Access
Terrence Orstlan - TSO Associates
Paul D’Amico - TD Newcrest
Steve Byrne - Merrill Lynch
Mira Lee - Friess Associates
Thank you for joining us for this discussion of PotashCorp’s second quarter performance. This is an exciting time, not just because we completed another record quarter but more importantly because of the potential this gives us to build an even stronger company going forward.
Our second quarter established a new standard of performance for PotashCorp as we benefited from continuing demand growth and higher prices. Our earnings of $2.82 per diluted share were more than triple the earnings in last year’s second quarter which were a record for our company at that time and more than 60% higher than our first-quarter earnings, which were a best-ever result at that time.
Our gross margin of $1.4 billion was an increase of 187% over the same period last year, with all three nutrients making record contributions. Through the first six months of 2008 we have already surpassed the full-year earnings and gross margin records set in all of 2007. This will be the fifth consecutive year of record earnings for our company and we plan to raise the bar as we move forward.
Our cash flow and EBITDA each topped $1 billion for the quarter, giving us tremendous flexibility in preparing for the future needs for fertilizer from the world farming community. We see the potential that this holds and believe the records we are setting today are only the beginning.
The long-term fundamentals that underpin our success are very clear and show no signs of abating. Global population continues to grow. China, India and other developing countries continue to gain economic strength and their people increasingly want to buy more food and better food.
For farmers to increase grain production, they must optimize their use of fertilizer. The need is more acute in offshore markets, where fertilizer, particularly potash, has been under applied for decades. This has put tremendous pressure on the global fertilizer supply, significantly tightening fundamentals. Potash producer inventories in North America are 41% below their five year average, as global demand has consumed virtually all available supply. This has led to significant price increases in North America and offshore.
For the quarter, our North American realized price was up 122% from the same time last year and we have only begun to capture the benefit of an additional $150 to $175 per short ton increase introduced June 1.
There continues to be upward pressure on price and a further $250 increase has been announced for the three month period from September 1 to November 30. Canpotex, the offshore marketing company for Saskatchewan potash producers, also raised prices to offshore markets. The offshore realized price of $417 per ton was up 192% from last year’s second quarter.
This does not fully reflect substantial increases in new contracts signed with India late in the first quarter and China early in the second quarter or spot market increases announced for June to August. Last week, Canpotex announced new agreements for September sales at $1,000 per ton for standard product and $1,025 for granular potash.
Higher potash prices have not had an impact on demand as farmers recognize they still generate significant returns on their potash investment. Phosphate and nitrogen markets are also feeling the impact of increasingly tight supply/demand fundamentals and higher prices. Like potash, demand is being driven by the need to increase food production. The supply side for these two nutrients is becoming a challenge as many producers are facing higher costs for key inputs, including phosphate rock, sulfur and natural gas.
To offset these rising costs, producers have raised prices for fertilizer, animal feed and industrial products. For our company, which has an integrated supply of high quality rock for phosphate production and lower cost natural gas contracts to fuel our nitrogen production in Trinidad, this presents an opportunity to capture greater margins on our products.
As pleased as we are with today’s market conditions and our second quarter, we have never operated with a quarter-to-quarter mindset. We have always said in good times and in bad that our business is a long-term enterprise. The decisions we make won’t be based on one quarter or one year. They will develop and protect the potential of this company for years to come.
Over the past two decades we have consistently demonstrated our commitment to building long-term value for all our stakeholders. As we have shown through five consecutive years of record earnings, we will use our strong cash flow to reinvest in areas that enhance our ability to deliver the greatest value to our investors, customers and employees not only today, but with an even greater focus on tomorrow.
This has been highlighted by investments in our potash capacity expansion program, as demand for this nutrient is continuing to grow. The power of the potash demand story is often overlooked in North America, where we have a more mature market and farmers have long understood the importance and value of balanced fertilization. In many other regions, farmers are only beginning to make significant and necessary increases in their potash applications.
Our company and industry are continuing to work closely with associations like the International Plant Nutrition Institute to help educate farmers about the value of balanced fertilization and other best practices for sustainable high yield agriculture. The results are evident in improving yields and greater economic benefit in many regions with developing agricultural economies.
This has given many farmers a taste of success and they want more of it. They also know that potash is essential to achieve that success. As a result, we expect potash demand will continue to grow far beyond the levels we see today.
To reach scientifically recommended application levels, China, India and Brazil alone need to use an additional 25 million tons of potash annually. China and India need to more than double their current consumption, while Brazil could use an additional 5 million tons of potash on its existing acres. This does not include the needs of new acres that could come into production.
Over the coming years, our industry will be challenged just to keep pace with demand from an increasingly potash hungry world. In anticipation of this growing need, we have worked for more than two decades to be ready with our world class potash assets when the need was the greatest. We have now entered that time.
We initiated our capacity reinvestment program in potash in 2003, long before demand or prices were hinting at the levels seen by our entire industry today. Now we are making a continued commitment to future production, confident in our understanding of the long-term demand trends and the potential of the additional tons we intend to add.
Last week, we announced our plan to spend $1.6 billion to access 2.7 million of additional capacity at Allan, Cory and Rocanville. These new tons can be developed much more quickly than a new mine and at a significant discount to green field production. Combined with projects currently underway at Patience Lake, Cory, Rocanville and New Brunswick, this new investment will raise our operational capacity to 18 million tons by the end of 2012, nearly double our 2007 sales volumes of last year.
We expect these tons will be essential to global food production and that the steps we are taking will prepare us for sustainable growth in the future. As we have for the last 21 years, we will continue to follow our long-held strategy of matching potash production to meet market demand.
To support these plans for growth, we are also working to ensure that our distribution capabilities will handle our long-term growth plans. Late in the second quarter, Canpotex made the very important decision to expand its terminal capacity, investing at least $500 million to nearly double its shipping capabilities by 2012.
Our reinvestment in potash capacity has become extremely important to the world’s food producers and to our plans to deliver value for all our stakeholders. This long-term approach is consistent with the way we have always operated and the way we will continue to operate. It is also this same long-term view that will guide our approach in working toward a resolution with our unionized employees at Allan, Cory and Patience Lake. We view the final offer that we have put forward as fair and reasonable for our employees, as well as our other stakeholders and all who are counting on the sustainability of our business for years and generations to come.
In the shorter term, we expect to continue to use our outstanding assets in all three nutrients to deliver strong performance for our shareholders. Given current market conditions, we have raised our full-year earnings guidance from $9.50 to $10.50 per share to $12.00 to $13.00 per share. We expect third-quarter net income in the range of $3.25 to $3.75 per share.
Thank you for your interest in PotashCorp today. I’m joined by members of our senior management team. We’d be pleased to answer any questions you might have.
(Operator Instructions) The first question comes from the line of Jacob Bout - CIBC World Markets.
Jacob Bout – CIBC World Markets
Just with pricing moving the way it has, is there any evidence here of demand destruction for potash? Maybe you can talk specifically about East Asia. In my mind, China demand should be down just because they’re on allocation this year, but does the demand from Japan, Indonesia, Thailand and Korea, does that offset what you’re seeing in China? Then maybe you can comment too just on your expectations for global potash demand in 2009.
We don’t see any signs of demand destruction for potash. On the contrary, we see increasing demand. As you see the real attention of the world turn to food production, clearly the farming community around the world is very smart in their analysis of the value added from potash. So, we have the opposite problem, which is we have so much demand it is exceeding the current supply and that looks to continue.
In terms of China, there has been some articles written about potential Chinese demand destruction. Only in those markets where you have price controls on grains do you have any potential for this to happen. Even in China, the government now is looking at freeing up the potash market, because clearly they’re dependent on imported potash and they know without proper potash application they’re not going to get the yields they need. They’re not going to be able to grow the grain they need to feed both people and animals. So, they’ve also talked about direct subsidies introduction on potash to farmers.
So China, we think, is going to come back in 2009 with a very strong demand year and we also think that they will be coming to the market here before the end of 2008 to begin those discussions.
So, global demand for potash is going to continue to put potash in a short situation and we don’t see that changing into 2009. We’re going to continue to be on allocation in all markets.
The next question comes from the line of Don Carson - Merrill Lynch.
Don Carson – Merrill Lynch
Bill, what could you see as sort of the sustainable demand growth rate? I’m wondering, is there pent-up demand here too, not only from China not being able to get as much as they want this year, but with a relatively late wet spring in the U.S. where farmers perhaps weren’t able to put down as much nutrients as they saw? Maybe Dave Delaney, you can comment on what you saw in NPK demand growth in the U.S. market this year?
Sustainable growth rate for potash, we have at 3%. That’s where we think it will be going forward. We’ve had it a little bit higher than that the last few years, as you know, the last five years, about 5.5%. But sustainable going forward, our plan is for 3% growth rate.
Don, with the delayed season we still had very good demand for N, P and K. There probably was a little bit of carryover of all three nutrients but frankly people kept buying through the quarter in regards to potash. We have been on allocation all year. We’ll remain on allocation, we think through 2009. And believe me, nobody is turning back any potash to us. Phosphate demand still looks very good.
Our new liquid prices are up considerably year-over-year and the same situation there, nobody’s giving us back any P205. You’ve seen nitrogen values really catch on fire the last couple of weeks. With India finally back in the urea market, we’re seeing record urea prices in Yuzhnyy in North Africa and the Middle East and record UAN prices. So, we expect a good year. We expect additional corn acres here in ‘09, maybe up to 93 million acres. Carry-out for both corn and soybeans will remain low and commodity prices still look to be very strong despite the turndown a little bit in the last couple of weeks. We still have $6 corn and close to $14 beans.
The next question comes from the line of Chris Willis - Impala Asset Management.
Chris Willis – Impala Asset Management
Can you talk a little bit about Brazil? There’s been fair amount of chatter about pre-buying in the region. Obviously, there’s some big seasons still around the corner here but if you could just talk a little bit about what you see happening down there on the ground? And then secondly, could you just put a little more detail to your equity earnings? Just talk a little bit about who contributed what in terms of the equity earnings within that equity line, away from the dividends?
In terms of Brazil, very strong market, exceptionally strong so far this year. Pre-buying is impossible because there’s just so many tons available for Brazil. Our guess is that Brazil will be seven million plus this year, only limited by the available tonnage. Brazil easily this year will be 7.5 if they could get the tonnage. The big problem is being able to just have physical availability of potash from total global sources.
The equity earnings are coming from SQM and Arab Potash Company and that’s how we account for those. The other income in other income that’s coming from those investments is dividend income from Israel Chemicals and from Sinofert. At this stage, the biggest contributors to those earnings are SQM and Arab Potash Company because of the significant increase in potash profitability.
The next question comes from the line of Fai Lee - RBC Capital Markets.
Fai Lee – RBC Capital Markets
Bill, in addition to demand destruction there’s been investor concerns that potash price increases are losing some momentum and they may be at peak heading into next year. I was just wondering how you respond to these investor concerns? If you had to pick a date, an arbitrary date for a downturn for your business, what is the earliest date that you would choose?
I don’t see any downturn in our business. The whole concept of potash prices peaking, we’ve just announced a big increase here in the domestic market September 1 and of course Canpotex has just increased prices up to the $1,000, about a $250 per ton increase there also, which we’ll see really take effect in the fourth quarter. I think the thing you’ve got to remember, and most investors don’t focus in on this, is that potash is a nutrient that is used least by farmers historically and when I say that in terms of NPK ratio around the world, potash has been significantly under applied.
So the demand for potash, especially as agricultural conditions in these developing countries become more sophisticated and as time goes on, they find that law of the limited where the nutrient in least supply is the one that holds them back from accomplishing their yield. So the demand for potash, as I said, we think 3% growing going forward but that’s on a continuing, escalating base and so you’re really going to see bigger increases on a per-year basis than you’ve seen in the past.
A $100 per ton increase is worth only $0.03 to a corn farmer in the Midwest of the U.S. So you start doing the leverage on that, while it’s huge for us, that $100 increase, it’s not a big deal to the corn farmer and they clearly see the benefit. We showed you a little bit of the economics in our formal earnings release where we referred to $1,000 potash in there. But if you’re adding $500, you’re only adding $0.15 to the cost of production of a bushel of corn. So you can see, we’ve got a lot of pricing room going forward and we don’t see a peak in our business.
The next question comes from the line of Mark Connelly - Credit Suisse.
Mark Connelly – Credit Suisse
You know, Canpotex and BPC have not been getting universally positive press lately and I’m just wondering what you and Canpotex are doing to counter that. Bigger picture, how important is Canpotex to you and to the other producers over the next five years if it were to be challenged? I mean, does it really make that much difference at this point? You’re in such a strong position.
I don’t know what press you’re reading Mark because I really haven’t seen negative press on Canpotex. BPC, I don’t pay attention to their press. What I’d say is Canpotex has a long history. The historical reasons why it was put together and of course has an anti-trust exemption from the Canadian government in the Combines Act of Canada was well founded then. The industry is essentially destroying itself going in and negotiating with one contract customer in China, one in India and the Canadian government clearly saw that as being deleterious to the future of the industry and all the jobs and all the economic activity that depended on it.
The other part of it is that there is a common distribution system that if it was replicated by each individual producer would end up costing customers around the world quite a substantial amount of money. All of our customers benefit from the economy of scale of Canpotex and I would tell you that if you go around the world and talk to customers of Canpotex the overwhelming response would be incredibly positive. They just think it’s a great organization, totally customer focused and dedicated. Service is extraordinary. The quality of the potash delivered, the timeliness of it, they just don’t miss a beat. I can tell you Canpotex has enormous support among customers around the world and is regarded as providing a very valuable service.
The next question comes from the line of Edlain Rodriguez - Goldman Sachs.
Edlain Rodriguez – Goldman Sachs
A question for you Bill on corn prices. We have seen over-trading corn prices recently. Can you tell us what is the potential impact of lower prices? Yes, it’s still high, but it’s definitely lower than it was a month ago. So, what’s the mindset of the farmer as corn prices decline?
If you look at where corn is today and you start looking at the economics of what a corn farmer makes, his revenue is just exceptional. We gave you a real good example of that in the earnings announcement, and boy, you’re starting to make that type of return over your costs, it is very compelling economics. So, we don’t see corn prices going down to the $2 level. Now if corn prices went to $2, all bets would be off, because obviously a farmer is not going to be buying fertilizer at the current price levels if you have got $2 corn. I just don’t see that happening.
I think the global pressure on food is so enormous and the ability of the earth to respond to that increasing growth is being stretched, quite frankly. The challenge is to produce a record crop every year and we need that because you’re going to have record demand every year. If you think about where global grain inventories are, we’re not even talking about replenishing global grain inventories which are at an incredibly precarious state. As I’ve said for years now, we should all be concerned about this current grain inventory situation because we are literally hanging on each harvest and if we have a major upset anywhere in any year, we are going to have problems and very, very serious problems.
So, I don’t see that grain issue that some people allude to. Some people always see ghosts around every corner. But if you know anything about population growth and the wealth creation that’s going on around the world, you can see clearly what we do that this food demand, fertilizer demand story, is very much intact and really is just at the beginning of the story. We are not anywhere close to the full potential for food demand around the world.
The next question comes from the line of Michael Piken - Cleveland Research.
Michael Piken – Cleveland Research
Just a quick question here regarding kind of the working capital situation of the farmers. Are you seeing any sort of issues with them being able to access the necessary funds in order to pay for not only the increase in fertilizer but also seed costs, equipment and even land rents are up quite a bit? And also, if you look at the rest of the world, are there any markets where maybe farmers are at a competitive disadvantage relative to other markets with respect to being able to access capital?
What we’re seeing this year projecting is net farm income a record $91 billion. So yes, fertilizer prices are higher. There’s a little more strain in the system from a working capital standpoint. But the farmer has money. Most of the farmers here in the United States own their land. Their balance sheets are in great shape. But, we don’t really see any issue from that standpoint and as I mentioned earlier on the call nobody is turning back their potash or phosphate or nitrogen products to us here this fall. Everybody wants everything we’ve committed.
You know Michael, what I’d say globally, we have record farm net income in the U.S., this year. Certainly we will in Canada as well. But globally, we see farmers having record net income around the world. It is an extraordinarily positive time to be in farming and the resultant demand on our company for our life-giving products is absolutely astounding, and it is not abating by any means. It’s growing stronger.
The next question comes from the line of David Silver - JP Morgan.
David Silver – JP Morgan
I had a question about your recent capacity announcement. I was hoping you could discuss timelines and bottle necks and things. So, when I do read your release from the 17th it says you’re going to be starting all three projects “immediately.” There are three different sized projects, three different locations, yet all of them are due to be completed in about three and a half years, end of 2012. Excuse me, four and a half years.
Anyway, so it raises an issue about whether there are increasing bottle necks in completing capacity projects that are already at brown field sites and where de-bottle necking is already underway. Could you maybe comment on timelines for projects that have yet to begin? And then separately, do you guys have an estimate on what China will import in terms of potash this year?
The projects that we announced on the 17th, the Cory one and the Rocanville parts were basically add-ons to projects we had already underway, so that would just fit into the basic schedule we had set up for those ones. The Allan project is a standalone project which is a fairly minor one in nature and regards a new hoist and some mining equipment underground and some minor mill modifications and some product storage. So, we see that it fits right into the schedule we had in place and the tie up with the contractors we have and the mining equipment we have ordered. So, we don’t see a problem with the scheduling of it going forward. We do see probably some difficulties with other people getting into projects because of the availability of equipment and also the timing and getting proper construction people and building materials in a timely fashion. But, we think we’re in pretty good shape for as far as our projects go.
Your second question on China imports this year, our best guess at the current time is 6 million. That’s down from 9.3 million in 2007. As you know, China wanted more. They couldn’t get it. This is why we’re saying that even if they revert to 2007 demand, you’re going to have a big push in 2009 and that’s why they’re coming to the market early and you’re going to have continued pressure on potash.
The next question comes from the line of Brian Yu - Citigroup.
Brian Yu – Citigroup
I recognize it takes about at least five years to build a new potash mine, but brown fields are less time and given you’ve identified 2.7 million tons additional capacity, look at other existing operations out there what’s the potential for your competitors to expand capacity?
The potential for our competitors to bring brown field, they’ve already made their announcements. If you think about where we are between now and 2012, we’re not the only ones bringing brown field. But we’re bringing the majority of the brown field and I think that’s really the key because everybody’s doing whatever they can.
Most of those competitors actually brought their brown field on earlier. When we were running at very low levels of production, they were doing their de-bottle necks and there’s just so much you can get up the shaft before you have to go to a green field type operation. So if you look at what’s coming in the next five years, there’s little bits and pieces coming in all those markets but we’re over half of the total global additions to capacity over the next five years.
The next question comes from the line of Mark Gulley - Soleil Securities.
Mark Gulley – Soleil Securities
I’ve got a question also regarding the potential for demand destruction. As you point out in the middle of page 5 in your release, you talk about the need for more fertility. But to the extent that U.S. farmers have already built high levels of fertility with respect to P and K in their fields, what is the potential in your view they could mine those fields next year, given the fact that they’re not paying market prices today for fertilizer but they certainly will be next year?
You know, mining the soil is a very dangerous thing, Mark. If you look historically, whenever you have a crop, especially with the returns that you’re getting, it’d be really foolish to cut back on your fertility and start mining the soil banks and farmers, good farmers just don’t do it. What I’d say is that if you have a crop, you’re always going to remove nutrients with each harvest. If you don’t have a crop, and obviously in some places that flooded earlier this spring, those people are hard pressed where they couldn’t replant in time. And by the way, I was just taking a little drive last weekend up through Wisconsin and into Northwest Wisconsin. A very spotty situation. You see acres that have been replanted, which are only a foot tall here on the 20th of July. You see a lot of ponding areas where there’s no crop at all, very uneven crop. Normally, the crop at this time of year is over your head and a lot of it was not even waist high.
So then, you start thinking about the potential for even a normal frost this year would come early for a lot of these crops. A lot of farmers are hoping that we have a very, very late frost this year because they need all the maturation they can get. When you don’t have your corn crops silking in July and you’re sitting there looking at it in August, you’ve got real concerns. So, there is a lot of people with fingers crossed. We stopped at a fresh corn market, talked to a guy who has mostly feed corn but sells some fresh corn and he told me he’s praying every morning that we have a late frost this year.
So, there’s a lot of concern there. But if they do have a crop, they’re going to remove a lot of P and K and those farmers will replace it.
The next question comes from the line of Charlie Rentschler - Wall Street Access.
Charlie Rentschler – Wall Street Access
Bill, the possibility of a strike at the three mines, are those different locals? Or if there’s a strike do all three go out? And what percent of your production do they represent?
Well, I’ll give you a comprehensive answer, and because the next, we just had a web question come in that asked even a little bit more detail about the strike. So, I’m going to try and answer yours and that question at the same time, because they’re very similar. And I’m going to ask Garth, first of all, to speak to the strike itself.
There isn’t a strike, by the way, yet but the potential action that’s out there and then I’m going to ask Wayne to just give a little financial look at it. Then, I’ll make a couple of comments.
Charlie, basically there’s three different locals involved. They’re all members of the steel workers, United Steelworkers Union at Allan, Cory and Patience Lake Division. We’ve been negotiating with them since April of this year and on July 23rd they issued strike notice to us.
All three locals did and we immediately responded by issuing lockout notices to all three locals. This, in effect, places the 500 union members in legal strike position at 2 p.m. on Friday of this week, July 25th and also permits the company at any time after that to implement lockouts at all three sites.
This does in no way mean that either party has to take action but gives them the legal right to do so any time after that date for an indefinite period of time. We basically feel confident that that offer we put forward is a fair and a competitive one and will be the basis for a settlement. We hope that the negotiating teams will be able to get back to the table and finalize a collective agreement in due course. There’s actually no action being taken at this time yet.
I just wanted to confirm for everyone that the financial guidance that we’ve given for the total year 2008 contemplates possible different outcomes, both in product prices and if there was to be any kind of a job action. So, it’s all factored into our numbers. So that guidance does reflect our best guess at what we think the outcome will be over the course of the year.
The first thing I would tell you is that we have tremendous respect for all of our workers at Allan, Cory and Patience Lake. We have very good relations, a long history of good relations with our work force. In our company we don’t buy into the old line thinking of union versus management or the us versus them approach.
We all work for the same company and we’re all in this together. I’d say that all of the activity to date, in my opinion, is just part of the negotiating process. The union management’s job was to get the best possible contract that they could. And you know what? They succeeded.
They got it. And they did a heck of a good job. So, that’s really what happened. When the guys, I will tell you this, when the guys showed me our final offer I did tell them I was glad I still had my own teeth because if they had been false teeth they would have fallen out and hit the table. It was that type of offer. But, they finally convinced me and we’ve offered a contract which will make our people the highest paid potash miners in the industry. Now I don’t know how you can do better than that.
The union management has referred in some of their comments to the good earnings of the company and the tax incentives received from the government but quite frankly their logic is convoluted. It’s what we’re doing with those earnings and incentives and that is we’re reinvesting them in Cory and Patience Lake and Allan to make all those operations bigger and more competitive so that we can secure the future for all of our workers at those operations.
It helps their families, maybe even some of their kids will want to come work for us in the future, and it certainly helps the communities around the mines. We just had an opening of our new mill at Lanigan last week and I talked to so many people from the community and they just were so complementary of the amount of money and activity that the company’s expansion there has brought to the Lanigan community.
So the reinvestment of those earnings in those three mines, clearly a win-win for the union and for the province. You know the union management should know that we’re the biggest tax payer in the province of Saskatchewan rather than a drain on the treasury as the old Crown Corporation was. We’ll be the source of about 10% of the total provincial
revenue next year. That’s just from one company. Despite the tax incentives, Saskatchewan remains the highest taxed jurisdiction for potash produced anywhere in the world. The Government of Saskatchewan knows this and so should union management.
The one thing that we won’t do is destroy our cost structure. We will not become a high cost producer of potash. We don’t want to end up like one of the airlines or a Detroit auto maker which lost their way and became uncompetitive. They are now shredding jobs and, if any of you’ve taken a flight lately, you don’t see very many happy employees. So hopefully we’re not going to have a work stoppage. They have a great deal and one of the real keys to life is knowing when you have a good deal. You need to take it. But if they don’t, the company is going to do just fine because we are in a very strong position.
Our nitrogen business is setting records, our phosphate business is setting records, our potash business around the world, when you look at where we are, New Brunswick, great operations in Saskatchewan, investments in Israel and Jordan and in Chile, all of those are really going to pay off for us and the company’s going to do just fine. Quite frankly, union management’s going to do just fine too and they’ll move on to their next deal.
The only ones who’ll really suffer in the whole process if there is a work stoppage are our great workers. It is always impossible to make up for lost wages. That would be a real shame. So hopefully cooler heads will prevail and people will see the benefit of what I think is an absolutely extraordinary contract offer and hopefully we won’t have any work stoppage.
The next question comes from the line of Terrence Orstlan - TSO Associates.
Terrence Orstlan – TSO Assoc.
Let me play clean up here. You gave the China and the Brazil numbers, Bill, what’s the India import number guesstimate? And a second question to Garth about the $1.6 billion. Not a PCS specific question, but what’s the inflationary trend in those numbers in terms of the contingencies and what you expect in the future further from these levels?
Garth, the contingencies for the potash projects, a round number for everything?
We have about 35% in there, Terry, going over that period of time, 35 to 40% depending on the project and depending on the type of project it is.
Terry, on the Indian question, that number we think is going to be around 4.5 million this year with pressure again on 2009 to increase imports. Did I cover it? Was there another question? And Brazil, the demand in Brazil? Demand in Brazil we think again is going to be in the seven plus range. As I said, they might take 7.5 if they could get it.
The next question comes from the line of Paul D’Amico - TD Newcrest.
Paul D’Amico – TD Newcrest
There are three quick ones. Bill, I appreciate you mentioned about in terms of crop pricing and farmer returns being healthy. The example being where we are currently still being good versus a month ago and the extreme example of $2 corn, bets off. Understood. Avoiding the extremes, the first question would be, where do you think sort of a turning point would be in terms of seeing a lot more push back from the farmer? Would it be something around $4, if you could, in terms of sensitivities?
A second question in terms of green field, there’s a lot of questions about brown field. Green field, when you take into account the infrastructure estimates, it really changes the longer-term projection. So I was wondering if you can comment on green field pricing that would be attractive to warrant green field. And lastly, in terms of the new capacity
announcement, is that complicated at all by the union issue that exists right now?
I’m going let Garth touch on green field and then I’m going to ask David to talk about corn sensitivities and Garth also about the potential job action on expansions.
As far as the green field goes going forward, the cost is still fairly high and it’s still up around, we still estimate without infrastructure about $2.8 billion and their number’s still holding around there. Depending on the return on investment and the various tax rates of wherever the green field might be the requirement for potash prices FOB the gate would be anywhere between $350 and $650 a ton just to make a return on 15%.
As far as the projects go that are under way at the different sites, we’re unsure of what the effect might be if there is a work stoppage, whether the contractors will or won’t cross the picket line. But we can’t speculate on that and we’ll just work through it if it does occur.
What I’d say, Paul, you know the pricing is really a moving target. I mean if you think today if you could build a green field mine we say $2.8. And that’s not our number. That came from the leading engineering company. So if you think that you’ve got to go after this thing over an eight-year period you’re just really, I think, with a moving target because you can’t get guaranteed pricing for items like structural steel.
You can get a guarantee of supply but it’s going to be at market price whenever that comes. So you’re going to need a big contingency on green field which really makes that pricing target. Garth gave a range and I think that’s really on the low side quite honestly. Because if you’re looking at what sort of investment, of course you’ve got to cover the cost of money in that period of time. You have no cash flow coming and then you add any infrastructure on green field, you know you’re talking a project in the $4 to $5 billion range. So then you’re talking prices well over $1,000 and you need that price out there that is going to be still sitting there eight years from now.
So you know it’s a big bet on the future and that’s why you haven’t had any green field to date. So there is a potential one there now in Russia but they’re saying that that’s ten years away and God only knows what the cost of that thing would be.
Yes, Paul, we think the variable cost for corn this year with current price is around $2.50. Full book cost is around $3.80. But I will say that Rabobank came out last week and indicated any stocks for 2008/2009 will be decreased by 9%, the lowest level in 35 years. So we don’t really see corn prices going down anywhere near that level. We’ll see corn carry over this year go below a billion bushels so we’re frankly quite bullish on corn.
The next question comes from the line of Steve Byrne - Merrill Lynch.
Steve Byrne – Merrill Lynch
A couple questions on raw materials. Sulfur popped up again here for the third quarter and I just wanted to know what your thoughts were on when you think the sulfur markets might top out and whether you’ve secured any lower-cost sulfur given your ability to ship molten sulfur?
You know first of all the most important facet with sulfur is supply. Getting the supply for your operations in. With that in mind, we do feel comfortable with our projections on production that we have adequate sulfur supply. Then you quickly turn your attention to pricing and we have seen settlements in the third quarter up $165. In our forecast we have included strong sulfur pricing throughout the year.
Now when will it change? I think a lot of that depends obviously on when some of these projects that oil companies have announced interest in dealing with heavy crudes. That will definitely impact the supply of liquid sulfur in North America. I would say that most of those are probably several years out so I do not see a dramatic change within the next 24 months.
The final question comes from the line of Mira Lee - Friess Associates.
Mira Lee – Friess Associates
What do you think the Chinese will do with the export tariff that’s set to expire September 30? Then the impact on the phosphate price if it’s removed.
Yes regarding phosphate, indications are they’ll make a decision here sometime in September. I will say they exported about almost between 2.5 and 3 million tons of DAP last year in the fourth quarter and we don’t anticipate, even if they repeal that tax, that exports would be anywhere near that level. Regarding nitrogen, we feel the same way. Let me back up. That number was in urea and they exported about 2.5 to 3 million tons last year in the fourth quarter. We expect, if they repeal the tax that number this year will be closer to half a million tons. So a big change year-over-year in urea.
This year we think last year they exported about 4 million tons of DAP and MAP. They’ve exported close to 2.5 this year. We think for the full year, if that tax is repealed, that number would only go up to 3 million tons. So we don’t expect a big export volume for nitrogen or phosphate if that export tax goes back to 35% in Q4.
You know Mira, what I’d tell you is the Chinese are very, very sensitive right now to food production. You know if you think what they’ve done here on nitrogen and phosphate, like putting this huge 135% tax in, it’s basically saying, “Hey, we’re worried about supply for our own farm community and for the food we need to produce in China.” That is under increasing pressure, as you know, as even with a little slow down, the GDP is going to go from 11% to 10% this year. There’s still tremendous upward mobility in China and the push on meat consumption is unabated.
The amount of grain required to feed those animals is escalating and I think you’re going to see a very careful Chinese export policy for any potential nitrogen and phosphate. As I said in my earlier remarks, they’re going to loosen up the market for potash, take some of these price controls off because they know they need to get the potash and they just can’t have a distorted market where farmers won’t use it because they’ve got grain prices too low and they won’t subsidize the farmers.
So they’re going to subsidize the farmer for potash, free up that market and that’ll allow the potash market to work a lot better too. So I think you should be very careful in assuming China will go back to its old ways of exporting a tremendous amount of nitrogen and their recent activity in phosphate.
Thank you, everybody, for joining us. If you have any further questions, don’t hesitate to call us at the office.
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