PotashCorp: Market-Driven Potash Prices Are A Significant Negative For The Company

| About: Nutrien Ltd. (NTR)
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On 30 July, 2013, Uralkali (OTC:URALL), one of the world's largest potash producers, with a share of about 20% of global potash production, made an announcement that:

The Board has decided to stop Uralkali's export sales through Belarusian Potash Company [BPC] and direct all export volumes through Uralkali Trading.

With this announcement, the company put an end to an era of high potash prices, driven by production restraints and export controls. Now the prices are likely to be market-driven, which normally depends upon the actual demand-supply situation. This comes as a shocking announcement for companies like PotashCorp (POT), Agrium (AGU), Mosaic (NYSE:MOS), etc. This development is likely to have a negative effect on these companies, as it expects to bring down the potash prices by about $100, from about $400, to $300.

PotashCorp is likely to be hardest hit by this situation, as the potash-based fertilizers constitute the major part of its revenues. The company is the world's largest potash producer by capacity, and is responsible for approximately 20 percent of the global potash capacity. (source: Annual report FY 2012 PotashCorp)

Details: (source: form 10-Q PotashCorp)

The company generates about 43.5% of its revenues from potash segment and more importantly over 60% of its gross profit from potash segment (see the table below).

The following table shows the financial performance of the potash segment:

The company operates with over 65% gross margin under its potash segment (six months ended June 30, 2013); every $10 decline in potash price could reduce its gross margin (potash segment) by about 2.75%. So, the projected $100 decline in potash prices could:

  1. Decrease the gross margin of its potash segment from 60.5% to about 37.5%.
  2. Decrease the overall gross margin of the company from 44% to about 27.5%.

If it actually happens, then this will be a huge negative for the company in the times to come, though the higher capacity utilization (its capacity utilization is low; see the table below) can help the company to offset, some of the negative effect.

(source: Annual report FY 2012 PotashCorp)

Long-term effect:

If Uralkali stands by its decision, then it will prompt the industry to improve the capacity utilization and slowdowns the future capacity additions.

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