Potash Market Rebound in Full Force

April 27, 2017 10:12 AM
 
PotashCorp Canadian Facility

Potash prices are recovering after a decade of weakness, lifting the prospects of a turnaround in fortunes for fertilizer companies following a slump in farm spending.

Potash Corp. of Saskatchewan Inc., the world’s second-biggest producer, boosted its full-year earnings forecast on Thursday and said strong demand will continue for the rest of the year as North American farmers seek to replenish soil nutrients after record harvests. Chinese potash shipments are expected to increased in 2017, it added.

The Canadian company’s performance suggests the potash recovery is in “full force," Sanford C. Bernstein & Co. analyst Jonas Oxgaard said in a note. Canpotex -- the joint venture handling overseas sales for Potash Corp. and its two largest North American peers, Agrium Inc. and Mosaic Co. -- has kept the market tight and driven up prices, while volumes have exceeded expectations in North America and export markets, a positive sign for the companies, he said.

“I think we’ve seen the turnaround already,” Oxgaard said by phone. “We expect continued price increases in potash.”

Potash Corp. maintained its forecast for worldwide industry potash shipments of as much as 64 million metric tons this year, up from 60 million in 2016. It raised its prediction for Latin American shipments. China, the largest market, is now seen consuming as much as 15.5 million tons.

Potash prices have been in a downward trend for a decade due to a combination of excess mining capacity coming on line and weak demand as lower crop prices undermined farmer spending power. While crop prices are still lackluster, Potash Corp. has been reducing its production capacity to help balance the market.

Earnings Beat

In the U.S. Corn Belt, potash spot prices have gained 23 percent since dropping to a nine-year low in July, according to Green Markets data. Producers are forecasting global demand will show mild growth this year, despite farm incomes remaining near multiyear lows, Bloomberg Intelligence analyst Jason Miner said in a March 16 report.

Saskatoon, Saskatchewan-based Potash Corp., which expected to complete its $12.8 billion merger with Agrium in mid-2017, forecast 2017 earnings of 45 cents to 65 cents a share, up from a January projection of 35 cents to 55 cents.

The shares climbed 2.2 percent to C$23.15 at 9:34 a.m. in Toronto. Agrium rose 1.8 percent to C$128.68.

For the first quarter, net income rose to 18 cents a share from 9 cents. Profit excluding one-time items was 18 cents a share, compared with the 11-cent average of 15 estimates compiled by Bloomberg. Sales were also better than expected, dropping 8 percent to $1.11 billion, compared with the $1 billion average estimate.

Bernstein’s Oxgaard said the main surprise in the report was the tax rate paid by Potash Corp. -- about 8 percent, far less than consensus estimate of 20 percent. The company said it’s effective income tax rate is anticipated to fall to as little as 2 percent this year, due to changes in provincial taxation.

Agrium Merger

In China, demand will be driven by attractive crop prices and full year shipments will be in the range of 14.5 million to 15.5 million metric tons, above last year’s 14 million tons.

"We expect improved consumption trends and nutrient affordability in key markets to support potash demand and our results through the remainder of 2017," Chief Executive Officer Jochen Tilk said in his company’s earnings statement.

In September, Potash Corp. and Agrium agreed to a all-share merger that will create the world’s largest crop-nutrient supplier. The Canadian companies expect to generate a cost savings of $500 million a year following the completion of the deal in mid-2017.

(Updates share price in ninth paragraph.)

To contact the reporter on this story: Jen Skerritt in Winnipeg at jskerritt1@bloomberg.net.

To contact the editors responsible for this story: Simon Casey at scasey4@bloomberg.net, Jim Efstathiou Jr.

©2017 Bloomberg L.P.

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