Developing phosphate interests in the Georgina Basin, Queensland, Australia

Free
Message: Outlook from Potash inc

Outlook

As the long-term food requirements of a growing population continue to intensify, fresh momentum is igniting the agricultural sector. Although 2010 global crop production is expected to reach the third-highest level on record, grain stocks are declining, which reinforces the escalating importance of potash, phosphate and nitrogen fertilizers to improve production.

While US corn prices are commonly used as a barometer of nutrient demand, the wave of interest in fertilizers is much larger than a single crop or a single growing region. It is supported by widespread demand for an array of global agricultural food products, most of which compete for limited arable land and are currently selling at prices well above historical levels. Since the end of the second quarter of 2010, prices for a basket of diverse crops — corn, sugar, wheat, rice, palm oil, soybean and cotton — have increased nearly 30 percent, demonstrating the widespread improvement in agricultural economics.

In our view, rising agricultural markets are not simply the result of short-term production challenges. The pressures of feeding a growing population, coupled with expanding economies and a desire for protein-rich diets, have been increasing for many decades and cannot be alleviated overnight. This long-term demand story is fueled by the inescapable fact that food production must increase on a sustainable basis. This requires crop prices that encourage farmers to commit to improving productivity over the long term, which includes making necessary investments in proper fertilization.

We believe the fertilizer industry has passed an important inflection point and is returning to a period of powerful growth. We see parallels to the demand-driven environment that led our company to five consecutive years of record performance prior to 2009. The difference today is the added challenge of replenishing the fertilizer pipeline — from farmers’ soils to the distributor supply chain — which will be essential to meeting global food demand. We believe all involved have only begun to undertake this essential challenge.

We see an exciting outlook for both the short- and long-term prospects for our company. A strong and growing agricultural economy benefits all three nutrients, as all are essential to improving yields and increasing food quality. As the third-largest global producer of both phosphate and nitrogen, we anticipate significant opportunities at a time of buoyant demand and high industry operating rates, enabling each of these nutrients to make a significant contribution to our earnings as we move forward.

Nonetheless, we believe our greatest opportunity is in potash. For decades, this important nutrient was under-applied in a number of key developing markets, but today these regions have growing economies, increasing demand for higher-quality food and greater ability to make the necessary investment in potash. Global potash production capabilities, however, are limited and bringing a greenfield mine into production is a seven- to 10-year proposition. As the world’s largest producer, with more than 50 percent of global brownfield expansion capacity under development, we believe we have a unique opportunity in the coming years to capture a significant share of new growth in demand for potash.

Our long-term approach to business reflects our belief that time is one of our most powerful allies. We have been patient stewards of our resources in all conditions, striving to maximize value for our stakeholders. Now, with the fertilizer industry — and potash, in particular — poised for what we believe will be an extended period of higher demand and operating rates, we have unique five-way potash leverage to improve our performance: 1) the potential to capture higher prices as demand improves; 2) the ability to sell more volumes; 3) the ability to lower our per-tonne costs for production; 4) the potential to reduce per-tonne profit tax on higher sales volumes; and 5) the benefit we gain from greater value and earnings contributions from our offshore potash-related investments. While this is a long-term growth opportunity, we expect the powerful fundamentals and market trends in place will also generate stronger immediate returns.

In North America, we anticipate robust potash demand through the fourth quarter as growers take advantage of a wider window for fall applications as a result of the early harvest. Although some customers are trying to rebuild inventories for the first time since 2008, limited product availability has meant that most shipments are heading straight to farmers' fields. As a result, distributor inventories remain low and we expect strong shipments for 2011. We believe the price increase announced in September ($50 per short ton) will begin to be reflected later in fourth-quarter shipments, while the October announcement (an additional $75 per short ton) will be realized after bookings at the previous price are shipped, likely in first-quarter 2011.

In offshore markets, China is beginning to demonstrate its commitment to redressing the under-application of potash and to securing its supply for the future. A three-year agreement between Canpotex and Sinofert signed in October outlines Sinofert’s minimum potash volume requirements for 2011-2013 (3.15 million tonnes), with pricing negotiated on a semi-annual basis. Negotiations are under way for pricing and volumes for the first half of 2011. In India, potash imports are expected to reach record levels in 2010 and remain strong in 2011 as this country works to improve food production capabilities and limit food price inflation. We expect robust demand from other Asian countries to continue, buoyed by highly supportive crop economics across all key crops grown in this region. Even as Latin America exits its high-demand season, shipments are expected to remain above historical fourth-quarter levels and be strong into 2011 as a result of low inventories, supportive grower economics and robust demand for applications on Brazil’s safrinha crop — the March corn planting that continues to grow in importance. Price increases announced by Canpotex in late September (on average, $50 per tonne in both Southeast Asia and Brazil) are expected to be fully realized with January shipments. We believe the potential exists for additional price increases, resulting from strong demand continuing to pressure supply and the need to transition toward prices supportive of new capacity development.

In this environment, we estimate our 2010 potash segment gross margin will be between $1.65 billion and $1.75 billion on total shipments in the range of 8.3-8.5 million tonnes.

Tight product inventory, strong demand and firm pricing are expected to result in a positive phosphate market through the North American spring season. In nitrogen, these same conditions, along with favorable US natural gas costs relative to key exporting regions, should continue to support a positive demand and pricing environment. We now forecast 2010 phosphate and nitrogen gross margin between $750 million and $850 million.

We expect 2010 net income to be in the range of $5.75-$6.00 per share.

In this tightening environment, we anticipate that restocking of the distribution chain will begin in 2011 and, accordingly, have raised our global potash demand forecast to between 55 million tonnes and 60 million tonnes in the next calendar year. Given our expectation that current conditions represent the front end of an escalation in demand and pricing for our products, we are providing 2011 earnings guidance in the range of $8.00-$8.75 per share.

Share
New Message
Please login to post a reply