By Bryn Levy

Analyst breaks down PotashCorp layoffs

Dec 3, 2013 | 4:15 PM

There's a few ways companies can deal with flat demand: Ride it out until supplies come down and prices pick up, or drive sales growth by cutting prices and snagging your rivals' market share.

With Tuesday's news of layoffs and production cutbacks, economist David Asbridge with NPK Fertilizer Advisory Service said it's clear how PotashCorp plans to weather the downturn in the fertilizer market.

“I think the announcement this morning is showing that their strategy is going to be to hunker down, slow things down a little bit, let the market kind of catch up to them and then continue on with their expansions,” he said, adding that the move didn't come as a surprise to most industry watchers.

“We knew something was going to have to happen up there,” he said.

Asbridge pointed out that PotashCorp's cutbacks come after years of overproduction fueled by record high prices in the late 2000's. When those prices failed to hold up in the wake of the Great Recession of 2008, PotashCorp found itself in the same boat as most other potash mining companies — they were left sitting on a pile of excess inventory and production capacity.

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“They'll work off their their inventories here probably within the next two or three years, easily, I think,” Asbridge said.

He added that he expected PotashCorp's other partners in Canpotex to follow a similar gameplan. Mosaic and Agrium already announced some cutbacks this year and Asbridge said there could very well be more to come.

He cautioned that this fact alone doesn't mean the strategy is a guaranteed winner. He said PotashCorp may have to turn the plan around if they start getting pressured by competition out of eastern Europe.

There's some uncertainty there because of the breakup this July of BPC, which was the Russian and Bielorussian equivalent to the Canpotex marketing group. It split into its component companies of Russia's Uralkali, who are the world's largest single potash miner, and Bielarussia's Bielaruskali.

Uralkali indicated after the breakup that it would be trying a product-over-price strategy and ramping up production to try and push competitors out of key markets like China.

“(PotashCorp) will have to look at this strategy over the short term here and see if they want to continue to cut production or if they want to get out there and kind of mix it up with the Russians,” he said.

With only about $35 a tonne in difference between PotashCorp's and Uralkali's costs of production, Asbridge said PotashCorp can crank out product cheaply enough to play that game if they get dragged into it.

“I don't know if they can win at it and all because, to be honest with you, it would hurt the entire industry. But, yes, PotashCorp has some fairly low cost production. If they decide that they want to compete in a market like that, they can do it, they have a cost structure that allows them to do it.”

Overall, Asbridge said that whatever approach companies take, fertilizer will always be needed and demand is bound to pick up.

“We have fairly definite price cycles in the fertilizer industry. And of course it follows the price cycles that we have in the grains industry. Corn prices, soybean prices have all come down from their peaks last year. So it's not surprising that fertilizer prices had to do that,” he said.

Meanwhile, K + S is full steam ahead on the construction of their legacy project near Bethune. Potash production is expected by 2016.

“We are committed to the long-term development of the project despite current potash prices,” Maeghan Dubois, communications specialist with K + S, said.

K + S currently employs 300 people at their site and are still hiring.

A spokesperson for Mosaic, which has potash production at Belle Plaine, Colonsay, and Esterhazy, said the company is continuing to monitor market prices but does not expect any major layoffs similar to that of PotashCorp in the near future.

BHP Billiton would not comment on PotashCorp's decision, adding they are not a potash producer.

“We take a long-term view and our decision making in building a project or a business is not driven by short-term market conditions. We are confident in the long-term fundamentals of the potash market. As we said in August, completion of the two Jansen shafts will create substantial flexibility and enable us to time our entrance to meet market demand,” Bronwyn Wilkinson, spokesperson with BHP Billiton, said in an e-mail.

-with files from News Talk Radio's Karin Yeske

news@panow.com

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