Potash Market Posting Impressive Gains

11 May 1998 00:00  [Source: ICB Americas]

By Dexter Johnson

The major fertilizer producers are posting high revenues and earnings from their potash units thanks to strong demand and rising prices. In the midst of this bullish market, two major producers have announced expansions of their operations, and the world's largest producer--Potash Corporation of Saskatchewan--may realize expanded capabilities through its acquisition of Potash Company of Canada Ltd.'s (Potacan) assets late last year.

Mississippi Chemical Corporation will expand one of its Carlsbad, N.M., mines by 100,000 short tons, raising its red granular capacity to 545,000 tons at the site. The project, which will cost approximately $8.2 million and be completed by December, will bring MissChem's total potash capacity for its two Carlsbad mines up to 1.1 million tons.

The expansion follows the December closure of MissChem's Eddy Potash unit after the company found it could no longer run the mine economically. The company acquired the Eddy Potash business, along with the assets of New Mexico Potash Corporation, from Trans-Resources Inc. for $45 million in August 1996, but concluded by the following November that the plant had to be closed.

Between the closing of the mine and the recent expansion announcements, MissChem missed out on part of potash's resurgence. In announcing its third quarter results, the company said its potash sales volume decreased by 6 percent because of the mine closure.

While MissChem's sales volume fell, the company's average net sales price for potash rose 15 percent relative to the prior-year period because of the strong demand in the domestic and international markets.

IMC Global, the other major player to announce an expansion, has enjoyed the full benefit of the potash upturn. In its first quarter earnings report, the company attributes its 2 percent overall sales increase largely to its potash business.

IMC's potash sales climbed 18 percent compared to the year-earlier quarter, while gross margins increased 38 percent. Potash sales volumes during the same period rose 2 percent to approximately 2.3 million tons, and prices increased 13 percent, averaging $77 per short ton.

"The company's first quarter results again demonstrate the strength of the global potash market and the need to be the low-cost leader in each of our businesses," says Robert E. Fowler, Jr., president and CEO. "IMC Kalium continues to benefit from strong potash demand and tight cost controls."

While financial results reflect the strength of the potash market and IMC's cost controls, the company is moving along with plans to expand two of its Saskatchewan mines by a total of 1.5 million tons to further capitalize on the market's health.

The announcement in February to expand its Belle Plaine solution mine and its Colonsay shaft mine in Saskatchewan over the next three to five years followed news of revisions to the provincial potash resource tax system unveiled by the Saskatchewan Department of Energy and Mines, which are aimed at making investment in the province more attractive.

The Belle Plaine operation will be expanded to 3.2 million tons of annual capacity from 2.4 million tons at a cost of $70 million to $80 million. The Colonsay mine and mill will be expanded to 2.2 million tons of annual capacity from 1.5 million at a cost of $35 million to $45 million.

In addition, IMC Kalium expects to spend about $175 million over the next five years in diversification and efficiency capital for high-return projects at all of its Saskatchewan mines.

The expansion of IMC Kalium's production may also strengthen the company in the export market. Increasing its production could give IMC Kalium a larger share in Canpotex, the exporting agency for Canadian potash producers. At present, PCS accounts for 57.5 percent of Canpotex volumes, while IMC has 35 percent share and Agrium maintains a 7.5 percent stake.

By announcing expansion plans, IMC and MissChem have gone against the popular wisdom, which dictates that PCS would be the most likely to expand its production because it had the most excess capacity.

PCS has made some incremental expansions during the past year, but the company still only produced slightly more than half of its 12.2-million-ton annual capacity last year, according to a PCS spokeswoman. She says that in any given year, the company could easily increase capacity but opts instead to match its production to market demand to maintain solid pricing.

Although not necessarily impacting its production capacity, PCS' acquisition in December of the troubled Potacan mine in New Brunswick from Kali und Salz Beteiligungs AG of Germany and Enterprise Miniere et Chimique of France may open up new markets.

While the Potacan mine has been rendered unsalvageable due to a flood that occurred in June, PCS intends to use the mill to upgrade standard-grade potash from its Saskatchewan mine to granular product for shipment into eastern Canada and the US.

PCS also plans to develop additional opportunities for the Potacan facility, such as expanding the production of potash ore at PCS' Sussex mine to be processed at the Potacan mill.

In the meantime, PCS has responded to the higher potash demand by using some of its excess capacity to produce more. The company manufactured 2 million tons of potash in the first quarter of 1998, compared to 1.65 million tons in the corresponding 1997 quarter. Potash costs on a per-ton basis for the company were down 10 percent because of the increased production and higher operating rates.

The strong export market, particularly in China, has fueled overall growth. China imported 4.6 million metric tons of potash in 1997, up 33 percent from 1996. Yet even with the robust imports, China's potash inventories remain low, suggesting that the country will be a source of further export growth.

According to Ed Wheeler, principal of Washington, D.C.-based Ed Wheeler & Associates, the increased demand in the export markets is the result of better agronomics and a balancing of the N-P-K ratio. In the past, China has predominantly used nitrogen in its fertilizer mix, but the country is now recognizing the benefit of using potash as well.

Even so, China is behind Western countries in its use of potash. The country has historically averaged an N-to-K ratio of about 8 to 1, while in North America and Western Europe the ratio is nearly 2 to 1.

A possible cloud looming over the future for the Asia market may be the development of a 300-million-metric-ton potash field near Udon Thani, Thailand, with a mineable reserve estimated at 196.6 million tons.

Asia Pacific Resources Ltd. and its 62.5-percent-owned Asia Pacific Potash Corporation, which is attempting to develop the ore reserve, estimate that the field could produce 2 million tons per year for 25 years. With transportation accounting for as much as half of overhead costs, an on-the-ground producer in Asia would have an advantage in the regional market.

However, long-time observers of the industry remain dubious of the project, noting that speculation about developing a potash mine in Thailand has been going on for more than a decade.

COPPER--Spurred by declining copper prices, Southern Peru Corporation is implementing a $30 million annual cost-reduction program. The planned streamlining involves reductions in general and administrative expenses, and purchased materials and supplies, as well as other operational improvements. The program also includes personnel reductions and a hiring freeze of the company's salaried staff.which became effective in March.

The cost-savings program is expected to be fully in place by the end of the year and should improve net earnings by approximately $8 million in 1998 and $18 million on an annual basis.

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