INSIGHT: Nutrien’s rocky road to the top

Source: ICIS News

2018/05/09

LONDON (ICIS)--Canadian muriate of potash (MOP) major Nutrien set out in January to develop an “unmatched capability to respond to customer and market opportunities” - and despite a few bumps in the road, slick CEO Chuck Magro remains committed to his promise.

Formed by the combination of MOP fertilizer producers PotashCorp and Agrium, Nutrien began operations on 1 January with a total of 20,000 employees - 4,500 based in Canada’s Saskatchewan province.

Now the world’s single-largest provider of crop nutrients, Nutrien’s assets include 22m tonnes/year of MOP capacity in Canada alone - the largest volume globally - while Agrium’s contribution makes the firm the world’s third largest nitrogen fertilizer producer, with sales of nearly 11m tonnes of product annually.

FIRST STEPS From its first few weeks of operation, Nutrien’s leadership made clear that difficult choices lay ahead; adding that the “merger of equals” would work to “build a new company that is stronger and better equipped”.

Initially, this began with the approximately $700m sale of the agribusinesses stake in rival MOP producer Israel Chemicals (ICL) - a move required by various governments to allow the merger to go ahead.

The company subsequently announced the closing for sales of its minority shareholdings in fellow MOP producers Arab Potash (APC) and Sociedad Quimica y Minera (SQM) by the end of Q2.

“[The APC and SQM sales] will generate in total with ICL somewhere between $4bn and $5bn of cash”, Magro says.

Added to this cash injection was news in early April of Nutrien’s rebranded retail business - now called Nutrien Ag Solutions, effective 1 July

The move ditched the lingering Crop Production Services, Agroservicios Pampeanos, and Utilfertil brands mashed together by the merger that created the agricultural giant.

The rebrand was accompanied by the acquisition of 29 new retail locations, with an estimated annual revenue of $280m, and the launch of an integrated agronomic digital management system for farmers - further strengthening the emergent company’s reputation among end-users.

Finally, writing in Nutrien’s Q1 earnings release, Magro says the agribusiness has “made significant progress towards achieving [an] annual synergy target of $500m”, having realised run-rate synergies of $150m as of 31 March.

Granted, some of these savings were less than popular, including news in February of 33 jobs lost thanks to corporate overlap between Agrium and PCS staff - but this was largely seen as the unsurprising result of rivals becoming one cohesive unit.

Nutrien expects to achieve savings of approximately $250m by the end of 2018, with the full annualised run-rate achieved by the end of 2019.

Why, then, has the seemingly resurgent company registered a net loss in excess of $1m in the three months to 31 March?

In reality, the challenges of administering such an immense enterprise has led to a somewhat mixed first few months for Nutrien.

Earlier this week, the company reported a net loss of $1m in the three months to 31 March, compared with a net profit of $149m in the same period a year earlier.

Despite the loss, the company was quick to point to a surge in sales to $3.7bn in the first quarter, from $1.11bn in the same period of 2017 - although the cost of goods sold widened to $2.64bn, from $706m.

CEO Magro, commenting on the results, attributed the loss to a vague grab-bag of issues: “Nutrien's first quarter was affected by a late start to the spring season across North America, and west coast rail performance issues.”

Magro’s comment on issues with the company’s railway transport provider, however, appears to be a diplomatic downplaying of the operational disruption caused by the dispute.

According to Nutrien, the “rail performance issues” forced the producer to implement a plan to bring its inventory under control - a plan which led to employees at its Vanscoy and Allan mines being informed that temporary layoffs would begin on 6 May.

Nutrien subsequently made good on its plans, taking 470 workers at its Vanscoy facility off the production line for six days; reinstating them on 4 May.

Meanwhile, 140 workers at Allan left work on 6 May, with no official announcement of an expected return date.

The producer insists its issue with Canadian Pacific (CP) is the main catalyst for the layoffs, claiming that “this is a direct result of railway performance challenges experienced so far this year”.

Naturally, the company added that the possibility of an imminent strike by unionised staff at CP could result in additional mines requiring downtime.

Unions at CP were prepared to strike on 21 April, but postponed the action after they were ordered by the federal government to vote on the railroad’s final offer, as it was feared the stoppage could have a serious impact on Canada’s economy.

The government is not alone in that thinking, and there is talk in the market that Nutrien’s decision may have far-reaching consequences, beyond that foreseen by Magro and co.

The layoffs could lead to months of additional pressure on potash supply around the world, at a time when availability is so tight, a source at one European rival, describing his customers’ enquiries, said: “One tonne, one container, one bucket – [buyers] would take anything.”

CP’s unions - the Teamsters Canada Rail Conference Train & Engine (TCRC), and the International Brotherhood of Electrical Workers (IBEW) - are expected to vote on the rail carrier’s final proposals on 14 May, with the process closing on 23 May.

Despite the disruption, however, Nutrien’s outlook remains otherwise positive. The company’s global MOP shipment forecast has been reassessed to 64.5m-66.5m tonnes this year - buoyed by strong demand around the world, which shows little sign of abating.

Plus, there was a welcome shot-in-the-arm offered by Canpotex - the Canadian MOP marketing arm, which ships Nutrien and rival Mosaic’s volumes around the world - which has set up a beachhead in Brazil, a key importer for the Canadian major.

Brazil cannot claim a burgeoning MOP industry of its own. In fact, despite being the world’s largest net exporter of agricultural products, the country imports 94% of its MOP from mines as far afield as 20,000km distant.

As such, Canpotex’s in-country sales arm may allow the marketing firm to meet potential customers, smooth established relationships, and straighten supply lines faster than its distantly-headquartered rivals.

So, despite the railway ruckus dominating the headlines, and a first set of financials unlikely to leave investors smiling, the road ahead is still looking up for Nutrien - bumps and all.

By Andy Hemphill

Additional reporting by Nurluqman Suratman and Mark Milam