Potash Corp. CEO William Doyle.© David Stobbe / Reuters/Reuters
Potash Corp. of Saskatchewan Inc. slashed its profit outlook and set plans to curtail output at two mines amid a standoff between the world's largest potash producers and consumers.
Major customers are deferring potash purchases as they balk at high prices for the crop nutrient, used to boost yields in farms around the world . Sales expected this year are now likely to be booked early next year.
The reduced profit outlook "primarily reflects lower than forecasted potash sales volumes due to delays in new contracts with buyers in China and India," Potash Corp. said.
The clash over potash prices signals a growing resistance to pricing power held by Potash and other members of Canpotex Ltd., the joint venture of Potash Corp., Agrium and Mosaic that sells potash outside of North America. Although producers and buyers face off over prices from time to time, analysts say the current disagreement appears to be deeper than Potash Corp. had anticipated.
The company has long enjoyed strong profits and a bright outlook, confident that farmers sooner or later need to replenish their potash reserves to boost production. Just last month it raised its quarterly dividend.
But the company's future performance is clouded by customer pushback from buyers in China, India and Brazil, analysts say.
CIBC World Markets analyst Jacob Bout warned in a report this week of the threat of a potash purchasing "holiday" in China and India, and other analysts accused producers of creating "demand destruction" with high prices.
Saskatoon-based Potash Corp. warned earnings for 2012 will fall below the low end of its previous forecast of between $2.80 per share to $3.20 per share set out in July.
CIBC's Mr. Bout said in his report that global potash consumption will likely fall this year as a result of a weak Indian rupee, high local potash production in China and competitive pricing pressure in Brazil.
Demand for the nutrient – a mined or manufactured product which farmers use to strengthen root systems to make them more drought-resistant – has fallen for several years in India by several million tonnes below trend.
Farmers eschewed the product in favour of nitrogen products that are subsidized, although Canadian producers are hopeful demand will pick up in the run up to elections in India in 2014, betting the government will boost subsidies to farmers for potash and increase demand.
Reports last week that the Indian government raised the retail price for urea, the organic compound containing nitrogen, may suggest an eventual return to more potash use.
"I think over time you may see the Indian government support policies for more balanced fertilization," said Joel Jackson, an analyst with BMO Nesbitt Burns Inc. He predicted stronger global potash demand in 2013 as China and India finally sign supply contracts and as farmers around the world take advantage of high crop prices.
Potash Corp., the world's largest fertilizer maker, announced temporary shutdowns at Rocanville – recently in the news for a fire that trapped miners for a day – and Lanigan, both potash mines in Saskatchwan.
The shutdowns occur at different times between November and January, around the same time the company is to conclude negotiations with India and China that should have been wrapped up by this month.
Potash Corp. did not say how much production would be curtailed, but analysts estimate the figure could be as high as a million tonnes, or about a third of an annual shortfall in Indian demand in recent years.
"Consistent with Potash Corp.'s practice of matching supply with market demand, notice was given to our Rocanville and Lanigan employees of the following potash inventory adjustments," the company said in a brief statement.
"Additional discussion around third-quarter results, as well as full-year guidance will be addressed in our third-quarter news release and conference call on October 25, 2012."
The production cuts announced this week come in addition to a previous, four-week shutdown at Lanigan that just ended on Oct. 13.