Global economic turbulence triggered a sharp drop in sales volumes and earnings for fertilizer giant Potash Corp. of Saskatchewan, as customers broke from traditional buying patterns and deferred purchases.
Citing slow purchases of potash in major markets such as North America, China and India, Potash Corp. reported a surprisingly steep 33-per-cent drop in first-quarter earnings and slashed its full-year profit forecast. Amid worries about a weakening global economy, buyers are increasingly shifting to shorter-term purchases, rather than stockpiling potash.
"While underlying consumption at the farm level was expected to be strong globally, most dealers chose to defer major purchasing decisions rather than build inventory," the company said in its first earnings report of the year.
Potash shares tumbled 3.2 per cent in Toronto, adding to a recent slump in the stock price.
Potash Corp. has suffered an increasingly uncertain earnings outlook in recent quarters as economic woes in Europe spread and led to bumpy demand for fertilizers.
The company's first-quarter earnings dropped to $491-million (U.S.) or 56 cents a share from $732-million or 84 cents a share a year earlier. The Saskatoon-based company lowered its guidance for 2012 profit to a range of between $3.20 per share and $3.60 per share, compared with guidance issued in January for full-year profit of between $3.40 a share and $4.00 a share.
"More disappointing than all the Q1 numbers are the 2012 guidance," said Joel Jackson, an analyst with the Bank of Montreal's BMO Nesbitt Burns in Toronto. "On the North American side it seems like the industry is moving more and more to a 'just-in-time' system … to where the channel [dealer]might wait to the last minute to restock."
Potash producers have been adjusting output to meet softer demand. As an example, Potash Corp. curtailed production at its Lanigan, Rocanville and Allan facilities in 29 so-called inventory-related downtime weeks in the first quarter.
Potash is a form of mined and manufactured potassium that farmers apply to their fields to strengthen root systems and make crops more drought-resistant. Farmers can skimp on the mineral for a time, but will eventually need to put it back into the soil to keep it productive.
Canada, Russia and Belarus control most potash exports and Saskatoon-based Potash Corp. owns about 20 percent of global production capacity.
Over the longer-term, Potash Corp. is expected to be a key beneficiary of the growing wealth of Asian populations, particularly in India and China, the No. 1 potash consumer, where healthier diets are translating into greater demand for agricultural products.
Its place in the market was underscored in 2010, when the world's largest mining company, BHP Billiton, made a hostile, $39-billion bid for Potash Corp. that was eventually blocked by the Canadian government, which described the company's assets as strategic to Canada.
Potash Corp. president and chief executive officer Bill Doyle remains steadfastly bullish on the sector. He says the move to just-in-time buying is a temporary reaction to European market turmoil.
"I don't see it as a permanent shift. I see it as a situation coming off this last six-month period which is now behind us, this risk-aversion and the whole fear of Europe exploding again," Mr. Doyle told investors, explaining that recent farm activity has deprived arable lands of nutrients that will need to be replaced.
"Simply put, a debt is being built that must be repaid over time to maintain the productivity of the soil," he added,
Potash Corp. expects a pick-up in business in the second quarter, perhaps to record levels as fertilizer dealers begin to come back to market to stock up again. It points at North America as one area of improved demand through the remainder of the year, buoyed by the prospect of an early harvest. In Latin America it says dealers are now moving aggressively to secure potash supply.
"Given our large order book – including what we believe could represent a second-quarter sales volumes record – we do not anticipate any inventory-related downtime in the current quarter," it said. "Potash Corp. expects record or near-record second-quarter earnings, with net income per share to approximate $0.90-$1.10."
The company is not alone in its strong outlook for the year to come.
Mosaic Co., the world's largest producer of phosphate-based fertilizers, said this week that global demand for nutrients has strengthened significantly.
"We expect demand to continue to grow, and crop nutrients to remain affordable. We anticipate another year of high farm income in North America – the second highest on record – and strong farm economics around the world. Our long-term outlook for the business is positive," Mosaic president and chief executive officer Jim Prokopanko said in guidance issued to the market.
Mosaic, Potash Corp. and Agrium Inc., a Calgary-based company that is the largest North American farm products retailer, account for about a third of global potash exports.
Potash Corp. earned $491-million (U.S.) in the quarter, or 56 cents per share, compared with $732-million or 84 cents in a record first quarter last year.
The results were below the median consensus estimate of analysts polled by Bloomberg for 63.5 cents a share and the company's stock was down 2.5 per cent in Toronto by midday.