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Slow potash sales to China, India slash Agrium profit

Mike Wilson, president and CEO of Agrium, addresses shareholders during the company's annual general meeting in Calgary, Alberta, May 11, 2012.


The "potash holiday" in China and India has claimed a new casualty, with Agrium Inc. of Calgary announcing lower-than-expected profit in the third quarter and warning it will be hit again in the final three months of the year.

The news drove Agrium stock down 10.7 per cent on Wednesday, when the company also forecast significantly lower international demand for potash in the fourth quarter.

Agrium is part of the Canadian potash marketing giant Canpotex Ltd., which also includes No. 1 producer Potash Corp. of Saskatchewan Inc. and Mosaic Co. and which is struggling to negotiate long-term sales contracts with state agencies in India and China. The two countries have dialled back demand for the nutrient in recent years in what analysts have described as a "potash holiday."

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"It really comes down to negotiation between India and China. Brazil is going to be very strong, we think Southeast Asia's strong," Agrium president and chief executive officer Mike Wilson said on a call with analysts after announcing a third-quarter profit that was less than half what it was in the same period last year.

"We are awaiting the negotiation completions with China and then followed by India, and they will settle and we will be supplying them in 2013, so we see a recovery, but you likely won't see a huge recovery until the second half of 2013," Mr. Wilson said.

The talks have extended months longer than in the past, stalling sales to two of the world's largest consumers of potash and wreaking havoc among other producers and customers who need to know pricing levels before closing their own deals.

The stalemate with India and China comes in part as the giant consumers resist pricing power held by Canpotex and Russian counterpart Belarus Potash Co. – the trading joint venture of Uralkali and Belaruskali.

Late last month, Potash Corp., the world's largest maker of the fertilizer, reported a 22-per-cent drop in profit as it failed to reach supply deals on schedule with its two largest buyers.

"Perhaps we should have seen it [Agrium results] coming, maybe not to this degree, but to the extent that it was flagged, given what Potash Corp. had talked about in the quarter, and the fact that they've had difficulty with India and China," said John Hughes, an analyst with Desjardins Securities Inc. in Toronto.

Agrium, a fertilizer maker and the largest U.S. farm products retailer, said profit fell to $129-million (U.S.) or 80 cents a share in the quarter from $293-million or $1.85 a year ago.

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Excluding items such as a $66-million charge related to environmental remediation, Agrium profit was $215-million or $1.34 a share, below the average estimate of 24 analysts compiled by Bloomberg that called for earnings of $1.81 a share.

Gross profit from potash sales in the quarter was $23-million, compared with $102-million in the same quarter last year, hurt by lower sales of potash at lower prices.

"Global potash demand has been weaker than the other two major nutrients, which has also impacted potash pricing," Mr. Wilson said. "This is primarily due to uncertainty with respect to the timing and volume of new supply agreements with China and India, and is expected to have a significant impact on international shipment volumes in the fourth quarter."

Agrium made up for its potash woes with good reports in its other divisions. It reported its highest-ever third-quarter performance from its nitrogen business, helped by the fallout from one of the worst droughts in U.S. history that drove grain prices to record highs.

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