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Potash producers are mindful of the collapse of potash prices three years ago. (Laura Leyshon for The Globe and Mail/Laura Leyshon for The Globe and Mail)
Potash producers are mindful of the collapse of potash prices three years ago. (Laura Leyshon for The Globe and Mail/Laura Leyshon for The Globe and Mail)

Potash producers slashing output to protect prices Add to ...

Potash companies are scrambling to prevent another sharp drop in the price of the crop ingredient by slashing production amid concerns about a slowdown in shipments to key countries such as China and India.

Major producers are taking pre-emptive steps to address fast-changing economics that could alter the industry’s supply-demand balance, given the fragile state of the world economy and new mines expected to start up in the coming years, adding to global output.

Companies are also mindful of the collapse of potash prices three years ago. Prices spiked to nearly $1,000 (U.S.) a tonne briefly in 2008 on concerns of a global supply shortage, then abruptly fell two-thirds to about $300 a tonne within months, as the global economic crisis laid waste to commodities demand.

Potash prices have bounced back to around $550 a tonne today, amid record volumes and an investor view that more fertilizer will be needed over the long term to feed the world’s growing population.

OAO Uralkali, Russia’s biggest fertilizer maker, said this week it plans to cut annual production by about 8 per cent to between 10.5 million tonnes and 10.8 million tonnes.

“Our strategy is that price is much more important than volumes,” said Uralkali chief financial officer Victor Belyakov. “It’s a strategy for most of the big players in the market.”

Saskatoon-based Potash Corp. of Saskatchewan Inc., the world’s largest potash producer, is following a similar strategy, expected to help maintain the company’s earnings power.

Potash Corp. late Wednesday announced a doubling of its dividend, the second such hike in the past year. The move “reflects the confidence we have in the drivers of our business and our commitment to creating superior long-term shareholder value,” Potash Corp. chief executive officer Bill Doyle stated.

Potash recently announced temporary shutdowns at some of its Canadian mines, representing just under 10 per cent of its operating capacity.

The production cutbacks are likely to have a significant impact on future prices, since the two companies account for about 37 per cent of global potash supply.

“We believe that the temporary shutdowns and decreased production targets from major suppliers in 2012 will prevent any significant erosion in potash prices in 2012,” Dundee Securities Corp. analyst Richard Kelertas said in a note.

Prices have remained steady despite record volumes, Mr. Kelertas noted, owing to high prices for crops such as corn and soybeans, which has encouraged farmers to use more fertilizer to increase their crop yields.

Dahlman Rose & Co. analyst Charles Neivert believes prices will not budge much this year as producers curtail production.

“We believe that 2012 is going to shape up as a challenging year for all of the major nutrient products and POT [Potash Corp.] in its role as the industry disciplinarian for potash, is going to be particularly challenged since it will bear much of the burden of cutting production to balance industry fundamentals and mitigate the scale of inventory gains which could otherwise occur,” he said.

Some analysts expect Potash Corp. to be more cautious about the market outlook when it releases its latest quarterly update on Thursday.

In October, the company said it expected global consumption to be in the range of 58 million to 60 million tonnes, noted Scotia Capital analyst Ben Isaacson.

“A lot has changed since then,” Mr. Isaacson said in a note. We expect POT’s forecast to move toward our 55-million-tonne estimate as the year progresses.”

With files from Bloomberg News

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