Potash Corp. of Saskatchewan Ltd. is laying off staff and slashing output capacity in a bid to become a lower-cost producer amid falling prices and slumping demand from key customers.
The Saskatoon-based company said on Tuesday that it will cut its global work force by 18 per cent – more than 1,000 jobs – and halt or suspend production at higher-cost mines in New Brunswick, Saskatchewan and Florida as it adapts to tumultuous markets.
Potash Corp. chief executive officer Bill Doyle blamed lower sales to China and India, and a stagnant global economy, for the changes that will help reduce its operating costs of $110 (U.S.) a tonne by $15 to $20 next year, and $20 to $30 by 2016.
"Since the Great Recession, we have seen very little global growth, and that has impacted the demand for fertilizer," Mr. Doyle said in an interview.
Mr. Doyle said China is meeting almost half its yearly 11.5-million-tonne requirement with domestic potash production. In India, potash imports have fallen as the government there reduced subsidies for its purchase in a bid to foster a domestic nitrogen market. Potash Corp. does not reveal sales on a per-country basis, but Mr. Doyle said the company continues to ship potash to China. It also plans to have a new contract sealed by the end of January.
The producer of crop nutrients potash, phosphate and nitrogen said it would suspend production at one of two Lanigan mills in Saskatchewan by the end of the year, but keep the business in "care and maintenance" mode. Production will be cut at the Cory facility, also in Saskatchewan, while the operation at Penobsquis, N.B., will be halted.
"What you're seeing here is an industry leader showing everybody else in the industry: 'Come on, let's be self-disciplined. Let's not get into a fight to see who can sell the most cheapest … and we'll get out of this quickest,' " said Colin Boyd, a professor at the University of Saskatchewan's Edwards School of Business.
Potash prices tumbled this year after Russia's OAO Uralkali quit a Belarus potash joint venture with Belaruskali in order to sell potash on its own. The other potash cartel is the Canpotex group in North America, which includes Potash Corp., Agrium Inc. and Mosaic Co.
Potash Corp. warned in October that its full-year profit would miss forecasts and that its average realized price of potash in the third quarter had fallen 23 per cent to $307 a tonne from the year-earlier period.
Mr. Doyle said the Potash Corp. shakeup had nothing to do with the turmoil in Eastern Europe, nor the lower prices that resulted. Rather, it was about reducing production capacity to meet lower demand.
The emerging markets of China and India have been big drivers in the rise of the global crop fertilizer market, as growing middle classes eat more red meat and spur the proliferation of cattle farming. To feed the livestock, farmers bought more fertilizer to grow grains and lifted worldwide sales of potash about 3 per cent every year between 1960 and 2007, when prices topped $1,000 a tonne.
Potash producers responded by spending billions on new mines and boosting production, a "gold rush" mentality that Mr. Boyd said has resulted in falling prices and a glut of supply.
"It's a typical commodity industry. It requires huge gambles of investments to bring online large tranches of new production in a context where it's very difficult to try and forecast what demand is going to be, and … where your competitors are all looking at the same signals and doing the same thing. It results in oversupply," Mr. Boyd said.
Potash Corp.'s 2013 output was 7.75 million tonnes, short of its capacity to produce 13.3 million tonnes. The cuts will reduce 2014 capacity – including inventory – to 10 million tonnes, and the company said it has the ability to boost output beyond that, if required.
A spokesman for Australian miner BHP Billiton Ltd., which is developing its Jansen potash mine in Saskatchewan, said the company is taking a long-term view of prices and has no plans to change course.
The province of Saskatchewan relies on potash output for about 3.5 per cent of its $11-billion (Canadian) budget. Saskatchewan Premier Brad Wall, who was given advance notice of the cuts along with New Brunswick Premier David Alward, said Saskatchewan's diversified economy remains strong.