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Potash Corp. of Saskatchewan's Bill Doyle has always had an enviable position, and the list of things that could possibly be of any concern to the Fertilizer King is shrinking.
Sure, last year wasn't a stellar one for Potash – its stock traded sideways as profits fell by 32 per cent from the previous year. But that was largely due to a Potash-instigated buyers' strike – the company hates to negotiate on pricing and often chooses to down tools instead – and the strike appears to be over. Potash shipments in the first quarter jumped by 78 per cent over the same period a year ago, as the company ended a string of six earnings shortfalls. Many analysts forecast significant increases in free cash flow this year and next, as well as possible dividend increases or share buybacks.
But things are looking even rosier longer term, now that two obstacles have diminished. First, potash producers settled a potentially costly class action lawsuit by customers in the U.S. accusing Potash and six other firms in Saskatchewan, Belarus and Russia of colluding to keep prices high. Potash's $43-million (U.S.) share of the settlement was a pittance, amounting to two days' worth of revenues. Second, the prospect of a glut of capacity – coming from new potash projects like BHP Billiton's proposed $14-billion mine's proposed $14-billion mine in Saskatchewan – is waning.
Now that the supercycle is over, the industry is in a hangover phase, and new BHP boss Andrew Mackenzie is singing a different song. He's promising to make more prudent, targeted investments and deliver better operating margins, and sounds like he's backing away from potash, telling the Wall Street Journal BHP hasn't yet decided whether to proceed. Why would they, when it would mean spending all that money to add excess capacity, not to mention threatening the cozy relations between existing producers (BHP had pledged not to join jointly-owned marketing organization Canpotex) that support potash prices?
After eight years of flat or declining demand for the fertilizer, it's easy to see why developers are pulling back on plans that were due to increase global capacity by an average of 4 per cent per year through 2021. The signs are ominous: Mosaic and K+S Group recently said they will defer previously announced projects while Brazil's Vale says it won't proceed with a potash mine in Argentina. Expect BHP to follow suit.
Potash customers are buying again, anti-collusion actions are now settled and concerns of overcapacity are melting away. If it seems like potash producers live a charmed life, they've earned it, by not succumbing to the same mistakes that bedeviled other miners when the market got hot.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff .
Sean Silcoff