The Flexible Phosphate Producer
Offering More Diversity in the Phosphate World
PotashCorp has built a diversified and flexible global phosphate business on integrated world-class operations in North Carolina and Florida. Our high-quality phosphate rock enables us to optimize our phosphoric acid to provide the most profitable combination of downstream products – liquid and solid fertilizers, feed supplements for livestock and poultry, and products used in industrial applications.
Good Rock Is the Basis of Success in Phosphate
Approximately 30 countries produce phosphate rock. China, the US and Morocco, the largest producers, together account for 67 percent of world production. Morocco alone accounts for almost half of phosphate rock exports. Producers without their own supply (non-integrated) must buy and process more expensive rock to produce downstream phosphate products.
Industry Enjoys Strong 2008 After 2007 Turnaround
Following significant increases driven by Morocco’s Office Cherifien de Phosphates (OCP) in 2007, phosphate rock prices continued to climb during early 2008, pushing up prices for all downstream products. Growing product inventories, declining raw material costs and demand deferral due to the economic crisis resulted in falling production costs and prices for these products in the second half of the year. Rock prices, however, remained relatively stable.
Extreme Volatility in Raw Material Costs in 2008
Sulfur, a byproduct of oil and gas production, is needed to convert phosphate rock into phosphoric acid, an intermediate product that can be sold or further processed. Strong demand and constrained supply drove sulfur prices dramatically higher in 2007 but they softened in the second half of 2008. In the fourth quarter, they fell faster than they had risen, due mainly to sharply reduced demand.
Significant volatility in the cost of ammonia, an important input in DAP and MAP production, also affected prices and profitability of those phosphate products.
Market Structure Can Lead to Higher Volatility
While it is much less of a pure commodity business than nitrogen, the phosphate industry still has many producers and considerable government ownership, as well as intermediaries to facilitate product movement. These situations make the marketplace potentially more volatile.
Limited New DAP Capacity Underway
No major additions to world capacity in solid phosphate fertilizers are expected until Saudi Arabia’s Ma’aden project is completed and its 3 million tonnes of DAP are ramped up, potentially by 2012. China is building some capacity for domestic consumption and Morocco plans to bring on phosphoric acid plant expansions in 2009 that will enable it to increase solid phosphate production. However, without any significant new capacity slated to come online in the immediate future, growth in demand for phosphate products is expected to keep global markets balanced to relatively tight.
Benefiting from Diversification
We have built our phosphate enterprise on a foundation of abundant and accessible phosphate rock reserves, with low levels of impurities and, therefore, low production costs. This high-quality rock enables us to produce phosphoric acid of equally high quality, and we use about 40 percent of it to make high-margin industrial and feed products outside the more cyclical solid fertilizer markets. We are also strong in liquid fertilizers, where there is increasing demand and we enjoy healthy gross margins on a P2O5 tonne basis. Our diversification strategy ensures that we are well-balanced in our exposure to both liquid and solid fertilizers.
Feed and Industrial Provide Stability
Feed and industrial sales have historically been less seasonal and cyclical, and therefore less volatile, than fertilizer sales, which increased the quality of earnings in these segments. We believe long-term global trends make these excellent businesses. However, they were not immune to the global economic crisis, and our performance – particularly in feed phosphates – suffered in the second half as our customers’ businesses were negatively impacted.
World meat producers and processors in general endured a difficult 2008, when increased grain prices led to substantially higher feed costs. Our primary feed customers are US bulk feed producers, while Latin America and Asia are our largest offshore markets. Dical and monocal are used primarily in beef, poultry and pork production. We have a competitive edge in producing DFP for poultry due to Aurora’s quality rock.
Industry uses phosphate in soft drinks, food, metal treatment and other products. We are a significant participant in the purified phosphoric acid business because of our wet process technology and our high-quality rock at Aurora. The US is our major market for industrial phosphate products, but rising incomes in developing countries are driving growth in offshore demand.
Phosphate Sales and Logistics
Roughly two-thirds of our phosphate sales volumes are sold in North America, where we typically benefit from higher realized prices. Depending on the product, sales are made on a spot or contract basis. Our North American business is handled by PCS Sales, while PhosChem, a US marketing association that includes Mosaic, sells our phosphate fertilizers offshore. PCS Sales handles our industrial sales in all markets.
Global and North American Competitors
Our major offshore fertilizer competitor is OCP, while in North America we compete with Mosaic, CF Industries, Mississippi Phosphate, Agrifos and Agrium. Innophos, ICL and Chinese imports vie with us for North American industrial sales, while Mosaic and Chinese producers compete with us for feed sales in both markets.
