More Potash Than Any Other Company
The Potash Leader
PotashCorp has potash assets unmatched by any other world producer, and we are expanding to build our competitive strength. We completed construction of an additional 1.5 million tonnes at our Lanigan operation in 2008. Between 2005 and the end of 2012, we will have added 10.1 million tonnes through debottlenecking and expansion, half of the industry projects being built worldwide in that time, with a total investment of CDN $7 billion.
We are also expanding our compaction capacity to produce more granular potash, which has a larger particle that can be easily blended with solid nitrogen and phosphate fertilizers for consistent application. This premium product is used in sophisticated agricultural markets and, increasingly, in developing nations, and we see it as the future of global farming practices. While more costly to produce, granular products provide higher margins and add flexibility to our potash operations.
Potash: The Ideal Fertilizer Enterprise
Potash has many advantages over the other primary nutrient businesses.
Significant potash production occurs in only 12 countries. Half of global reserves are located in the Canadian province of Saskatchewan, while Canada, Russia and Belarus together account for two-thirds of world production and more than 80 percent of reserves.
Most potash companies are publicly owned and traded, so business decisions in the industry are likely to be made for economic rather than political reasons. Only in Belarus, where the economy and GDP growth depend heavily on potash sales in US dollars, is there significant government ownership.
Entry into the potash business is difficult because quality deposits are rare and costs to build a new mine are substantial. A new conventional Saskatchewan mine would require an upfront capital investment of CDN $2.8 billion or more, excluding roads, rail, utilities, port facilities and other infrastructure outside the plant gate that could increase the cost significantly. It would take a minimum seven years to generate positive cash flow from when construction begins.
Greenfield Production At Least Seven Years Away
No significant greenfield projects are on the immediate potash horizon, and the long lead time for a new mine makes the completion of new competitive construction unlikely for at least seven years. While rising prices and profitability increase the likelihood of a future greenfield commitment, the cost and time required to establish a large-scale facility continue to be major impediments. However, if and when we determine that a greenfield project is appropriate, we have property at Bredenbury, Saskatchewan where, we believe, geological exploration is the most advanced of any prospective new mine, complete with previously drilled potential shaft pilot holes.
More Long-Term Growth
Expanding offshore markets, particularly in developing nations, provide most of our growth. In 2008, those markets purchased 65 percent of our potash for use on rice, wheat, soybeans, corn, oil palm, sugar, rubber, bananas, oranges, coffee and other agricultural commodities. Most of our remaining potash was sold in North America, a mature and stable agricultural market. A small amount – about 6 percent – was purchased by industrial customers in North America and offshore.
Offshore Sales and Logistics
Our company is the largest contributor (54 percent) to Canpotex Limited (Canpotex), which represents Saskatchewan's three potash producers (PotashCorp, Mosaic, Agrium) in offshore markets. In the key markets of China, India, Brazil and Southeast Asia, Canpotex competes with global marketing agencies such as Belarusian Potash Company (for Belaruskali and Uralkali) and International Potash Company (for Silvinit), and producers such as ICL and K+S. Our New Brunswick facility has logistical advantages in supplying Brazil and other Latin American countries.
Purchasing methods vary among large offshore customers:
- China buys from Canpotex under three-year memoranda of understanding, with pricing and volumes negotiated annually. The current memorandum expires at the end of 2009;
- Japan and Korea buy from Canpotex under six-month price and volume contracts;
- India has traditionally bought from Canpotex as needed under six- to 12-month price and volume contracts;
- Brazil buys from Canpotex and PCS Sales, and Southeast Asian countries from Canpotex, on the spot market.
PotashCorp benefits from lower transportation and distribution costs by marketing through Canpotex. These costs can be considerable when shipping from Canada's interior.
Approximately 25-35 percent of Canpotex customers buy at the port where the product is loaded and pay their own freight (FOB). Canpotex pays the freight for customers who buy on a delivered basis. As a result, ocean freight rates can affect margins significantly.
North America Sales and Logistics
Sales to the United States are typically made from Saskatchewan, particularly from our Rocanville plant, which is just 95 miles from the border. North American customers – primarily wholesalers, retailers and cooperatives that purchase on the spot market from PCS Sales – buy mainly on a delivered basis. We do not sell directly to farmers. We own or lease more than 100 distribution points in the US (mostly with variable cost leases, paid for only when used) and approximately 3,500 potash railcars.
Global and North American Competitors
The principal markets for both Canpotex and former Soviet Union (FSU) producers are China, India, Brazil and Southeast Asia. FSU producers also ship into the European Union. K+S customers are primarily in Europe and Brazil, while ICL ships to India, China, Southeast Asia, Brazil and Europe.
In North America, PotashCorp competes with Mosaic, Agrium and Intrepid. Our share of North American producers' sales to this market was 37 percent in 2008.
Strategic Investments Broaden Our Potash Enterprise
Our investments in four potash-related companies give us strategic opportunities and enhance our bottom line. With 32 percent ownership, we have an influential position in SQM in Chile, the world's leading producer of specialty potassium, iodine and lithium products. Our 28 percent ownership of APC in Jordan – which has a logistical advantage in delivering to Mediterranean and East Asian markets – enables us to appoint its top four management positions. In 2008, we increased our ownership of ICL in Israel to 11 percent and our investment in fertilizer distributor Sinofert in China to 22 percent. Sinofert – the biggest potash distributor in the world's largest market – distributes 50-60 percent of the fertilizer imported into China. It has an 18 percent interest in, and handles all product of, Qinghai Salt Lake Potash Company (QSLP), the country's largest potash producer.
The market value of our offshore investments was $4.6 billion at December 31, 2008.
