Phosphate Results
2007 vs 2006
Highlights
- While strategic focus on our unique ability to produce and market specialty phosphate products has brought stability and increased profitability to the phosphate segment in recent years, strengthening global agricultural fundamentals have begun to demonstrate the value of our leverage in liquid and solid phosphate fertilizers. Phosphate gross margin was $432.8 million, surpassing our previous record of $230.1 million set in 1998.
- Solid fertilizers generated $205.8 million in gross margin during 2007, while liquid fertilizers added $88.2 million, feed $67.3 million and industrial products $60.2 million.
- Transportation and distribution costs declined 23 percent in 2007 despite the increase in sales, for offshore sales volumes of solid fertilizers fell as the company focused on the North American market. Freight increased more than sales due to higher market freight rates and changes in customer and destination mix that required more freight.
Sales and Cost of Goods Sold
The total gross margin increase of $307.5 million was largely attributable to the following changes:
- Realized prices were up in all major product categories, for two main reasons: strong agricultural demand and the global impact of higher demand for inputs such as sulfur, phosphate rock and ammonia. As producers around the world allocated more phosphoric acid to manufacturing solid fertilizers, markets for liquid, feed and industrial products were squeezed. Pricing for phosphate products sold on spot markets moved up significantly, while certain industrial products rose on a delayed basis. Realized prices for manufactured solid and liquid fertilizers increased by 56 percent and 27 percent, respectively, while manufactured feed prices rose by 9 percent and industrial manufactured prices by 2 percent.
- Manufactured solid fertilizer sales volumes declined 1 percent overall as we sold fewer tonnes in order to deliver on liquid phosphate demand. Our liquid phosphate fertilizer capability allowed us to capitalize on significantly higher US demand, selling 15 percent more there than in the same period last year as we focused on these markets ahead of lower-netback offshore regions. Total manufactured liquid fertilizer sales volumes increased 8 percent. Manufactured industrial sales volumes were 13 percent higher due to increased production at our newest Aurora purified acid plant. Manufactured feed sales volumes were up 5 percent.
- Rising costs for ammonia, sulfur and phosphate rock negatively impacted phosphate gross margin. Greater demand from the phosphate sector challenged global sulfur supply in the latter part of 2007, particularly in the international market. The impact of this was also felt in North America and, as a result, our sulfur costs rose 4 percent and negatively impacted gross margin by $6.2 million compared to 2006. Ammonia costs, which were 5 percent higher, reduced gross margin by $5.9 million compared to 2006. Costs were further increased by 5 percent higher rock costs resulting from higher electrical and chemical processing costs at Aurora and White Springs and two planned dragline turnarounds at Aurora. These higher prices were partially offset as the company had recognized in 2006 an impairment loss of $6.3 million within the liquid fertilizer component. The unfavorable cost variance in feed and industrial was higher than in solid and liquid fertilizers. In feed, higher maintenance costs negatively impacted costs. Industrial was negatively impacted by higher electricity costs, higher maintenance and a higher proportionate share of Geismar fixed costs allocated to it after the shutdown of two product lines there in 2006. Despite the higher ammonia cost noted above, solid fertilizer costs were relatively constant due, in part, to a change in product mix within the solid fertilizer category as we produced less DAP and more MAP, which consumes less ammonia.
2006 vs 2005
Highlights
- In 2006, phosphate generated $125.3 million in gross margin, 27 percent higher than the $98.9 million in 2005. Phosphate gross margin was negatively impacted by a $6.3 million writedown of assets at Geismar during 2006.
- Price increases were realized in all major product categories, in response to continuing high input costs and reasonably tight supply/demand fundamentals.
- Specialty products remained the foundation of our phosphate business, proving their value as stable, higher-margin businesses. Manufactured feed and industrial products contributed $54.3 million and $49.2 million of 2006 gross margin, respectively, while liquid fertilizer, which was directly impacted by the above-mentioned writedown, added $24.2 million for the year after the writedown. Within industrial, purified phosphoric acid was again the most profitable product, generating gross margin of $47.3 million for the year, representing 27 percent of net sales.
Sales and Cost of Goods Sold
Total gross margin increased by $26.4 million, largely as a result of the following changes:
- Higher prices realized in the feed and fertilizer markets, due to tight industry fundamentals, were supplemented by industrial price increases implemented in 2005 that held through 2006. Higher feed prices implemented as a result of a strong pricing stance over volumes contributed $38.8 million to the gross margin increase. Of this increase, monocal represented $22.6 million due to higher realized prices achieved in both the North American and offshore markets. Fertilizer prices contributed positively to the change in gross margin due to stronger demand.
- Manufactured sales volumes were relatively flat, although there was a change in product mix. Manufactured fertilizer sales volumes improved, contributing $31.7 million to the change in gross margin, as supply/demand fundamentals were strong. This was partially offset by a 10 percent decline in manufactured feed sales volumes resulting from our decision to remain firm on pricing and reduce sales of lower-margin products, and a 3 percent decline in manufactured industrial sales volumes due to reduced market demand.
- The price variance in cost of goods sold negatively impacted the change in gross margin by $84.1 million, primarily due to higher raw material costs and a change in product mix. However, 8 percent higher sulfur prices and 7 percent higher ammonia prices combined to reduce gross margin by $11.4 million and $8.1 million, respectively. Phosphate rock costs were up 5 percent as a result of higher costs for purchased rock at Geismar and higher electrical and chemical processing costs at Aurora and White Springs. The writedown of assets, a change in product mix (requiring more ammonia to be used), higher depreciation charges and escalating prices for supplies and services throughout the year further increased costs.