Potash Results
2007 vs 2006
Highlights
- 2007 potash gross margin was a record $912.3 million, 63 percent higher than 2006 when offshore volumes were impacted by lengthy price negotiations with China and India, and 29 percent above the previous high of $707.4 million in 2005.
- Exceptionally tight potash market conditions led to products being sold on an allocation basis to all customers for much of the last half of 2007. Sales prices and volumes were higher than in 2006 in both the North American and offshore markets. Sales volumes of 9.4 million tonnes established a new company record and were 31 percent higher than in 2006.
- Farmers outside of North America are working to correct decades of under-application of potash and, while this will take many years to accomplish, potash is vital to improving crop quality and gives plants the capability to better utilize nitrogen and phosphate. As a result, demand rose in 2007, taking reported producer inventories to historically low levels and contributing to further offshore spot market price increases during the year. Even with production 31 percent higher than in 2006, our year-end potash inventories of approximately 680,000 tonnes were 27 percent below 2006 year-end levels and represented our second-lowest year-end inventory since 1991.
- To meet increasing global demand, we raised our production to 9.2 million tonnes in 2007; this compares to 7.0 million tonnes in 2006. Despite higher production levels, cost of goods sold per tonne increased due to additional costs for brine inflow management at Esterhazy and New Brunswick and the impact of a stronger Canadian dollar.
Sales and Cost of Goods Sold
The most significant contributors to the $351.2 million increase in total gross margin were as follows:
- Canpotex shipped 9.3 million tonnes (PotashCorp's share was 55 percent) in 2007 as all major markets increased consumption, driven significantly by rising demand and higher commodity prices, particularly for grain, soybeans, corn and palm oil. When considering our share of sales through Canpotex and sales directly from our facility in New Brunswick, Brazil was our largest market in 2007, taking 24 percent of our total offshore shipments as higher soybean and corn prices led to an increase in acres planted there and a corresponding increase in potash imports. China was next at 23 percent and India followed at 9 percent, while Indonesia, Malaysia and Vietnam together represented 16 percent. In North America, sales volumes were up 25 percent as stronger dealer fill and field application of potash, due to higher commodity prices and more acreage planted, led to higher demand.
- Offshore prices were up 18 percent as price increases in major markets were announced throughout 2007. In early February, Canpotex reached an agreement with Sinofert in China on a $5-per-tonne increase for shipments in 2007. Canpotex implemented price increases in Brazil that totaled $175 per tonne by year-end while in India, a $50-per-tonne increase took effect on imports in the second quarter. Southeast Asian customers saw a total of $195 per tonne in price increases over the course of 2007. The full benefit of announced offshore price increases was not captured because of higher ocean freight rates and locked-in contract pricing to China and India. Higher ocean freight rates had a negative impact of about $15 per tonne on all delivered-basis (CFR) sales. Prices in the North American market were up 12 percent or $20 per tonne, significantly due to the price increases implemented throughout 2007, which totaled $82 per tonne by year-end. North American prices were $36 per tonne, or 23 percent, higher than offshore prices. The gap is due in part to offshore contracts with prices that lag behind the North American spot market price. It also reflects product mix, as North American customers prefer granular product that commands a premium over standard product more typically consumed offshore.
- Higher production levels and 47 fewer shutdown weeks significantly reduced cost of goods sold compared to 2006 when production shutdowns occurred as we remained true to our strategy of matching production to market demand. However, the effect of increased production and lower natural gas costs and consumption was more than offset by higher brine inflow management costs and the impact of foreign exchange on potash operating costs. Brine inflow management costs at New Brunswick and Esterhazy incrementally increased total average costs by almost $5.50 per tonne ($51.5 million) while a stronger Canadian dollar relative to the US dollar negatively impacted cost of goods sold by more than $3 per tonne. Since the costs of brine inflow were attributed to production of potash that was mainly sold in the offshore market, the negative price component of the cost of goods sold variance was higher for the offshore market than for North America.
2006 vs 2005
Highlights
- PotashCorp entered 2006 with potash shipments to China at a virtual standstill as fertilizer buyers negotiated price with suppliers. India followed the same course – and both countries deferred purchases, drawing down inventories until price settlements were reached in the third quarter. The China agreement called for a base price increase of $25 per tonne over the 2005 contract price. The signing of the China deal served to spur shipments across Southeast Asia and Latin America, where customers had delayed purchasing ahead of the price settlement. Offshore sales volumes increased in the latter half of the year, but still, annual sales volumes were 12 percent lower than 2005.
- North American potash demand was constrained during the first three quarters of the year as customers delayed purchasing and relied on inventories in the face of high fuel costs and low crop prices.
- Reduced sales volumes raised the per-tonne fixed distribution costs for the year and, combined with softening prices due to extended contract negotiations, resulted in declining margins on offshore potash sales in 2006. Although North American sales volumes were down 11 percent compared to 2005, realized prices were 7 percent higher.
- Following our strategy of producing to meet market demand increased our costs per tonne during 2006. We incurred 66 plant shutdown weeks, up from 24 weeks during 2005. In response to increased demand in the latter part of the year, PotashCorp produced a record 2.4 million tonnes during the fourth quarter, raising 2006 production to 7.0 million tonnes, down from 8.8 million tonnes in 2005.
Sales and Cost of Goods Sold
The most significant contributors to the $146.3 million decline in total gross margin were as follows:
- Sales by Canpotex were reduced from 8.2 million to 6.7 million tonnes, contributing to the 12 percent decline in our offshore sales volumes. Canpotex shipments to China and India totaled 2.0 million tonnes, down 40 percent from the 3.3 million tonnes shipped in 2005. Except for certain shipments from Russia, China was virtually absent from the market until late in July 2006 as it waited to conclude new pricing contracts with suppliers. Brazil took approximately 1.0 million tonnes of potash from Canpotex in 2006, a reduction of 4 percent from 2005, although taking 30 percent more potash in fourth-quarter 2006 than in fourth-quarter 2005. Brazil continued to be affected by a strong real relative to the US dollar and lower soybean prices. This pressured margins for Brazilian farmers and limited credit availability, leading to fewer acres being planted and a decrease in imported crop inputs. Hesitancy to purchase large positions in potash until conclusion of the Chinese negotiations led Brazilian customers to delay purchases. Following the negotiations and coupled with improving market conditions, Brazil's volumes increased sharply. Sales volumes in 2006 increased to many smaller potash-consuming countries such as Indonesia, Malaysia, the Philippines, Taiwan and Vietnam, which together took 1.7 million tonnes from Canpotex, an increase of 20 percent over 2005.
- North American sales volumes dropped for the year despite a rebound in the fourth quarter. First- and second-quarter reductions resulted from reduced field applications due to low crop prices, high energy input costs and, to a lesser degree, weather. Sales volumes were relatively flat in the third quarter; however, with demand growing and record-low inventories, prices for many crops – including corn, wheat and soybeans – began to rise significantly, giving farmers the motivation and the resources to boost their fertilizer use.
- Realized prices in the offshore market were negatively impacted initially by higher per-unit throughput distribution costs resulting from the reduced sales volumes. Higher prices were realized during the latter part of the year as potash flowing to China through Canpotex was at the higher 2006 price. Realized prices were lower on sales to Brazil due to increased competition in the marketplace early in the year, although they rebounded strongly after completion of the price negotiations with China and India. Realized prices in the North American market were 7 percent higher as price increases announced during 2005 held into the first half of 2006, but dropped off during the third quarter as higher producer inventories at the start of the quarter contributed to heightened competitive pressures. Prices rose in the fourth quarter as our North American price increase announced for October 1 began to be realized in November. Prices in the North American market were $38 per tonne, or 29 percent, higher than offshore prices.
- The change in gross margin was negatively impacted by higher cost of goods sold. Production shutdowns, higher depreciation charges due to completion of some of our expansion projects, higher natural gas prices earlier in the year and escalating prices for supplies and services throughout the year increased unit cost of goods sold. The impact of a stronger average Canadian dollar for most of the year also negatively impacted cost of goods sold, by more than $3.50 per tonne.