RISKS TO OUR POTASH STRATEGY
Since potash is the heart of our company and our largest gross margin contributor, we pay particular attention to risks to its success and act quickly and firmly to mitigate them. In 2007, the following risks were viewed as most important:
Suppressed Demand Creating Market Imbalance
If expected growth in demand fails to materialize, negatively affecting sales volumes and price realizations, our potash success could be threatened. While we anticipate long-term growth in consumption, fluctuations in demand are inherent to the global potash market. We attempt to mitigate this risk by matching our production to market demand, thereby protecting our margins.
Lack of Adequate Transportation and Distribution Infrastructure
Without adequate transportation and distribution infrastructure, we could find it difficult to achieve our growth plans. In the short term, railcar shortages, slow turn times and disruptions such as strikes, derailments and/or adverse weather could prevent us from delivering product in a timely manner to North American customers or ports on both coasts. This could result in customer dissatisfaction, loss of sales and higher distribution costs.
Directly and through Canpotex, we mitigate this risk by working with major rail carriers to ensure sufficient investment is made in transportation infrastructure to help potash move as smoothly as possible.
To further manage this risk, both Canpotex and PotashCorp have purchased railcars or leased them long-term to facilitate the movement of potash. In Brazil, we have invested in two terminals for better throughput.
Risks Particular to Underground Mines
Unexpected underground rock falls can result in life-threatening injuries, a risk that all mining companies face. Several ground falls have occurred in our potash mines in the last three years, and our mitigation actions have included developing a mining machine canopy to protect our employees.
Many underground mines around the world – including our potash mines – must deal with water-bearing strata that carry the risk of water inflow. We are successfully managing water inflows at our New Brunswick operation, and inflows are being managed at Esterhazy, where we currently have a 25 percent interest. Our other conventional mines are currently dry.
Advanced geoseismic monitors record micro-events, provide information to help predict ground falls and help us avoid areas with unusual ground conditions that could carry the danger of water inflow. Our Earth Sciences group is also developing ground-penetrating radar that could help determine such conditions.
New Supply Creating Market Imbalance
Recent growth in demand for potash has outpaced the historical trend, requiring producers to increase operating rates and pushing up prices. Those higher prices could attract credible new competitor supply in the form of greenfield mines, which could outpace the growth in world demand, reducing prices and potash margins.
To mitigate this risk, we continue to follow a strategy of producing to meet market demand to protect our margins.