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Potash
Potash gross margin totaled $554 million for the third quarter, below the $700 million generated in the same period last year. This result brought potash gross margin for the first nine months to $1.7 billion, trailing the $2.2 billion earned in the comparative period last year.
Sales volumes for the quarter totaled 2.1 million tonnes, slightly below the 2.2 million tonnes sold in the same period of 2011. While strong demand pushed North American potash sales volumes to a third-quarter record of 1.0 million tonnes, surpassing the 0.8 million tonnes sold in the same period last year, offshore sales volumes fell to 1.1 million tonnes from 1.4 million tonnes in 2011. Shipments to Latin America outpaced last year’s third quarter, but strength from this market was more than offset by the decline in sales to China and India. Shipments from Canpotex Limited (Canpotex) – the offshore marketing company for Saskatchewan potash producers – during the third quarter were heavily weighted towards Latin America and Other Asia (countries outside of China and India), which accounted for 32 percent and 41 percent of tonnes, respectively, while China represented 12 percent and India 5 percent. Total sales for the year reached 5.9 million tonnes, trailing the record 7.5 million tonnes sold through the first nine months of 2011.
Our third-quarter average realized potash price of $429 per tonne was relatively flat compared to second quarter 2012, but declined 5 percent from the same period last year on softening prices in spot markets.
Third-quarter potash production of 1.6 million tonnes reflected the impact of scheduled maintenance shutdowns, capital-related work at our Allan facility and inventory-related downtime at our Lanigan facility. Production for the quarter was 18 percent below last year’s third quarter, which did not include any inventory-related downtime and contained fewer weeks of scheduled maintenance. This lower level of production – along with a greater percentage of production from higher-cost facilities, a rise in costs associated with potash tonnes from Esterhazy and increased depreciation charges – negatively impacted our cost of goods sold on a per-tonne basis.
Phosphate
Third-quarter phosphate gross margin of $122 million raised our nine-month total to $370 million, with both results lagging the $169 million and the $485 million earned in the comparable periods last year. Fertilizer products delivered $74 million in gross margin for the third quarter of 2012, while feed and industrial contributed $43 million.
The impacts of tropical storm Debby, a turnaround at our Geismar facility and challenging mining conditions in a new portion of our Aurora mine limited production during the quarter. As a result, third-quarter sales volumes of 0.9 million tonnes were below the 1.1 million tonnes sold in the same quarter last year, reflecting our decision to allocate a larger percentage of our limited phosphoric acid production to higher-margin products.
Average realized phosphate prices for the quarter totaled $537 per tonne, trailing the $602 per tonne achieved in the same quarter of 2011. This change reflected lower prices for solid and liquid fertilizers, although the relative strength of our diversified feed and industrial products – where pricing is typically less volatile than products with agricultural exposure – helped limit the overall decline.
Phosphate cost of goods sold on a per-tonne basis was positively impacted during the third quarter by lower sulfur costs and a favorable adjustment to our phosphate asset retirement obligations (due to an increase in the relative discount rate) compared to the same period last year.
Nitrogen
Our ammonia-focused nitrogen business continued to benefit from higher prices, increasing third-quarter gross margin to $251 million, and raised our total for the year to a record $772 million. These results compared to $263 million in gross margin generated in last year’s third quarter and $675 million earned during the first nine months of 2011. Trinidad generated $144 million of our third-quarter 2012 gross margin, while our operations in the US (including the impact of our hedge position) contributed $107 million.
Gas interruptions in Trinidad and expansion-related downtime at our Augusta facility resulted in sales volumes for the third-quarter declining to 1.1 million tonnes from 1.3 million tonnes in the same period last year.
Average realized price for nitrogen reached $458 per tonne, up from $424 per tonne in the third quarter of 2011, as tight ammonia market fundamentals pushed prices higher relative to the same period last year.
Higher Tampa ammonia prices – the benchmark to which our Trinidad gas costs are primarily indexed – were the primary driver of the increase in cost of goods sold on a per-tonne basis in the third quarter.
Financial
In September 2012, we announced a 50 percent increase to our quarterly dividend that raised it to $0.21 per share. This was our third dividend increase since the beginning of 2011, with our quarterly dividend now more than six times its level at the start of that year.
Third-quarter capital-related expenditures, primarily related to our potash expansion projects, were $546 million, raising our total for the first nine months of 2012 to $1.5 billion. General Outlook The economic motivators for farmers to increase food production remain strong – a situation that, combined with the basic principles of agronomy and the need to improve crop yields around the world, typically drives fertilizer demand. Yet, as this situation unfolds, the speed and magnitude of response has varied by market. In the US and Brazil, farmers are responding more quickly to the opportunities and driving strong demand for all fertilizers, while regions with more government involvement and less-developed agricultural economies – and lagging yields – have moved more slowly. This current dichotomy has disrupted typical demand patterns and caused potash shipment expectations to fall below previously forecast levels, which are now anticipated to be in the range of 50-52 million tonnes for the year. These conditions are not unprecedented, as growth has often occurred in uneven waves, with increases in demand sometimes punctuated by periods of contraction. PotashCorp has successfully navigated through these challenges in the past, following strategies designed to minimize the impact during periods of slower demand while delivering long-term growth. Potash Market Update In North America, we have witnessed improved sentiment among farmers and fertilizer dealers that is translating into rising demand to meet fall application needs. While farmers work to address their soil nutrient needs as they seek to capitalize on supportive crop economics – driven by strong crop prices and the affordability of fertilizer – we believe dealers will cautiously manage purchases through the remainder of the year in an effort to minimize inventory positions. We anticipate fourth-quarter demand in this market will be above that of the same period last year and still see the potential for second-half shipments to reach record levels. Latin American distributors are working to keep pace with significant grower demand. Soybean and corn planting is well underway in key producing regions, which is drawing down potash supplies. We anticipate demand in this region will remain strong for the balance of the year as distributors prepare for Brazil’s Safrina crop (February/March corn planting) and attempt to take advantage of the typically slower import period to help alleviate port congestion. Potash shipments for full-year 2012 are forecast to remain strong and we believe could approach last year’s record levels. Demand in Other Asia (countries outside of China and India) remains relatively strong, despite volatility in prices for oil palm, a key crop in this part of the world. We expect full-year demand to fall below that of 2011, but anticipate this market will end the year with lower inventories than a year ago. While demand for potash in China is expected to be equal to that of 2011, delays in new contract commitments have reduced seaborne supply expectations for 2012. Demand in this market is currently being met from internal production, inventory withdrawals and tonnage via rail, but additional requirements are anticipated. We do expect a resolution prior to the end of 2012 and believe reduced Chinese inventory levels by year-end could lead to increased requirements in 2013. In India, a number of near-term challenges are continuing to create uncertainty. High food inflation, crop yields that are well below many other countries in the developing world and the significant under-application of potash are well documented, but the path India will follow to address these critical issues remains unclear. India faces significant challenges in improving, or even maintaining, current crop production levels given existing fertility practices. The need to address this situation – along with mounting internal pressure on the government from its local fertilizer industry – fuels our confidence that policies will ultimately be modified and demand will improve. We believe an increase in demand will begin to unfold in 2013, although the extent to which that happens remains uncertain at this time. Financial Outlook In this environment, we now estimate our 2012 potash segment gross margin will be in the range of $2.1 billion to $2.3 billion. This revised estimate primarily reflects a reduction in our shipments estimate for 2012, which is now anticipated to be in the range of 7.6-8.3 million tonnes. The wide ranges on these estimates primarily reflect our varied timing assumptions on new supply contracts. Inventory-related downtime at our lower-cost Lanigan and Rocanville facilities, in addition to increased depreciation charges and the impact of higher costs associated with potash tonnes from Esterhazy, is expected to result in a per-tonne cost of goods sold for the fourth quarter above those compared to the same period last year. In phosphate, tight North American phosphoric acid markets are expected to contribute t o relatively stable markets through the balance of the year, although this may be offset by higher per-tonne cost of goods sold – a product of higher rock and ammonia costs – and result in margin contraction from third-quarter 2012 levels. The expectation of record or near-record corn plantings in 2013, along with healthy industrial demand, is likely to lead to relatively tight markets – particularly for ammonia – through the balance of 2012. We expect higher per-tonne cost of goods sold for the fourth quarter, reflecting the recent rise in North American spot gas prices and the lagging impact of sales from inventory produced with higher-cost Trinidad gas during the third quarter. We expect that our expansion project at Augusta will begin producing during the fourth quarter, and that our ammonia plant restart at Geismar will commence in January 2013. We now forecast our combined phosphate and nitrogen gross margin for full-year 2012 to be in the range of $1.3 billion to $1.5 billion. PotashCorp now forecasts full-year earnings between $2.40 and $2.60 per share which includes the impacts of the $0.39 per share adjustment for a Sinofert impairment charge recognized in the second-quarter of 2012.
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