Potash Corp of Saskatchewan (PotashCorp) today reported record second-quarter earnings of $2.82 per share ($905.1 million), a 220% increase over the $0.88 per share ($285.7 million) earned in last year’s second quarter. This represents the highest quarterly earnings in company history – 62% above the record $1.74 per share ($566.0 million) set in first-quarter 2008 – and reflects rising global fertiliser demand and the impact of significantly higher prices for potash, nitrogen and phosphate products. Record quarterly gross margin of $1.4 billion was up 187% from the $501.4 million generated in the second quarter of 2007, with all three nutrients making record contributions. Earnings for the first six months of 2008 were $4.54 per share ($1.5 billion), more than triple the $1.50 per share ($483.7 million) earned in the first half of last year and higher than the record $3.40 per share ($1.1 billion) earned for the full year 2007. First-half gross margin reached $2.3 billion, compared to $871.1 million in the first six months of 2007, and has already exceeded the record full-year total of $1.9 billion set last year.
Potash Corp of Saskatchewan (PotashCorp) today reported record second-quarter earnings of $2.82 per share ($905.1 million), a 220% increase over the $0.88 per share ($285.7 million) earned in last year’s second quarter. This represents the highest quarterly earnings in company history – 62% above the record $1.74 per share ($566.0 million) set in first-quarter 2008 – and reflects rising global fertiliser demand and the impact of significantly higher prices for potash, nitrogen and phosphate products. Record quarterly gross margin of $1.4 billion was up 187% from the $501.4 million generated in the second quarter of 2007, with all three nutrients making record contributions. Earnings for the first six months of 2008 were $4.54 per share ($1.5 billion), more than triple the $1.50 per share ($483.7 million) earned in the first half of last year and higher than the record $3.40 per share ($1.1 billion) earned for the full year 2007. First-half gross margin reached $2.3 billion, compared to $871.1 million in the first six months of 2007, and has already exceeded the record full-year total of $1.9 billion set last year.
Cash flow from operating activities prior to working capital changes reached $1.1 billion for the quarter and $1.7 billion for the first six months of 2008, compared to $473.7 million for the second quarter of 2007 and $756.7 million for the first half of that year. Earnings before interest, taxes, depreciation and amortisation in the quarter grew to $1.4 billion from $496.4 million in last year’s second quarter, raising first-half EBITDA to $2.2 billion compared to $877.4 million in the same period of 2007.
This strong performance was enhanced by offshore investments in Arab Potash Co (APC) in Jordan, Soc Quimica y Minera de Chile, Israel Chemical and Sinofert Holdings in China, which added $94.0 million to before-tax earnings in the quarter. Year to date, these investments have contributed $117.4 million to our other income and the total market value of our investments today is $9.8 billion, roughly equivalent to $30 per PotashCorp share.
“This quarter established a new standard of performance for our company,” said PotashCorp President and CEO Bill Doyle. “We are experiencing strong growth in demand and are capturing the value of higher prices in all three nutrients, especially in potash. With farmers around the world striving to maximize yields and placing a priority on fertilization, this quarter provided a glimpse of the future potential of our company.”
Market Conditions
Fertiliser demand remained strong, fuelled by the global need to increase food production and by supportive crop commodity prices. Corn prices in the second quarter were up more than 60% from the same period last year, while soybean prices were almost double. This is providing farmers with record income and significant motivation to increase acreage planted and yields.
The resulting tight fertiliser supply/demand fundamentals impacted all three nutrients in the quarter, and were clearly evident in higher product prices. First, in potash, inventories were reduced to historically low levels around the world. For example, reported North American producer inventories were 41% below the previous five-year average at the end of June, an extremely low level given upcoming summer maintenance shutdowns. Global demand remains unsatisfied, even without considering the protracted contract settlements that left China approximately 3 Mt short of previously expected 2008 potash requirements.
Global nitrogen and phosphate supply was impacted in the second quarter by China, the world’s largest urea exporter and second-largest phosphate exporter in 2007. China introduced a 35% tax on phosphate and nitrogen exports during the first quarter to protect its domestic supply, and then raised it to 135% effective from April 20 to September 30, 2008. Phosphate supply tightened further in May when a severe earthquake struck Sichuan Province, which produces 11% of China’s phosphate rock and a significant amount of related downstream fertiliser, feed and industrial products. In nitrogen, while higher global costs for oil and natural gas supported higher product prices and generally restricted product movement to regions relatively close to the source of production, the Chinese export tax immediately and significantly drove world urea prices higher.
Phosphate producers without an integrated supply of phosphate rock continued to be affected by rising costs for key inputs. The price of rock from Morocco rose to $350-$400/t, compared to $190 in the first quarter of 2008 and $56 in last year’s second quarter. Delivered sulphur prices rose to $800/t or higher in China and India, while US molten sulphur prices increased $200/t from the first quarter of 2008.
PotashCorp’s qarterly potash gross margin of $886.4 million was 240% higher than the $260.4 million of last year’s second quarter and approached 2007’s record full-year gross margin, reflecting the benefit of rising prices. For the first six months of 2008, potash generated gross margin of $1.4 billion, more than triple the $434.6 million of the first half of 2007. Gross margin as a percentage of net sales rose to 79% compared to 59% in the same quarter last year.
As demand continued to exceed available supply in the quarter, PotashCorp and Canpotex, the offshore marketing company for Saskatchewan potash producers, shipped volumes to customers in North America and offshore, respectively, on an allocation basis. The per-tonne North American realised price of $403 was up 122% quarter over quarter, as the company realised five price increases in that time totalling more than $330/t. The offshore realised price of $417 was up 192% from last year’s second quarter as, since that time, Canpotex realized 10 price increases totaling approximately $520/t to Brazil and eight increases totalling $465/t to Southeast Asia. It also began to realise the $355/t increase built into India’s new contract in March, while the $400/t increase in China’s contract signed in April did not appear until late in the quarter because of limited available supply.
Quarterly potash sales volumes of 2.7 Mt were the second highest in company history, trailing only last year’s second quarter, which entered with 1.1 Mt of inventory and therefore had more product to sell. By quarter-end, inventories had declined to a record-low 315,000 t, 58% below the same time last year and 53% below March 31, 2008 levels. North American customers continued to purchase available potash supply despite a weather-delayed spring season, pushing up sales volumes by 3% quarter over quarter to 1.1 Mt. Offshore volumes for the quarter were 1.6 Mt, 7% below the same period last year due to lack of available product. Canpotex shipments were down 3% quarter over quarter, but up 12% year-to-date. Compared to the same period in 2007, second-quarter volumes to Brazil increased by 36% to 670,000 t, to Southeast Asia by 49% to 825,000 t and to India by 28% to 310,000 t. Those countries consumed volumes made available by delays in the negotiation with China, which received only 150,000 t in the quarter (down 82% from the second quarter of 2007).
In a strong pricing environment underpinned by high world energy prices and heavy global agricultural demand, the nitrogen segment generated a record $210.0 million of gross margin in the quarter. This is 46% higher than the $144.2 million generated in the same quarter last year, and 13% more than the previous record of $185.4 million generated in the first quarter of this year. Year-to-date nitrogen gross margin of $395.4 million is 44% ahead of 2007. Trinidad operation, which benefits from long-term, lower-cost natural gas contracts, generated $91.8 million in second-quarter gross margin, even with volumes significantly reduced by a major plant outage. This compared to $77.2 million in the same quarter last year. US operations, which are geographically insulated from Gulf imports, contributed $106.3 million in gross margin, while hedging gains added $11.9 million.
Realised prices for ammonia increased 70% quarter over quarter, while urea prices rose 50% from the same quarter last year. The higher prices for other nitrogen fertilisers pushed nitrogen solutions prices up 44% compared to the same period of 2007.
Substantially higher prices drove second-quarter phosphate gross margin to a record $340.9 million, 252% higher than the $96.8 million generated in the same quarter last year. Year-to-date phosphate gross margin of $496.9 million was 209% higher than in the first six months of 2007 and has already exceeded the full-year record of $432.8 million set last year. Solid fertilisers generated $191.7 million in the quarter, almost quadruple the $51.4 million of the second quarter of 2007. Liquid fertilisers generated $54.9 million, feed supplements contributed $70.7 million and industrial products added $19.8 million.
Strong global demand and higher input costs contributed to an increase in solid fertiliser realised prices to $961/t in the second quarter, 145% above the same quarter last year and 46% higher than in the trailing quarter. Liquid fertiliser prices rose 166% quarter over quarter, largely the result of a PhosChem contract with India signed at $1,985 per phosphoric acid (P(2)O(5)) tonne for selected second-quarter shipments versus $566 per P(2)O(5) tonne under the previous contract. North American liquid prices did not yet fully reflect the rising value of P(2)O(5), as these sales are primarily contracted on a fertiliser-year basis. Feed prices were up 146% quarter over quarter following $250 per-short-ton increases on each of April 1 and May 1. Realised prices for industrial products, which have several contracts with pricing that will not reset until early 2009, rose 71 percent from last year’s second quarter.
The company believes the recent “attention to issues of food production and food security is a necessary and positive development, as those issues are a long-term reality underpinning growth in the fertilizer industry. Global population continues to rise by an estimated 77 million people per year, with the largest portion of that growth occurring in countries with increasing economic strength such as China and India. Improving diets, specifically adding more protein from animal sources, is a priority in these regions and is putting considerable pressure on global grain supply.
“The world’s farmers must produce record volumes of grain and oilseeds every year just to meet the growing need for food, animal feed, fibre and fuel. This does not even begin to address the issue of restoring severely depleted global grain inventories, now down to less than two months of supply. That presents farmers with a significant challenge – one that becomes greater as population covers a larger portion of the world’s agricultural spaces, leaving less land for food production.
“Producing record crops globally year after year is difficult and unpredictable for many reasons, particularly the weather. Due to cool wet weather, more than half of the US corn crop was seeded after May 10 this year -much later than usual – which could reduce crop production. Flooding in the Midwest further impacted production potential and total harvested acreage. The result is higher corn prices, signalling farmers to plant a very large corn crop in 2009. The potential for higher corn plantings has increased competition for acres from other crops, such as soybeans, and has raised futures prices for those crops.
“These conditions, in turn, underpin demand for fertilisers, which are essential to maximize the quality and quantity of crop yields. Research has established that without fertilizer, at least 40% of the world’s annual crop production would be lost. If nutrients in the soil are not replaced following harvest, future production suffers. Thus, the world’s ability to produce more grain is tied directly to best farming practices, which include appropriate application of fertilizer, especially in developing regions that continue to under-apply.”
