Potash Corp. of Saskatchewan Inc.’s decision to shut its New Brunswick operations reflects the fact that potash demand hasn’t met the fertilizer industry’s hopes for the better part of a decade.
The move effectively nullifies a $2 billion investment that was first approved in 2007, and will result in up to 430 job cuts.
The New Brunswick operations are higher-cost than Potash Corp.’s Saskatchewan mines, and the company decided it has to suspend them to become more competitive amid very low potash prices.
“Our hearts go out to the people (losing their jobs) and we wish we would be able to deliver different news,” chief executive Jochen Tilk said in a phone interview from New Brunswick on Tuesday.
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Until the mid-2000s, potash demand grew at a solid pace of around three per cent annually for many years. Potash Corp. was optimistic that growth would continue and tighten the supply-demand balance in the industry. As a result, the Saskatoon-based company initiated a huge capacity expansion strategy in 2003, and has spent more than $8 billion on expansions to date (including the $2 billion in New Brunswick).
Unfortunately, demand growth has been minimal over the past several years amid global economic uncertainty and disappointing demand in key markets like India. Meanwhile, supply has steadily increased. That combination has crushed the price of the crop nutrient, which peaked at more than US$900 a tonne in 2008 but is now worth less than US$300.
The outlook remains challenging in the short term. Low crop prices and a strong U.S dollar are putting pressure on farmers globally, limiting the amount of fertilizer they want to buy. The potash industry has also become more competitive since a marketing alliance between Russian and Belarusian companies broke apart in July 2013.
Tilk, who only joined Potash Corp. in 2014, said he still believes the company’s expansion strategy was a good one, because global population growth trends indicate that much more potash will be needed in the long term.
He would not comment on individual investments the company has made as part of that strategy. But Tuesday’s announcement is clear evidence that the New Brunswick expansion, at the very least, was a mistake.
Tilk said management and the board “agonized” over the decision to close the facility. He noted the work force in New Brunswick has done “everything right,” but the decision had to be made for the long-term health of the company.
The suspension in New Brunswick takes effect immediately. Potash Corp. expects the move to lower its cost of goods sold by US$40 million to US$50 million this year. The company will also save about US$185 million that was going to be invested in New Brunswick over the next two years.
At full capacity, the New Brunswick operations were expected to produce up to 1.8 million tonnes of potash a year. They will be placed on so-called “care and maintenance,” meaning they can be restarted in the future if the potash market improves.
Citigroup analyst P.J. Juvekar said this closure proves Potash Corp. is sticking to its longstanding “price-over-volume” strategy and wants to avoid a price war.
“This attempts to minimize pain in the short term, but the potash market remains challenged due to overcapacity,” he said in a note, adding that potash producers need to take more downtime to balance the market.
The “price-over-volume” strategy is a stark contrast to what is happening in the iron ore sector. Both industries are highly concentrated and oversupplied, but in the case of iron ore, the large producers are selling every tonne they can in a vicious battle for market share.