No matter how low Potash Corp. of Saskatchewan Inc. sets its expectations for the global potash market, it keeps having to go lower.
The Saskatoon-based company Thursday slashed its earnings guidance for the fourth time in five quarters as the market continued to wobble in the first few months of 2016. The potash sector has suffered due to a number of factors: rising supply, increased imports into the United States, weak demand in India and the lack of signed supply contracts with China, which are a key bellwether for the industry. Customers were cautious in Q1 as they tried to predict price trends.
The collapse in prices has been swift and dramatic. Potash Corp.’s realized potash selling price in the first quarter was just US$178 a tonne. That compares to US$284 in the same quarter a year ago, and US$238 in the last three months of 2015. At the peak of the market in 2008, spot prices for the crop nutrient topped US$900 a tonne, a level that seems inconceivable today.
S&P downgrades fertilizer firms on market weaknessCanadian firms dominate phosphate imports from Western Sahara: report
“You saw a fairly quick deterioration (in the first quarter),” chief executive Jochen Tilk said in an interview.
Potash Corp. now expects earnings of US60 cents to US80 cents a share in 2016, down from the prior guidance of US90 cents to US$1.20 a share, which was considered cautious a few months ago. The company also cut capital spending by US$100 million on Thursday.
The key silver lining for Potash Corp. and its peers is that the market finally appears to be turning a corner. The company said prices are stabilizing and demand is picking up as the key spring planting season gets underway. Potash Corp. predicted global potash shipments will reach 59 to 61 million tonnes this year, which would be a near-record level despite the slow first quarter.
“In the western corn belt in the United States, it has been a very, very good season,” Tilk said.
He noted that three of Potash Corp.’s competitors have announced price increases, a sign the business is gaining momentum. He also suspects an increasing number of farmers think prices have bottomed.
However, some experts remain skeptical that the outlook for the potash industry has turned fully positive.
“Potash fundamentals remain challenging and uncertainty around the timing of key contracts with India and China is high,” Citi analyst P.J. Juvekar said in a note.
Potash Corp. took severe actions this year to adjust to a weaker price environment. In January, the company shuttered its New Brunswick operation, eliminating 430 jobs and wiping out a $2 billion investment. The following month, it announced production curtailments of 400,000 tonnes from its Saskatchewan operations to try to match supply with demand. Potash Corp. also slashed its dividend in January for the first time.
Some investors are concerned the dividend is still too high and may need to be cut again. The annual payout is currently US$1 a share, which is above Potash Corp.’s earnings guidance for the year. The dividend yield on the stock is 6.1 per cent, which is relatively high for a resource company.
Tilk acknowledged the high payout ratio, but said a second dividend cut is “premature” as the company expects to benefit from cost reductions (partly from the New Brunswick closure) and improved market conditions through the remainder of 2016.
“There is confidence that the second half is better. That’s clearly evident by the fact that we have not modified our dividend,” he said.
Potash Corp. reported first quarter earnings of US$75 million. Earnings per share were US15 cents after stripping out one-time items, which was a penny below the average analyst estimate.