Healthy Potash Price Can’t Stop The Layoffs

Gold, uranium and potash have been the three bright spots for the mining sector through what has been a historically bleak period.

But in the case of potash, high prices for the commodity aren’t enough to protect the industry from the pain of a contracting global economy.

With agricultural food prices falling, farmers are cutting back on their use of fertilizers, spurring the industry to rein in production.

Mosaic Co. (MOS-N) is the last of the big three North American potash producers to announce cutbacks, and its planned layoff of 1,000 workers in Saskatchewan is the deepest cut so far.

In December, Potash Corp. of Saskatchewan (POT-T, POT-N), the largest potash producer in North America, said it would lay off 940 workers for eight weeks.

The third key producer, Agrium (AGU-T, AGU-N), notified its workers that 380 employees could be laid off for eight weeks at its lone potash operation, Vanscoy, also in Saskatchewan.

The moves come as the industry seeks to prevent a buildup of potash stockpiles that could drive potash prices down.

Potash Corp.’s layoffs were part of its plan to reduce production by 2 million tonnes. Mosaic is looking to produce 1 million fewer tonnes, and while Agrium has not made any announcements regarding cutbacks, a spokesperson for the company says Vanscoy is operating at 50-75% capacity.

For workers, however, the layoffs are a bitter pill to swallow with potash prices remaining so high.

Canpotex, the world’s largest exporter of potash, and a company that is wholly owned by Mosaic, Potash Corp. and Agrium, reported a 262% increase in potash prices in 2008 compared with 2007. Prices hit US$601 per tonne for offshore potash, and US$563 per tonne for potash sold into the North American market — up 189% over the previous year.

And in November, Canpotex signed a contract with a Japanese customer for roughly US$900 per tonne.

So why the cutbacks if prices remain strong?

The answer comes from the farm.

While the prices for grains and oil seed crops that rely on potash, phosphate and nitrogen to produce strong yields had been recovering in recent weeks, a new report from the U. S. Department of Agriculture sent a bearish signal to markets. The report said decreasing global demand would put many agricultural commodities into surplus.

The report had an immediate impact as corn, wheat and soybean futures prices all fell in Chicago commodity trading on Jan. 12.

And if crop prices fall, so does the incentive for farmers to increase yields, diminishing their need for fertilizer.

Yet the drop in agricultural commodity prices runs directly counter to what most pundits had been saying for months: mainly that people still need to eat in a recession, therefore demand should continue unabated.

“That is a longer-term thesis,” Bill Johnson, director of public affairs for Potash Corp. says. “Can people step to the sidelines for three months? We’re seeing that they can. But can they step to the sidelines for two to three years? That is tough to do. Food is not a luxury item.”

Along the same lines, Richard Downey, a senior director of investor relations for Agrium, says farmers will have to buy fertilizer eventually.

“Phosphate and potash stay in the soil better then nitrogen,” Downey explains. “So if a farmer uses optimal rates of fertilizer, he can pull back in the short term without a big yield impact. But that can only work for a period of time.”

While the amount of time that a farmer can hold off on replenishing the land depends on many factors such as soil and crop type, Downey says a six-month holdover period can be reasonably expected.

As for the financial condition of Mosaic, its most recent quarterly report showed a company on solid financial ground — although it did contain some foreboding signals.

For the quarter ending Nov. 30, Mosaic had a net income of US$959.8 million, up from US$394 million the previous year. Revenues climbed 37% to US$3.01 billion.

The news, however, wasn’t all good.

There was an inventory valuation writedown of US$293.5 million, and the company says it expects its remaining phosphate inventory to be sold at no gross margin.

Gross margin for the quarter fell to 25.7% from 28.4%.

So Plymouth, Minn.-based Mosaic turned to its Saskatchewan operations to cut costs. The company has more than 1,500 workers and three potash mines in the province.

Brad DeLorey, manager of public affairs for Mosaic, says that the 700 workers at its Esterhazy operation will be laid off for two weeks, while 300 workers at its Colonsay operation will be laid off indefinitely.

The United Steelworkers of America represents workers at the Colonsay mine, while the Communications, Energy and Paperworkers Union of Canada represents those at Esterhazy.

No layoffs are planned at Mosaic’s Belle Plaine operation in the Prairie province.