High Potash prices can’t save jobs

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 proving to be enough to protect the industry from the pain of a contracting global economy.

With agricultural food prices falling, farmers are cutting back on their demand for fertilizers, spurring the industry to reign in production.

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

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

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

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

Potash Corp.’s layoffs were made with the aim of reducing production by 2 million tonnes. Mosaic is looking to reduce production by 1 million tonnes, and while Agrium has not made any announcements regarding cutbacks, a spokesperson for the company says Vanscoy is operating at between 50 and 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 to 2007 as prices hit US$601 per tonne for offshore potash, and US$563 per tonne for potash sold into the North American market – up 189% from last 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 so high?

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 prices on crops fall, so to does the incentive for farmers to increase yields, diminishing their need for fertilizer.

Yet the fall 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 side lines for three months? We’re seeing that they can. But can they step to the side lines for two to three years? That is tough to do. Food is not a luxury item.”

Richard Downey a senior director of investor relations for Agrium furthers Johnson’s point.

“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 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 period ending on Nov. 30, Mosaic had a net income of US$959.8 million, up from US$394 million the year previous. That gain was made on the back of revenues climbing 37% to US$3.01 billion.

The news, however, wasn’t all good.

There was an inventory valuation write-down of US$293.5 million, and the company says that 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%.

That left Plymouth, Minnesota-based Mosaic to turn to its operations in Saskatchewan to look for cost cutting. The company has over 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 will be laid off for two weeks, while 300 workers at its Colonsay operation will be laid off for an indefinite period of time.

DeLorey says the difference in terms for the workers has to do with differing agreements with their respective unions. 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 final operation in the province at Belle Plaine.