Why potash stocks could be a winner for investors in 2014 (Part 5 of 5)
Mosaic Co.’s (MOS) projection of its future operating rate (in its Q3 2013 earnings presentation) didn’t look very optimistic. But the recent large layoff at Potash Corp. (POT) is a key factor that will lift potash companies in 2014. This is very significant because it shows a large supplier of potash is making moves to support prices, responding to Uralkali’s initiatives.
Potash Corp. announces capacity reduction
On December 3, POT announced a significant reduction in its workforce of approximately 1,050 jobs out of its current 5,900 employees. About half of the cut, 570 employees, will be removed from potash, while the remaining 475 will be drawn from the company’s phosphate business. Although POT was able to reduce production significantly in 2012 from 2011, after commodity demand weakened worldwide, it hasn’t been able to do much in 2013, because it kept much of its workforce. This likely contributed to a sharper decline in potash price.
Contributing to high competition
Companies don’t want to lay off workers because employees are an important part of a business. If people are laid off, it becomes difficult to hire them back again. Potash Corp’s announcement to lay off workers likely reflects its inability to cut further production without more labor cuts. This is likely why competition within the potash industry remained quite fierce, as Potash Corp. tried to cover its large medium-term fixed costs (labor) and held its operating rate low.
Operating rate should rise higher
Since POT supplies about 15% to 18% of the world’s potash demand, this layoff and production cut are so large that they would drive operating rates substantially higher in 2014. Based on the company’s demand estimate for 2014 and its announced capacity reduction program, the company’s operating rate is expected to approach 90%. The operating rate could be even higher if Uralkali’s more optimistic estimate of 60 million is realized. For more analysis on this outlook, see Why China may drive Uralkali’s record 60 million mt potash estimate.
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