An investor's guide to PotashCorp's 1Q14 and forward outlook (Part 8 of 11)
During the first quarter, PotashCorp shipped 1.6 million tonnes of nitrogen fertilizers (an increase of 13.1% from last year), primarily driven by strong operating rates across all of the company’s facilities, and a full quarter contribution from the expanded Geismar ammonia plant in Louisiana. In February 2013, the Geismar ammonia plant was restarted.
What differentiates PotashCorp’s nitrogen fertilizer business from other nitrogen fertilizer producers, such as CF Industries Holdings, Inc. (CF), Terra Nitrogen Company, L.P. (TNH), and CVR Partners (UAN), is the company’s Trinidad, South America, plants.
Benchmarked gas price
Prices of natural gas (the primary input used to make nitrogen feritlizers) in Trinidad plants are benchmarked to Tampa (Florida) ammonia prices. While this means PotashCorp’s nitrogen business’s margins will lose out when nitrogen fertilizer prices rise, or natural gas prices in the United States fall, the company’s earnings are less volatile, which merits lower required rate of returns from investors. (If investors wish to reduce volatility in their portfolio, but would still want to have exposure to agriculture business, they can use the Market Vectors Agribusiness ETF (MOO).)
Industrial end market
Approximately 69% of the company’s sales went toward the industrial market in 2013, which has shown to be less volatile compared to nitrogen fertilizer prices sold in the agriculture market. According to PotashCorp (POT), “ammonia can be used to produce fibers and resins, refrigerator coolands, pulp and paper, and metal products; urea is used to produce resins, dyes, adhesives, NOx removal, and pharmaceuticals; and nitric acid is used to produce fibers, resins, polymers and metal finishing products.”
As the chart above shows, PotashCorp’s ammonia prices fell from close to $700 per metric tonne to $400 per metric tonne since 3Q12. Yet the gross margins have only fallen slightly.
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