Continued from Part 3
Possibility of new entrants
Another variable that affects competition level is the possibility of new entrants. For the seed industry, the likelihood of a new small enterprise successfully competing against giants such as DuPont (DD) and Monsanto (MON) was small due to defensive characteristics such as economies of scale, first mover advantage, patents, and large marketing and R&D expenses. While the fertilizer industry does benefit from economies of scale and access to raw material that’s relatively concentrated among a handful of producers, fertilizer companies can’t protect themselves with patents (see Part 3), nor do they require significant marketing and R&D expenses. But what they do have is high capital expenditure costs and long construction lead times that give them time to enjoy high profits, which high R&D and marketing expenditures also provide.
High capital cost
Take potash mines for example. In order to set up a new potash mine with an output capacity of 2 million metric tonnes per year, Potash Corp. (POT) estimated a requirement of 4.7 billion to 6.3 billion Canadian dollars. For new players, this makes it harder for them to find the financial resources needed to enter the business. For incumbent firms (existing players), they will generally be more cautious when deciding whether to add new capacity. Both these factors will reduce the possibility of adding too much capacity that will hurt industry revenue and profits. In Potash Corp’s Q2Y2013 earnings presentation, the company revised the estimate higher to ~17 billion Canadian dollars.
It’s also important to know that the amount of time it takes to open up a new mine can also work to reduce possible new entrants. Build a potash mine takes six to eight years. From investors’ standpoint, this means they won’t see returns for at least six years, which limits funding prospects for new entrants. For entrepreneurs, it means at least six years setting up a business. That is a rather long time, considering that anyone who’d want to jump into the industry are those above ~35 who have industry experience. By the time they’re done, they’ll be at least 41, so it’s an unlikely career path.
How other fertilizer companies stack up
Continue to Part 5
More From Market Realist