Mosaic’s (NYSE: MOS) decision to lay off 51 workers across its potash division in Saskatchewan — or just under 2% of its workforce in the province in Western Canada — is not as dramatic as Potash Corp. of Saskatchewan’s (TSX: POT; NYSE: POT) December 2013 slashing of its workforce by 18% across its Canadian, U.S. and Trinidadian operations amid soft crop-nutrient demand from developing markets.
Nevertheless, Mosaic’s move spells more gloom in the sector and shines a spotlight on lagging demand and excess capacity for the fertilizer ingredient.
Mosaic — a leading producer of potash with five mines and production facilities and an annual capacity of 10.3 million tonnes — told reporters that the affected workers at its office in Regina and mines in Belle Plaine, Colonsay and Esterhazy were sent home from work.
Sarah Fedorchuk, a spokesperson for the company’s potash division, did not return phone calls requesting comment.
Analysts at Investec in London pointed out in a research note after the layoffs were made public that “global demand for potash has grown more slowly than expected in recent years, as some producers expanded capacity.”
They said that “with producers cutting workforce the sector remains challenging,” noting that BHP Billiton (NYSE: BHP) is “pursuing a staged development at its major Jansen potash project” in the province.
Paul Burnside, manager of fertilizer analysis products at the CRU Group in London, says he’s not surprised that Mosaic made cuts after PotashCorp’s layoffs in December.
“The members of Canpotex are managing output to match demand,” he writes in an email response to questions. “The problem is that those producers in Saskatchewan have been building new capacity — much of which isn’t required right now — so they’re cutting staffing levels. Prices aren’t the issue, so much as capacity utilization rates.”
Burnside explains that the concern for 2014 is the apparent disparity in strategy between suppliers in the major production centres (Canada and Russia–Belarus). Despite the ownership change at Uralkali, he says, it has bullish production expectations for 2014 and is targeting an increase in market share. “Will the members of Canpotex sit back and let Uralkali take market share?” he asks. “If Uralkali sticks to its production targets, at what price level will Canpotex choose to compete?”
This could make for an interesting market dynamic in 2014, he adds, but the issue for workers in Saskatchewan is that the potash industry, especially but not exclusively in Canada, has built a lot of new capacity in the last few years, but demand growth simply hasn’t kept pace.
“My opinion is that even with the downward shift in prices that we saw in 2013, and assuming a stable price outlook, demand will at best just keep up with capacity growth in the medium-term — meaning that utilization rates will continue to be under pressure,” he concludes.
In Scotiabank’s latest Commodity Price Index, the bank’s vice-president of economics and commodity specialist Patricia Mohr noted that after bottoming in January at US$295 per tonne (FOB Vancouver), the price of standard-grade potash has “inched ahead” to US$297.50 per tonne.
“Demand is reported to be strong in Latin America, including Brazil — where Canpotex has announced a US$360 CFR granular price for April — and is good in China,” she writes.
Raymond Goldie, a senior mining analyst and vice-president of commodity economics at Salman Partners in Toronto, notes that potash prices, as he has been forecasting, do seem to have hit bottom, but adds that “prices are coming off that bottom slowly.”
Goldie says that PotashCorp pointed out on March 19 that “North American potash producers ended February 2014 with inventories that were down by 43,000 tonnes from their level on Jan. 31, 2014 . . . but they were still 16% above the previous five-year average.”