Potash Corp of Saskatchewan to shutter New Brunswick mine at cost of 430 jobs

Potash Corp. of Saskatchewan Inc.’s decision to seal its New Brunswick operations reflects the fact that potash demand hasn’t met the fertilizer industry’s hopes for the greater a part of ten years.

The move effectively nullifies a $2 billion investment which was first approved in 2007, and can lead to as much as 430 job cuts.

 The New Brunswick operations are higher-cost than Potash Corp.’s Saskatchewan mines, and also the company decided it has to suspend these to become more competitive amid very low potash prices.

“Our hearts visit the folks (losing their jobs) and we wish we would have the ability to deliver different news,” chief executive Jochen Tilk said in a phone interview from New Brunswick .

Related

Why Potash Corp must take a run at Intrepid Potash-in a yearAgrium and Potash Corp face earnings downdraft

Until the mid-2000s, potash demand grew in a solid pace of around three per cent annually for many years. Potash Corp. was optimistic that growth would continue and tighten the supply-demand balance in the industry. As a result, the Saskatoon-based company initiated an enormous capacity expansion strategy in 2003, and has spent a lot more than $8 billion on expansions to date (including the $2 billion in New Brunswick).

Unfortunately, demand growth has been minimal in the last several years amid global economic uncertainty and disappointing demand in key markets like India. Meanwhile, supply has steadily increased. That combination has crushed the price of the crop nutrient, which peaked at more than US$900 a tonne in 2008 but is now worth less than US$300.



The outlook remains challenging in the short term. Low crop prices along with a strong U.S dollar are putting pressure on farmers globally, limiting the amount of fertilizer they want to buy. The potash industry has also become more competitive since a marketing alliance between Russian and Belarusian companies broke apart in July 2013.

Tilk, who only joined Potash Corp. in 2014, said he still believes the company’s expansion strategy would be a good one, because global population growth trends indicate that rather more potash is going to be necessary for the long term.

He would not comment on individual investments the organization makes included in that strategy. But Tuesday’s announcement is clear evidence that the New Brunswick expansion, at the very least, was a mistake.

Tilk said management and the board “agonized” within the decision to shut the facility. He noted the work force in New Brunswick has done “everything right,” however the decision had to be designed for the long-term health from the company.

The suspension in New Brunswick becomes effective immediately. Potash Corp. expects the proceed to lower its cost of goods sold by US$40 million to US$50 million this season. The company will also save about US$185 million that was likely to be committed to New Brunswick within the next 2 yrs.

At full capacity, the brand new Brunswick operations were expected to produce as much as 1.8 million tonnes of potash a year. They will be placed on so-called “care and maintenance,” meaning they may be restarted later on when the potash market improves.

Citigroup analyst P.J. Juvekar said this closure proves Potash Corp. is sticking with its longstanding “price-over-volume” strategy and wants to avoid a cost war.

“This tries to minimize pain for the short term, but the potash market remains challenged because of overcapacity,” he said inside a note, adding that potash producers need to take more downtime to balance the marketplace.

The “price-over-volume” technique is a stark contrast to what is happening in the iron ore sector. Both industries are highly concentrated and oversupplied, however in the situation of iron ore, the large producers are selling every tonne they can in a vicious battle for market share.