Market Overview. Southwestern Fertilizer Conference. July 2016

Transcription

1 Market Overview Southwestern Fertilizer Conference July 2016

2 FORWARD LOOKING STATEMENTS This presentation contains forward-looking statements or forward-looking information ( forward-looking statements ). These statements can be identified by expressions of belief, expectation or intention, as well as those statements that are not historical fact. These statements often contain words such as should, could, expect, may, anticipate, believe, intend, estimates, plans and similar expressions. These statements are based on certain factors and assumptions as set forth in this document, including with respect to: foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates. While the company considers these factors and assumptions to be reasonable based on information currently available, they may prove to be incorrect. Forward-looking statements are subject to risks and uncertainties that are difficult to predict. The results or events set forth in forward-looking statements may differ materially from actual results or events. Several factors could cause actual results or events to differ materially from those expressed in forward-looking statements including, but not limited to, unexpected developments with respect to any of the following: variations from our assumptions with respect to foreign exchange rates, expected growth, results of operations, performance, business prospects and opportunities, and effective tax rates; fluctuations in supply and demand in the fertilizer, sulfur and petrochemical markets; changes in competitive pressures, including pricing pressures; risks and uncertainties related to any operating and workforce changes made in response to our industry and the markets we serve, including mine and inventory shutdowns; adverse or uncertain economic conditions and changes in credit and financial markets; economic and political uncertainty around the world; changes in capital markets; the results of sales contract negotiations; unexpected or adverse weather conditions; changes in currency and exchange rates; risks related to reputational loss; the occurrence of a major safety incident; inadequate insurance coverage for a significant liability; inability to obtain relevant permits for our operations; catastrophic events or malicious acts, including terrorism; certain complications that may arise in our mining process, including water inflows; risks and uncertainties related to our international operations and assets; our ownership of non-controlling equity interests in other companies; our prospects to reinvest capital in strategic opportunities and acquisitions; risks associated with natural gas and other hedging activities; security risks related to our information technology systems; imprecision in reserve estimates; costs and availability of transportation and distribution for our raw materials and products, including railcars and ocean freight; changes in, and the effects of, government policies and regulations; earnings and the decisions of taxing authorities which could affect our effective tax rates; increases in the price or reduced availability of the raw materials that we use; our ability to attract, develop, engage and retain skilled employees; strikes or other forms of work stoppage or slowdowns; rates of return on, and the risks associated with, our investments and capital expenditures; timing and impact of capital expenditures; the impact of further innovation; adverse developments in new and pending legal proceedings or government investigations; and violations of our governance and compliance policies. These risks and uncertainties, as well as additional risks and uncertainties, are discussed in more detail under the headings Forward- Looking Statements, Risk Factors and Management s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and in our other filings with the US Securities Exchange Commission and Canadian provincial securities commissions. Forward-looking statements included in this presentation are given only as at the date hereof and PotashCorp disclaims any obligation to update or revise any forward-looking statements in this presentation, whether as a result of new information, future events or otherwise, except as required by law. MARKET OVERVIEW

3 EXECUTIVE SUMMARY Following a challenging year for a broad range of commodities and emerging market currencies, the global macroeconomic environment has shown signs of improvement in Strong demand and production issues in select growing regions have kept grain and oilseed supplies relatively tight. North American crop prices have fluctuated in recent months due to changes in weather forecasts and supply/demand projections. We believe fertilizer affordability is very strong at current crop and fertilizer price levels. Current crop economics provide an incentive for farmers to plant and supply the necessary nutrients to achieve high yields. We expect improved potash shipments to western hemisphere markets will partially offset lower shipments to Asia in Reduced global potash deliveries in the first half of 2016 could result in strong second half shipments. Additionally, a late contract settlement in China has historically set the stage for increased demand in the following year. Between 2016 and 2020, approximately 7 million tonnes of potash capacity is expected to be eliminated due to mine depletion and economic conditions. We expect the combination of healthy demand growth and announced mine closures will offset the development of new capacity and support a relatively balanced market. Lower energy feedstock costs in most key nitrogen producing regions have increased competitive supply and weighed on the market. Several US nitrogen projects are expected to come on-line in 2016, which is expected to reduce import requirements. The majority of new phosphate capacity over the next four years is expected to come from Saudi Arabia and Morocco. We believe this new capacity will temper, and eventually lower, China s exports, which were at a record high in This is expected to help provide a relatively balanced phosphate market in the medium term. MARKET OVERVIEW

4 Strong Correlation Between Growth in Crop Production and Fertilizer Use The most basic driver of fertilizer consumption is higher global crop production. The charts above illustrate the strong historical correlation between crop production and fertilizer consumption. Fertilizer consumption has grown at an average annual rate of approximately 2 percent over the past 20 years (matching crop production growth), with the rate of potash consumption growing most quickly among the primary nutrients. Given the need to replenish soil nutrients removed by record crops in recent years, we believe fertilizer consumption will remain strong in the years ahead. MARKET OVERVIEW

5 Consumption Has Increased for 19 Consecutive Crop Years Global grain and oilseed consumption has risen at an annualized rate of 2.2 percent over the past decade. This past crop year marked the 19 th consecutive year-overyear consumption increase. Growth has been sustained during periods of changing economic and agriculture market conditions. This highlights the resilient nature of the agriculture industry. Global ending stocks have increased in recent years with a significant portion of the stock buildup attributed to record crop production in China. Stock levels in the rest of the world have remained relatively tight, providing support to global crop markets. MARKET OVERVIEW

6 Fertilizer Represents Even Greater Value for Farmers The graph above illustrates the relationship between crop and fertilizer prices. Although farmers face some uncertainty, we believe crop prices continue to offer them an economic incentive to plant and optimize fertilizer applications to improve profitability. Crop prices have been variable in recent months but overall have increased since the beginning of Over this time period fertilizer prices have declined. We believe this increased affordability will support strong fertilizer demand and provide the opportunity for a fertilizer price recovery. MARKET OVERVIEW

7 Fertilizer Affordability Dramatically Improved Over the Past Year Over the past five years, potash has provided a strong payback for US Midwest farmers with soils testing below the established critical level. Over the past year, the cost of fertilizer has declined more than the price of crop commodities, which has increased the estimated return from potash application. We believe potash not only remains a good short-term investment but more importantly is a long-term investment in the soil s productivity. MARKET OVERVIEW

8 Strong Demand for US Corn and Soybeans USDA is projecting record demand for US corn and soybeans for the 2016/17 crop season. With ethanol demand relatively mature, growth in corn demand will be driven largely by feed and exports. Soybean demand growth is driven almost entirely by exports. US exports have been very strong in the past year supported by robust demand for edible oil and protein sources in Asia. Greater than expected production challenges in South America have also supported the outlook for US exports in recent months. MARKET OVERVIEW

9 Robust Brazilian Farm Prices Supports Strong Planting Outlook Adverse weather has lowered production expectations in Brazil. The combination of a smaller harvest and a weaker currency has driven up the price of agriculture commodities. This situation created the possibility for farmers to lock in very strong crop returns. When farmers begin planting their full season crops in September, we believe they will increase their soybean area due to strong economics. Corn economics are also strong, which could benefit full season and safrinha crop acreage. The strength of crop economics has helped the industry collaboratively overcome some of the credit and fiscal constraints that farmers face in light of a challenging economic situation in the country. MARKET OVERVIEW

10 Potential For Above Average Monsoon and Lower Fertilizer Retail Prices Monsoon rains are critical if India is to produce a large enough crop for a growing population that is experiencing improved economic well-being. After two years of below-average monsoons, a late onset of rainfall in June delayed planting of Kharif crops. However, moisture levels have improved and monsoon rainfall is projected 5 percent above normal in An improved monsoon season is expected to give farmers confidence to invest in fertilizer for the upcoming planting seasons. In addition, the maximum retail price for potash and DAP has been lowered, which should also improve farm level demand. MARKET OVERVIEW

11 Reduction in Chinese Corn Acreage to Have Small Impact on Fertilizer Use China s corn price support program raised domestic corn prices percent above world levels and encouraged farmers to increase corn acreage by 44 percent over the past decade. In an effort to reduce the subsidy burden and provide for a more sustainable long-term policy, the government is in the process of phasing out its state stockpiling program. According to government officials, corn acreage could be reduced in 13 provinces by about 8.2 million acres (~9% reduction) by The government plans to allocate 3.5 billion Yuan to encourage farmers to shift to crops such as silage corn, potatoes and soybeans. From a fertilizer market standpoint, there could be some impact on Chinese nitrogen consumption if corn acreage is reduced in favor of crops such as soybeans. We believe the impact on potash would be less given current low potash application rates on poor quality corn land and a more neutral application rate tradeoff between corn and substitute crops such as soybeans. MARKET OVERVIEW

12 Weather Related Production Issues Tighten Stock Levels Southeast Asian palm oil production will decline for the first time in almost 20 years as El Niño-linked dry weather has impacted yields. Fresh Fruit Bunch (FBB) yields in Malaysia were down 16 percent through the first half of Inventory levels had declined sharply providing support for palm oil prices. USDA is projecting a recovery in palm oil output during the 2016/17 marketing year as the impact of El Niño dryness wanes. Healthy palm oil prices and the potential for improved weather conditions are expected to support regional fertilizer demand during the second half of MARKET OVERVIEW

13 Prices Under Pressure in 2016 The absence of new contracts in China, limited demand from India and cautious buying patterns in spot markets reduced global potash deliveries in the first half of This weaker demand environment, combined with increased competitive pressures, pushed potash prices lower in most spot markets. We believe the combination of supportive crop prices, an opportunity for improved demand and the impact of recent production outages could provide a more supportive price environment in the second half of MARKET OVERVIEW

14 Late Chinese Contract Settlement Has Historically Impacted World Potash Demand The chart above shows the historical impact of the timing of China s contract settlement on global potash demand. While not the only important factor, it is not surprising that world potash demand has been impacted in years with a late Chinese contract settlement. However, this has tended to set the stage for increased demand in the following year (except during the financial crisis). We expect the situation will be no different with a delayed contract impacting shipments in the first half of 2016, setting up the potential for a strong demand recovery in the coming year. MARKET OVERVIEW

15 Expect Improved Demand in the First Half of 2016/17 Fertilizer Year Potash demand in North America during the first half of the 2015/16 fertilizer year (Jul-Dec) was impacted by a shortened fall application season and lower buyer engagement. However, shipments improved in the second half of the fertilizer year (Jan-Jun), largely supported by increased crop acreage and lower dealer inventory. We expect potash demand will be strong in the 2016/17 fertilizer year, as increased affordability supports the potential for a healthy fall application season. The pace of offshore imports has slowed in recent months and we expect this trend will continue in the first half of the 2016/17 fertilizer year. MARKET OVERVIEW

16 Approximately 7 Million Tonnes of Capacity Expected to Be Closed by 2020 During previous decades, an average of more than 5 million tonnes of potash capacity has been lost as a result of water inflow issues, depleting ore bodies or economic related closures. Based on public announcements, a total of nearly 7 million tonnes of capacity could be closed between 2016 and Three reported closures are associated with ore depletion, two KCl mines are being converted to specialty multi-nutrient products and two mines will be indefinitely shut down in 2016 and placed in care and maintenance mode. MARKET OVERVIEW

17 Supply/Demand Expected to be Relatively Balanced; Similar to Historical Levels With very few brownfield projects completed so far in 2016 and some operations going offline, we see global operational capability staying relatively flat in Based on our estimate of global potash shipments, we believe market fundamentals could tighten as the year progresses. Over the next five years, the majority of new potash capacity will be associated with greenfield and brownfield projects in Canada and the FSU. Some of it will replace capacity that will be closed due to mine depletions and economic factors. We project potash demand will grow at an annualized long-term rate of percent, reaching approximately 70 million tonnes by Operational capability is forecast to grow at a similar average rate over the next five years, supporting a relatively balanced market outlook. MARKET OVERVIEW

18 Prices Pressured by Lower Energy Costs and Increased Supply Global nitrogen prices fell sharply in the second half of 2015 as lower energy prices drew down the cost of production and global supply increased. Although nitrogen demand was strong in most key regions, the surge in lower-cost supply could not be fully absorbed by the market. Despite a surge in urea and UAN prices during the US spring peak season, nitrogen prices have subsequently softened due to steady imports and new domestic supply. The timing of new capacity (especially in the US), India s urea tenders and the ability of high-cost producers such as China to supply the market will be key factors to watch. MARKET OVERVIEW

19 Feedstock Costs Have Decreased Significantly With energy feedstock costs accounting for the bulk of ammonia production costs, lower global energy prices have brought down nitrogen production costs in many regions, contributing to lower nitrogen prices. Additionally, a stronger US dollar relative to other currencies has lowered both feedstock and other production costs in US dollar terms. Natural gas markets that are linked to the price of oil, such as the European contract markets, have seen the largest price decreases. At the same time, lower coal prices in markets such as China have shifted the cost for these producers. MARKET OVERVIEW

20 Capacity Developed in Lower-Cost Regions Many of the major ammonia-producing regions plan to expand their capacity, with a significant number of projects nearing completion. Most of this new capacity will be used in the production of downstream products such as urea and nitrogen solutions. In the US, capacity will be developed and will partially replace offshore imports. New capacity in Russia, the Middle East and Africa is primarily destined for the export market. China accounted for 36 percent of increased global nitrogen capacity from 2010 to 2014, however, its share of additional capacity in 2015 to 2020 is expected to decline. It is anticipated that China s nitrogen supply will rebalance as the US shifts its purchasing to newly constructed domestic sources and as stricter Chinese environmental standards potentially accelerate closures of inefficient plants. MARKET OVERVIEW

21 Increased Domestic Production Will Pressure Imports 2016 marks a significant year for nitrogen capacity additions in the US with several greenfield and brownfield projects scheduled to be commissioned. These new projects will increase domestic production of ammonia, urea and nitrogen solutions. The timing of commercial start-up will be a key factor to watch in the second half of Imports are expected to decline with the addition of lower-cost domestic supply. However, if projects are delayed there is potential for a seasonal tightening in nitrogen supply. MARKET OVERVIEW

22 Liquid Phosphate Prices Moderate; Seasonal Changes in Solid Phosphate Prices Following a sharp decline in the later part of 2015, solid phosphate prices have been relatively stable in the first half of Healthy Latin American demand and reduced exports from China and the US have been supportive factors. Liquid phosphate has been in tighter supply over the past few years in comparison to solid phosphates. After an extended negotiation period, India s phosphoric acid contract has settled lower moving more inline with historical relationships. MARKET OVERVIEW

23 Lower Feedstock Prices Shift Cost Curve Lower The global DAP/MAP export cost curve shifted lower in 2016 due to declining prices for key raw materials, including ammonia and sulfur. Compared to a year ago, the price for phosphoric acid is down about 25 percent while ammonia and sulfur are down more than 35 percent and 45 percent respectively. Weaker currency values have also impacted production costs in many producing regions. China is the largest phosphate exporter by a wide margin but is also at the higher end of the global cost curve. A softening market could make it challenging to maintain the same degree of participation in phosphate trade. MARKET OVERVIEW

24 Expect Shifts in Global Trade Import demand is expected to be relatively flat in 2016 but with some shifts in trade patterns. The first half was impacted by weaker demand from India but purchases are expected to increase in the second half. India s imports are expected to be stronger in the second half given the potential for an improved monsoon and lower retail prices. After a period of low demand, Brazil is expected to increase imports to support its rising crop production requirement. The US is expected to remain a seasonal importer. On the supply side, DAP exports from Morocco and other African countries are expected to grow due to capacity expansions (OCP) and improved operating conditions. As a higher cost region, China s exports are expected to decline significantly in MARKET OVERVIEW

25 Majority of New Capacity Being Developed in Saudi Arabia and Morocco Over the next four years the majority of new phosphoric acid capacity is expected to come from Saudi Arabia and Morocco. A joint venture between Mosaic, Ma aden and SABIC was announced in They are building a phosphate complex in Saudi Arabia capable of producing approximately three million tonnes of finished product annually. This site is expected to start production in mid In Morocco, OCP plans to complete three more fully-integrated phosphoric acid and granulation facilities over the next four years. OCP also has a long-term plan to keep adding units as market demand permits. We believe the new capacity from China will largely displace older, inefficient operations. MARKET OVERVIEW

26 THE BUSINESS OF CROP NUTRITION FARMING S GO-TO INFORMATION RESOURCE. When making business decisions, farmers need as much information as they can get. Our user-friendly ekonomics website features concise summaries of the latest crop nutrition research, tips and tools for more productive soils, industry news, commodity futures prices, rainfall data, as well our Nutrient ROI Calculator and Nationwide Nutrient Balance Analysis both industry firsts exclusive to ekonomics. NUTRIENT ROI CALCULATOR See how much you could be increasing your yield and profits with optimal P and K applications. GROWING DEGREE DAYS CALCULATOR Predict plant and pest development rates by calculating how much heat they ve been exposed to. NUTRIENT REMOVAL CALCULATOR As crops are harvested, the soil loses vital nutrients. Find out how much you should replace. RAINFALL TRACKER Keep track of the rainfall in your area. Videos Nationwide Nutrient Balance Analysis There is no shortage of scientific data out there to help farmers make better business decisions. However, it can be hard to find and difficult to understand. Our industry experts have condensed this data into a series of short, easy-to-digest videos. Some cover the latest research, others the most topical issues of the day. An interactive map provides an instant snapshot of nutrient levels and balance trends for each state. It s the first-of-its-kind to aggregate nutrient removal records, fertilizer consumption information and manure data. All of which is helping farmers understand what conditions are like in their area and what trends to prepare for in the future. Your business. His priority. PotashCorp s resident agronomist Robert Mullen has a B.S. in Ag Business, as well as an M.S. and Ph.D. in Plant and Soil Science. He s also been published in a variety of books and trade journals. But what really makes him unique is his ability to take complex data and explain, in simple terms, how it impacts a farmer s bottom line. A key contributor to the ekonomics program, he delivers the kind of insightful observations that can lead to a more profitable business.