As global potash supplies have grown and U.S. crop production margins have fallen, North American P&K producers have reduced output in an effort to maintain profitability. While production cuts and mine closures may benefit potash and phosphate producers in the short-term, further down the road, they may find the most pertinent curtailment has been to their global marketshare.
We have written before that Russia holds the upper hand in potash production due to declines in the ruble against the U.S. dollar. The sharp discount the Russian currency holds to the dollar allows domestic production to be undertaken at a fairly low cost. Finished products are then released onto the global market in U.S. dollars, which favors low-cost producers and supports profits.
The same is true of phosphate. As North American phosphate production was curtailed to protect margins, low-cost foreign producers in Russia and the Middle East were able to to take advantage of low-cost domestic production sold on the export market in dollars.
Investors have begun to shy away from North American potash and phosphate companies as they believe the cautious production stance will harm long term prospects and narrow global P&K marketshare. MosaicCo reports strong domestic disappearance in their most recently released data, but very weak export activity.
PotashCorp is showing similar results with Q1 2016 potash exports falling 34% below the same time last year as production fell 11% below the prior year.
It appears PotashCorp and MosaicCo are adopting the former strategy of Saudi Arabia who used to dominate the global crude oil market by adjusting production to prop up prices during periods of global price softness. But the crude oil market has changed dramatically in the past few years, and Saudi Arabian crude oil producers are more concerned with applying pressure to high cost producers by holding production levels high, and gathering marketshare in a low-price environment.
It has been argued that a better course of action for North American P&K producers would be to more aggressively pursue marketshare and resign themselves to a few years of thin margins in order to drive high-cost producers to cut production under financial strain. This strategy may serve producers no better, however, than curtailing production as foreign producers take advantage of low domestic production costs and a high exchange rate for finished products in U.S. dollars.
Low exports year-on-year, declining production, facility closures and an ultra-conservative stance on margin maintenance may allow North American P&K producers to return acceptable dividends to shareholders in the short-term, but the cost in export demand and shrinking global marketshare will one day have to be reckoned with.