Potash output cuts seen hindering industry's long-term recovery

Thu Jun 2, 2016 1:00am EDT
 
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By Rod Nickel

WINNIPEG, Manitoba, June 2 (Reuters) - North America's big potash miners have doubled down on a production cut strategy they hope will lift the fertilizer's price from a near decade low, even as some investors warn this threatens their long-term profitability and props up weaker rivals.

Shares of Potash Corp of Saskatchewan and Mosaic Co, major players who have trimmed output when prices weakened, are down nearly 50 percent from a year earlier following their most recent production cuts.

Some suggest they should take a page from Saudi Arabia's oil strategy, boosting production to drive out higher-cost competitors, with the goal of maximizing profit over time.

"Lower prices would keep the new capacity out. That's more sustainable than trying to artificially maintain the price by closing (low-cost) facilities," said Bryan Agbabian, head of agricultural equities at Allianz Global Investors, which has avoided potash company shares for three years.

While this new approach would hurt share values in the near term, it would also begin a healthy industry transition, he added.

Potash Corp, which confirmed it is sticking with its tighter supply strategy, surprised many in January by closing its eastern Canadian mine about a year after opening it.

"The reason it works well is the resources in potash are more concentrated than any other commodity," Chief Executive Jochen Tilk said in an interview, noting that a few players in the industry have access to the majority of resources.

Mosaic CEO Joc O'Rourke told analysts last month that the company will continue to cut production when markets soften. Mosaic spokesman Ben Pratt said there has been no change in strategy since then and executives were unavailable for further comment.   Continued...