July 22, 2009 / 4:27 PM / in 8 years

PREVIEW-Fertilizer companies braced for dismal earnings

* Analysts, investors expect weak Q2 results

* Lower farm prices, weak demand have hurt producers

* Investors now focused on 2010 fertilizer season

By Euan Rocha

TORONTO, July 21 (Reuters) - North American fertilizer makers a year ago posted enormous profits on the back of soaring prices, but investors are braced for a sharp setback this quarter and hope to see the first signs of improvement later this year.

The credit crunch, coupled with a collapse in commodity prices and a slump in fertilizer demand, has led to a drastic change in conditions within the industry over the past year.

Fertilizer inventories that were tight have ballooned. Pricing that rose steadily since early in the decade has collapsed in the span of a few months. And the industry that a year ago claimed production capacity was insufficient to cope with demand has now idled a large part of its resources.

“The directional arrow on soft commodity (grain) prices has gone from pointing firmly upward to pointing firmly downward,” said Morningstar analyst Ben Johnson. “This adds an additional layer of uncertainty, because this is the primary driver of your customers’ purchasing power at the end of the day.”

As a consequence, the major fertilizer producers are expected to report very weak results on a year-over-year basis, said Jennings Capital Inc analyst Russell Stanley. “The real focus will be on the outlook.”

Potash Corp of Saskatchewan (POT.TO), the world’s largest producer, already slashed its second-quarter earnings forecast a month ago, citing substantially lower-than-expected potash sales volumes and weaker-than-expected pricing for its phosphate fertilizers.

Potash Corp now sees quarterly earnings of 70 cents a share, down from the $1.10 to $1.50 per share that it had earlier forecast. [ID:nN25293238]

A year ago the company posted a profit of $2.82 per share, raised its outlook and forecast that fertilizer prices, along with demand, were not about to wane.

Agrium Inc (AGU.TO), a leading fertilizer maker and agricultural products retailer, is expected to post second-quarter results in early August. It has forecast earnings of $2 to $2.40 a share, excluding items. That is well below its year-ago profit of $3.81 a share.

Mosaic Co (MOS.N), which is majority owned by commodities trading giant Cargill Inc [CARG.UL], is expected to post fiscal fourth-quarter results later on Wednesday. The company has not issued a forecast, but analysts are expecting earnings of 7 cents a share, well below year-ago earnings of almost $2 a share.

Analysts also expect results of smaller rivals such as CF Industries (CF.N), Terra Industries TRA.N and Intrepid Potash (IPI.N) to be much weaker than those of a year ago.

Last week, China’s main distributor of imported fertilizers, Sinofert Holdings (0297.HK), warned it might post a loss for the first half of 2009, as it has been forced to make provisions to write down some of its fertilizer inventory.

A month ago Germany’s K+S SDFG.DE said it expects a more significant drop in earnings and sales this year than previously forecast. [ID:nLH599947] [ID:nL2773025]

To be sure, it’s not all bad news for the sector. The latest data indicates that nitrogen- and phosphate-based fertilizer inventories in North America declined in June and potash markets, which have remained frozen for months, are likely to thaw in light of the price cuts that have been announced in North America, Europe and Asia.

Potash, along with nitrogen and phosphate, are the three main macro nutrients used by farmers across the globe. While nitrogen- and phosphate-based fertilizer prices have fallen sharply, the price of potash, until recently, has remained stubbornly high, as producers have kept a tight rein on supply.

“I think investor focus is going to shift from the short-term to the medium-term,” said Terence Ortslan, at TSO and Associates in Montreal.

“2010 will be an improvement (over 2009) -- there is no question about it,” said Ortslan. “We don’t expect a 2008 type of banner year to immediately recur, but this is an industry in which those type of years will come back.” (Reporting by Euan Rocha; Editing by Frank McGurty)

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