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Case Study on Potashcorp

In: Business and Management

Submitted By agec6302013
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A Changing Environment:
A Case Study on PotashCorp
The Case on PotashCorp
On July 1, 1999 William Doyle crawled into a pair of massive shoes as the President of PotashCorp, and began his opportunity to make new footprints in the already proven trail of success at PotashCorp. As president of a multi-million dollar company, Doyle faced the reputation of a successful business verses the challenges of future production. With the growing population the world is facing and rising competition in the potash industry in 2013, staying on top of an already growing industry is going to comprise of either following in the footprints of the past or taking a slightly new path in order to keep the shoes the largest in the industry.
PotashCorp is the largest fertilizer company by capacity in the world. The increased need for fertilizer over the past years has helped the company sit at the top of the industry. With the increased need for a higher yield per acre ratio in the farming industry because of the rising population, there will continue to be a strong basis for the company in the fertilizer industry in the future. What Doyle faces are the different options the company can take in order to stay a powerhouse in the industry. PotashCorp produces a globally traded commodity at a low-cost. With low-costs when producing potash and increasing market prices, PotashCorp’s margins have increased in the potash segment of the company. However, other segments of the company, such as Nitrogen and Phosphorous, are facing decreasing margins. Since potash is the company’s main product, the overall revenue of the company has been positive. Because potash is such a highly produced global product, there is much competition in the industry for who supplies the current demand. One advantage PotashCorp has over its competitors is their participation in Canpotex (Canadian Potash Exporters), which is a marketing and logistics company that sells and distributes potash from the Canada area. Canpotex is composed of PotashCorp, Agrium and Mosaic. Being part of this company allows for a duopoly affect in the market and keeps prices fairly lower than the competitors. Since there is a rising demand, greater competition for potash will arise across the globe. The distribution from Canpotex could be intercepted by potash companies closer to those areas around the world that have a faster growing population. A key advantage PotashCorp holds is that it has either fully acquired or purchased substantial shares in smaller companies around the world related to the fertilizer industry. The company has minority interests in Israel Chemicals Ltd., Sociedad Quimica y Minera de Chile, Arab Potash and Sinofert. This has given PotashCorp insight on the global market and information on demand, trends, and needs in North America, South America and several countries in Asia as well. This has also allowed for the company to more closely watch their competitors and respond to the decisions they are making. A viable option the company has shown interest in is new technology. One of these new technological advances that is becoming more popular is fertigation. Fertigation is the application of fertilizer through drip irrigation systems. The fertilizer is transformed into a soluble form and mixed with the water before dispersed to the plants through the pipes. The major nutrient used in fertigation is nitrogen because of the lack of disturbance it causes to the flow of water through the irrigation system, but it is mixed with the other components to make a balanced fertilization component. An increased interest in fertigation could allow for PotashCorp to increase margins in the nitrogen and phosphorous area of the company instead of allowing for the current decline to continue.
History of the Potash Industry
Potash began being used for fertilizer in the 18th and early 19th centuries when settlers in North America would burn trees and use the ashes for fertilizer in the soil. Technically known as potassium, the burning and use of the ashes from the trees is where potash received its name. Later in the 1860’s, there was a large mineral deposit discovered in Germany that struck the widespread availability of the mineral. Germany was the main source of potash production and exported around the world until World War 1. During the war, exports from Germany were prohibited, which created a massive search for new areas across the globe that could be mined for the mineral.
Potash (K) is one of the main ingredients in fertilizer. Together with nitrogen (N) and phosphorous (P), N-P-K is used for most major crop production. A healthy balance is determined for different crops grown. Nitrogen is used for foliage growth as well as stem and branch development, phosphorous is important for seed germination and root development, and potash is used for all around growth and disease resistance of the plant.
PotashCorp was founded after the production decline in Germany by the government of Saskatchewan in 1975 as a Crown corporation. On November 2, 1989, Potash Corporation of Saskatchewan Inc. joined the Toronto and New York stock exchanges. Since then, the company has completed construction on many different projects to increase production. The six existing mines are the Lanigan, Cory, Patience Lake, Sussex, Rocanville and Allen projects. Aside from these potash mines, the company also produces nitrogen and phosphorous. Canpotex creates a duopoly effect in the industry, so the other major players in the industry are those other members in Canpotex, Agrium and Mosaic. Figure 1.2 shows the leverage ratio of each of the three companies. Because PotashCorp is the largest of the three, they provide the most supply of potash. PotashCorp is the leading producer of potash and the third highest nitrogen and phosphorous producer in the world. However, Agrium and Mosaic combine to make up a substantial part of the market share, bringing in stiff competition for the supply that Canpotex offers.
Figure 1.2

Other competitors are the Belarusian Potash Company, Vale, and BHP who are all mine numerous metals and minerals. Vale and BHP do not currently produce potash but are in the process of building massive mines that will reach completion in the next few years. Last year BHP tried to purchase PotashCorp because of their interest in the potash industry, but the deal fell through. With new potash production set to take place in the next few years by these extremely large mineral companies, competition will increase dramatically in the potash industry.
Problems and Solutions The global population is constantly rising. The world population is set to increase by 2.6 billion over the next 45 years. Because more than 99% of food supply (calories) coming from the land, the demand for food will continue to increase. According to Mike Strain, Louisiana’s Agriculture and Forestry Commissioner, “the global demand for food will increase by 50% by 2030.” This means food production is needed to increase by 25% in the next eight years in order to meet demand. However, with only 17% of arable land left not used, increasing yield per acre is going to be important to meet this eight year goal. Along with a rising population, there is also a rising middle class which demands higher quality of food. This is especially true in India and China where the middle class is rising at a substantial rate. As this population grows, cities expand and valuable cropland is consumed by housing and buildings. Aside from losing land from urban expansion, yearly wind and water erosion degrade more than 10 million ha of cropland soil. On top of that, each year another 10 million ha of cropland is lost because of salinization of soil. With less cropland available and more mouths to feed, the need for higher crop yield per acre rises. With the rising population and the amount of land decreasing, an increase of fertilizer is demanded in order to make the amount of arable land as efficient as possible. Doyle is left with the decision to keep current production, invest more strongly in other companies around the world, or look at new technology to set the company apart from others.
In order to expand production, there are many government regulations PotashCorp has to abide by in Canada. With these government regulations also come safety regulations. Building new mines is dangerous and because of the numerous safety regulations placed on the industry, it can be a major determinant in the expansion of the company. These two factors can make expanding difficult.
As shown in the table 1.1, shares in companies that produce potash or other fertilizer ingredients have been purchased in other countries, but because of numerous government regulations, expansion or even mass production in those countries can cause setbacks. Also shown in table 1.1, PotashCorp only owns a portion of most of these companies. They mainly use them to read the local markets and determine how PotashCorp can contribute to production in the area.

Table 1.1 Percent of Companies Owned by PotashCorp Company in which Invested | % Shares Owned | White Springs Agricultural Chemicals Ltd. | All Outstanding Shares | Texgulf Inc. | All Outstanding Shares | Arcadian Corporation | All Outstanding Shares | Israel Chemicals Ltd. | 14 % | Minera Yolanda SCM | 100 % | Sociedad Quimica y Minera de Chile | 32 % | Arab Potash Company Ltd. | 28 % | Sinofert | 22 % |

Doyle’s Solution Options The first option Doyle can consider is to continue to increase production and keep the current business model of the company. The company has shown a past of success, one that has a strong business model. Though over the past years they have shown a decline in nitrogen and phosphorous, their potash numbers have shown an increase. The company has more than enough resources that can be mined for potash production; however, they can only produce as much as Canpotex can supply. With this business model, they would have to find a way to reach out to the India and Asia markets and their rapidly growing population while fighting through foreign government regulations. When expanding, the company would pursue brownfield mine expansions in order to cut costs and utilize current facilities. A brownfield mine expansion is one that expands on an old mine that is not utilized or is underutilized. A Greenfield mine expansion is expanding into an undeveloped area and building the new facility from the ground up. “Based on our brownfield development abilities, we believe PotashCorp will lay claim to approximately half of all new operational capabilities in the next four years, giving it the greatest volume growth potential in the industry,” said Wayne Brownlee, PotashCorp’s Executive Vice President and Chief Financial Officer. Another option Doyle could take is taking the money from expansion and investing more heavily in other companies around the world. Since the main focus area of expansion are in the Asian markets, having more companies in that area that can give PotashCorp an inside opinion could help the company slip into that market. Having these relations with fertilizer industries in the area could allow for more production to these distributors as well. Doyle could also look into the future and invest in technology. While keeping current production, investing in an uprising technology could give the company an advantage above its competitors. According to David Freerich, a branch manager for Eco-Drip, “Fertigation is just now in its infancy stage. There is still quite a bit to be learned about it.” In the past everyone has steered away from fertigation, but with it being a more efficient way to fertilize cash crops, the technology cannot be ignored. PotashCorp owns a 14% share in Israel Chemical Ltd. (ICL), which is the largest soluble N-P-K fertilizer manufacturer in the world. With specialty fertilizers growing at a 5%-8% rate, ICL is starting to target this market and invest more heavily in the technology by investing in many different companies also targeting this specialty market. Since PotashCorp owns 14% of the company, heading in the direction of fertigation and increasing sales of N-P-K is a viable option. Not only do they own stakes in a company that is pursuing the technology, but they have the insight to the demand and trends of the company. Because of the strict government regulations in India, this could be a way for PotashCorp to slip into the market.

References
Muckerman, Taylor; “Analyst Report”; http://www.fool.com/reports/pot-r.aspx
Pimentel, David; “Global Environmental Resources Versus World Population Growth” Ecological Economics; Volume 59, Issue 2, 12 September 2006, Pages 195–198

Potash Corp determined to buy Israeli company; The Canadian Jewish News; Thursday, March 21, 2013; http://www.cjnews.com/index.php?q=node/103275.
China, Fertigation and ICL’s Specialized Aspirations; Proedge Wire; October 27, 2011; http://www.proedgewire.com/potash-phosphate-intel/china-fertigation-and-icls-specialized-aspirations/.
Jordan, Pav; “Potash Corp. sees profit plummet as sales to Asian markets slide”; The Globe and Mail; January 31, 2013; http://www.theglobeandmail.com/globe-investor/potash-corp-sees-profit-plummet-as-sales-to-asian-markets-slide/article8030413/
Potash Corporation of Saskatchewan Inc. full description by Reuters. http://www.reuters.com/finance/stocks/overview?symbol=POT.TO http://finance.yahoo.com/q/bs?s=POT+Balance+Sheet&annual http://finance.yahoo.com/q/bs?s=MOS+Balance+Sheet&annual http://finance.yahoo.com/q/bs?s=AGU+Balance+Sheet&annual http://www.potashcorp.com http://www.life123.com/home-garden/gardening-tips/soil-fertilizers/the-history-of-potash-fertilizer.shtml http://www.lexisnexis.com.libezproxy.tamu.edu:2048/hottopics/lnacademic/?verb=sr&csi=344171

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