~Potash Mining~

The Potash Corporation of Saskatchewan Responds to the Financial Crisis
By Brian Harvey

After setting records for sales and profits in 2008 and spending a short time as Canada ’s most valuable company, the Potash Corporation of Saskatchewan (PCS) is facing the reality of the global financial crisis. Commodity markets continue to struggle in the first part of 2009 and the corporation’s hopes for an early recovery in the agricultural sector have failed to materialize. Instead, potash sales are sluggish and demand continues to fall. The corporation was forced to lay off 940 workers at three of its Saskatchewan mines earlier in the year and just last week company spokesman Bill Johnson announced that further layoffs are coming. Production cutbacks are expected to reach 4.7 million tonnes in total this year as demand for its commercial fertilizer products weakens both in America and on overseas markets. (Kyle, Wood) An industry that just a year ago was attempting to maximize production to keep up with soaring prices and constantly growing demand is today facing inventory surpluses and cutting back operations in response to the ongoing recession. 

The bright side of an otherwise dismal economic forecast for PCS is that its fertilizer products are essential nutrients for growing agricultural food crops. The world’s population continues to climb and already there are systemic food shortages in certain parts of the world. The threat of famine is never far away in parts of Africa and Asia . As the Potash Corporation of Saskatchewan ’s CEO William Doyle said this April to concerned stakeholders, “Food shortages were making headlines just a year ago before they were supplanted by the financial crisis and its effects…We have seen these conditions before and when it’s time to gear down, we know how to do that.” (Hill, Mining Weekly)  

The corporations dizzying success in the first three quarters of 2008 possibly drove the price for potash and other commercial fertilizer products well above what international agricultural markets could bear. Prices eventually topped $1000 per tonne in certain South American and Asian markets allowing PCS to record profits of 3.5 billion for the year. (Google Finance Canada ) Potash prices may have reached levels that were unsustainable in early 2008 due to speculative demand for fertilizers and perceived production shortages on overseas shipments as rising food prices fuelled an overheated international market. Then the sudden and dramatic meltdown in the final quarter of last year caused demand for exported commodities to falter across the board. Today potash prices have stabilized in the neighbourhood of US$ 750 per tonne. This is a price that Bill Doyle thinks is reasonable and sustainable over the long-term.  

PCS - Materials Distributed via Rail
(Photo: PotashStocks)

Economic predictions for 2009 remain dire but Doyle is quite correct when he said that the corporation has faced adverse conditions before. The recession of the early 1980’s was a major challenge for PCS. Along with a dramatic downturn in North American markets, the United States government actively legislated reductions in that countries agricultural output in order to reduce huge surpluses in grain inventory. A global recession, along with American government trade policies and severe drought conditions in the many parts of the US , lowered demand for all agricultural fertilizers by 23%.  The Potash Corporation of Saskatchewan ’s profit margin fell 40 per cent from the then record levels it achieved in 1980. (Funding Universe) PCS began looking beyond the US market to increase sales overseas but here too, inventories had built up around the world and sales were slow. Out of the adverse economic conditions of the early eighties, came a cost-cutting and restructuring program that eventually made PCS the industry leader and provincial powerhouse that it is today.

Established by the provincial government in 1975, the Potash Corporation of Saskatchewan began its existence as a crown corporation created to exploit the vast reserves of mineral wealth that the province literally found itself sitting on top of. The first two mines acquired by the corporation instantly made it a key player in the global fertilizer market and by 1977, it was the second largest potash producer in the world at half a million tons. Steadily increasing its mine holdings, infrastructure and underground reserves through the 1970’s, PCS came to control over half the provinces production capacity and realized record sales of US$312 million by the end of the decade just before the onset of the recession in the early eighties.  

Just as is struggles with global economics today, PCS trudged through the downturn of the mid-eighties suffering periodic shutdowns, employee layoffs and cutbacks in production. Sales to the US remained soft for most of the decade. Together with Canpotex, the national potash marketing and distribution organization, PCS worked hard to develop overseas markets and found success with steadily increasing sales in Southeast Asia, South America and especially China where half a million tonnes were being shipped annually through a negotiated bilateral contract. By the end of the eighties, record sales were again being realized in diverse markets around the world. Even in the US , where agricultural markets were rebounding after a terrible slump, potash sales were rising and demand was reaching unprecedented new heights. 

In 1989, an era remarkable for its mass privatizations of government assets, the corporation went public with 13 million shares put up for sale on the Toronto Stock Exchange.  The vast majority of those Shares were sold within the province of Saskatchewan . The revenue from sale of stock allowed PCS to acquire new and improve existing assets, move into other areas of the fertilizer industry and further expand its presence in Asian and even Middle Eastern markets. By the early 1990’s The Potash Corporation was again riding a wave of success. Record sales and production allowed PCS to take its place as Saskatchewan ’s flagship corporation and one of the world’s leading producers of potash and other fertilizers. 

Whether the Corporation can regain the spectacular fiscal momentum of 2008 remains to be seen but PCS is well run, well managed and has learned to survive difficult times during the 1980’s. Though small consolation for workers facing layoff, by scaling back production now when demand is low, PCS is positioning itself to weather the current economic climate until commodity markets recover - even if that recovery does not occur well into 2010.