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PotashCorp upbeat on potash, but phosphates outlook 'challenging'

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PotashCorp flagged "positive pricing trends" in the potash market, but foresaw further "challenging" conditions in phosphates, in which the group's profits have already collapsed, potentially paving the way for an asset write-down.

The Canada-based group stood by expectations of a rise in world potash shipments in 2017 to 61m-64m tonnes, foreseeing "consistent customer engagement throughout the year", after a "strong" close to 2016 for demand.

"This view is supported by healthy underlying consumption trends and lower dealer inventories in most key buying regions," PotashCorp said, noting "compelling fertilizer affordability" in North America, and a the potential for record demand of up to 12.0m tonnes in Latin America.

"We believe recent positive pricing trends will carry into the new year," said the company, which saw its average sales price of potash, at $157 a tonne, rising in the October-to-December period for the first time in two years.

Jochen Tilk, the PotashCorp chief executive, said: "We see a continued potash recovery."

'Subdued market'

However, PotashCorp was less upbeat in phosphates, in which its gross margin slumped 87% year on year to $8m for the latest quarter, amid a "subdued" global market.

"Record Chinese exports and seasonally slow demand in India offset stronger shipments to Latin America," the group said.

And, in guidance for 2017, it forecast that "challenging market fundamentals to weigh on realisations for our products and profitability in this segment".

Mr Tilk flagged "expected challenges for our phosphate results."

'Rally to end'

Phosphate prices suffered a particularly poor close to 2016, with values of the key diammonium phosphate product in the three months to January 17 tumbling by 19% in the US's Tampa export market, and by 21% in the Black Sea, according to VTB Capital.

But there have been some signs of recent recovery, with Raymond James on Tuesday reporting a 2.5% rise last week in Tampa prices of diammonium phosphate (DAP), taking 2017 gains to 4.4%, helped by curbs in China, a key exporter.

"Phosphate prices were up due to better balance in China, where suppliers have shown increased discipline, focusing more on the domestic market," and reducing exports, Raymond James said.

However, Credit Suisse, while backing ideas of a 4% rise in Tampa DAP prices so far this year, raised doubts about the increase lasting.

"At the end of March/early April, Chinese DAP volumes are expected to come back, thus putting an end to the… rally" in phosphate prices, the bank said.

'Potential impairment'

PotashCorp said that it had late in 2016 begun a review to see if "certain assets should be assessed for potential impairment", signalling potential writedowns in the value of some operations.

"This assessment is ongoing, with a particular focus on phosphate", the group said, although adding that "if any impairment charge is necessary, we would not consider it to be significant to our operational outlook".

The company forecast full-year earnings for 2017 coming in at $0.35-0.55 a share, signalling potential for improvement on the $0.40 a share it reported for last year, but below the $0.66 a share that Wall Street has pencilled in.

The forecast factored in a rise to $550m-800m in potash profits this year, from $437m in 2016, but a $0.05-a-share hit from costs associated with PotashCorp's plans to merge with rival Agrium, in a deal the group said was expected to close in "mid-2017".

Earnings fall

The comments came as the group unveiled earnings down 71% to $59m for the October-to-December quarter, equivalent to $0.07 a share, lagging investors' expectations of a $0.09-a-share result.

Revenues dropped 22% to $1.06bn, in line with market forecasts, reflecting weaker sales in financial terms in all three divisions – potash, nitrogen and phosphate.

Nitrogen sales dropped particularly steeply, by 34% to $303m, thanks to weaker prices, for which PotashCorp forecast some continued pressure from new North American capacity, encouraged by ample supplies of shale gas.

"While we expect some seasonal price strength," with the important northern hemisphere spring planting season nigh, "competitive pressures are expected to keep margins below 2016 levels".

PotashCorp shares fell 3.4% to $19.18 in early deals in New York.

By Mike Verdin

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