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PotashCorp ups potash outlook - but cautions on nitrogen, phosphates

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PotashCorp hailed a "constructive" potash market as it raised its forecast for profits from the nutrient this year – in contrast to weakened expectations for its nitrogen and phosphate operations.

The Canada-based fertilizer giant, which is amidst a merger with rival Agrium, raised to 62m-65m tonnes, from 61m-64m tonnes, its forecast for world industry potash shipments this year - taking the figure "well above" the volume of 60m tonnes achieved in 2016.

The revision reflected in the main an upgrade to 15.5m-16.5m tonnes, from 14.5m-15.5m tonnes, in the forecast for Chinese volumes this year, as price weakness and "a move to balance fertility" spur consumption.

"With recently settled contracts in China," including a 1.4m-tonne deal through the rest of this year agreed with Canadian export consortium Canpotex last week, "we expect strong deliveries in the second half of 2017", PotashCorp said.

The estimate for full-year Latin American deliveries was also lifted, by 300,000 tonnes at both ends of the range to 12.0m-12.5m tonnes, after "robust" volumes in the first six months, with the forecast for India receiving a 200,000-tonne upgrade.

"In India, we anticipate that a good monsoon, agronomic need and increased acreage will offset the impact of lower subsidies," the group said.

'Robust demand'

For PotashCorp itself, the improved conditions will see sales volumes reach 9.0m-9.4m tonnes, nudged higher from a previous estimate of 8.9m-9.4m tones, with the estimate for gross margin raised to $650m-850m, from $600m-800m.

"Robust potash demand" in the April-to-June period, especially in offshore markets, "supported a constructive market and is expected to carry through the remainder of the year," said Jochen Tilk, the PotashCorp chief executive.

However, he cautioned too that PotashCorp was anticipating "more subdued nitrogen and phosphate markets in the second half to offset strength in potash".

Indeed, the forecast for the group's combined gross margin from nitrogen and phosphate was downgraded to $150m-300m, from $150m-400m.

"As a result, have maintained our full-year earnings guidance range," with group earnings still expected to come in at $0.45-0.65 per share for 2017.

'Increased global supply'

In the April-to-June quarter, PotashCorp reported a jump of 66% in earnings to $201m, on sales up 6.4% at $1.12bn.

However, excluding an income tax rebate, earnings at that level were equivalent to $0.16 per share, a touch behind market expectations of a $0.18-per-share result.

In potash, gross margins soared 73% to $213m, boosted by higher sales volumes and prices which, in the North American market, returned above $200 a tonne for the first time since late 2015.

However, margin in nitrogen slumped by 48% to $68m, hurt by a retreat in average sales prices to $223 a tonne, "as increased global supply weighed on benchmark pricing, pulling down realisations for nearly all our products".

"We expect recent capacity additions to continue to pressure prices and alter trade flows, keeping margins below those of 2016."

The comments follow a warning by nitrogen giant Yara International over the extent of nitrogen production capacity additions, largely in the US, where the discovery of cheap shale gas has spurred a jump in investment.

Worst since at least 1998

In phosphates, PotashCorp reported a negative gross margin of $26m - the division's biggest loss on data going back to 1998 – "as prices for nearly all products decreased, most notably liquid fertilizers".

"We anticipate that challenging market fundamentals will continue to impact prices and our profitability" in phosphates, the group said.

PotashCorp shares stood 2.0% higher at Can$22.40 in lunchtime deals in Toronto.

By Mike Verdin

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