by Jen Skerritt

Potash Corp. of Saskatchewan Inc., the crop-nutrient producer planning to merge with Agrium Inc., forecast lower-than-expected earnings for 2017 as it warned that new nitrogen-fertilizer plants in the U.S. will weigh on prices. Fertilizer stocks dropped.

The Canadian company also said Thursday in a statement that it expects “challenging market fundamentals” in the phosphate-fertilizer market, and is assessing the valuation of the its phosphate assets, which may lead to a writedown.

It projected earnings this year of 35 cents to 55 cents, trailing the 62-cent average of estimates compiled by Bloomberg. The company’s fourth-quarter net income also disappointed, falling to 7 cents a share from 24 cents a year earlier, compared with the 9-cent average estimate.

Potash Corp.’s phosphate segment has been impacted as the market for liquid fertilizer in the U.S. has deteriorated while the competition in feed has increased amid rising imports from places such as Eastern Europe and Russia, Chief Executive Officer Jochen Tilk said on an earnings call. The company’s gross margins in phosphate may run at a deficit in 2017, he said.

Phosphate accounts for less than 15% of the company’s earnings and it would be premature to suggest there could be a divestment, Tilk said in a telephone interview. The merger between Potash Corp. and Agrium started with a discussion on how they could work together on phosphate and the company remains focused on the transaction and its core business, he said.

“It’s a relatively small part of our business,” Tilk said in a telephone interview following the earnings call.

Management sounds “seriously concerned about the phosphates segment,” Sanford C. Bernstein analyst Jonas Oxgaard said in a note. It’s unclear why the cost of goods sold in phosphates was “dramatically higher,” and “this is by far the biggest surprise,” he said.

Potash Corp. shares dropped 3% to close at $19.26 in New York. Agrium fell as much as 4.4% while rival fertilizer producers Mosaic Co., CF Industries Holdings Inc. and Intrepid Potash Inc. also slumped.

While prices for the company’s potash fertilizer --- its biggest business -- are still affordable, a fourth straight year of stalling farm incomes has reduced the overall appetite for crop nutrients, Bloomberg Intelligence analyst Jason Miner said in a Jan. 12 report.

The downturn across the farm economy has sparked a string of mega-mergers in the agricultural-chemicals industry. In September, Potash Corp. and Agrium agreed to a $12.9 billion merger that will create the world’s largest crop-nutrient supplier.

Canpotex Sales
The outlook isn’t all gloomy for Potash Corp. It sees conditions strengthening for the potash market. Global demand will increase in 2017 as farmers in North America seek to replenish soil nutrients following a record harvest, and strong affordability is helping robust consumption in Latin America and China, the company said.

Sales of potash through Canpotex, its potash-export joint venture with Agrium and Mosaic, is sold out for the first quarter.

Potash Corp. said the Agrium merger is expected to be completed in mid-2017 and generate a cost savings of $500 million a year following the completion of the deal.

--With assistance from Megan Durisin.

To contact the reporter on this story: Jen Skerritt in Winnipeg at mailto:[email protected]

To contact the editors responsible for this story: Simon Casey at mailto:[email protected]

Millie Munshi, Robin Saponar

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