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Agrium-PotashCorp merger: What it means for the potash industry

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After years of being both courted and courting others, leading North American fertilizer producer PotashCorp has finally met its match, and reached a merger agreement with regional counterpart Agrium to create a new parent company for their combined operations. The new firm has yet to be named, but would be 52pc owned by PotashCorp and 48pc by Agrium. Shareholders will vote on the merger on 3 November, and in the event that it is approved, Agrium and PotashCorp expect to close the deal in mid-2017, subject to regulatory and Canadian court approvals.

The merger “creates a new, premier, Canada-headquartered company that reflects our shared commitment to creating value and unlocking growth potential”, PotashCorp chief executive Jochen Tilk said. “This is a transformational merger that creates benefits and growth opportunities that neither company could achieve alone,” Agrium chief executive Chuck Magro added.

Synergies from the all-stock transaction could cut $500mn/yr from operating costs within two years of closing the deal, mostly through the integration of distribution and retail businesses, the companies said. The company expects to have realised synergies of $250mn by the end of the first year after completion, with savings from production optimisation, shared selling, and general and administrative costs providing a major source of savings. Achieving such savings may be vital to a successful future in a potash market dominated by oversupply.

Production, Distribution And Retail Businesses

A good strategic fit?

PotashCorp is heavily focused on potash, while Agrium also concentrates, beyond fertilizer production, on the agriculture retail sector. The merger would help to balance out the offering of both companies in the retail, potash, nitrogen and phosphate sectors. The firms could also benefit from more co-ordinated sales and cost reductions in a lower price environment.

Potash would make up just over a third of the new company’s earnings before interest, tax, depreciation and amortisation (ebitda), based on figures for the 2013-15 fiscal years, down from 51pc previously. Nitrogen would make up 34pc of the new company’s ebitda, while phosphate would account for 12pc, and retail operations the remaining 19pc.

Agrium And Potashcorp Potash Mines

In terms of potash, the merger would boost PotashCorp’s leading position in the industry, and consolidate the firms’ production capabilities. PotashCorp has a nameplate capacity of about 14mn t/yr of MOP across five active Saskatchewan mines, while Agrium owns the recently expanded 3mn t/yr Vanscoy potash mine in Saskatchewan. Including PotashCorp’s New Brunswick mine, the merged firm would have a nameplate capacity of 19.1mn t/yr, with an additional 3mn t/yr of incremental capacity due to come on line in the future.

Both companies are active in the North American nitrogen and phosphates markets. Agrium operates four nitrogen fertilizer plants in Canada and one in Texas, while PotashCorp has three such facilities across the US.

On the phosphates side, Agrium operates the 660,000 t/yr Redwater MAP facility in western Canada and the 340,000 t/yr Conda MAP facility in the US. PotashCorp operates the 840,000 t/yr DAP and 360,000 t/yr MAP Aurora facility in North Carolina. The merger brings under one roof roughly 17pc of North American DAP and MAP capacity, and is the latest instalment in a series of consolidations and closures that have characterised the US phosphate sector since the early 2000s. This decline has long been predicted as phosphate rock resources erode and environmental pressures increase.

Agrium And Potashcorp Nitrogen And Phosphate Facilities

Anti-competitive?

The firms said the new company will remain “absolutely committed” to the Canpotex joint venture between Agrium, PotashCorp and fellow North American producer Mosaic. Canpotex is the export co-ordination and marketing organisation for the Canadian producers, and represents them globally, except in the US. Canpotex was ‘mirrored’ in many ways until 2013 by BPC, the Belarusian Potash Company, which acted similarly as export co-ordinator for Belaruskali and Russian firm Uralkali.

Industry consolidation may be inevitable in an environment of oversupply and price collapse. But could this merger be viewed as anti-competitive? When asked if they would need to consider divestments to pass anti-trust hurdles, the companies said they did not wish to speculate, but that the deal could go through as is. Regulatory issues, if any, are likely to emerge in the US, as Canpotex will remain the supplier for other export markets.

It is too early to speculate about the reactions of US competition authorities, but it appears that there will still be a number of potash suppliers that have the ability to supply the US, despite the merger. The Canadian Legacy solution mine, due to start production in the second quarter of 2017, will give German firm K+S Kali a competitive source of potash with which to supply the US, as well as the Latin American and Asian markets.

What does it mean for the industry?

Potash producers have seen prices fall by around 20pc since 2015, and by 40pc since the demise of export co-ordination between Belaruskali and Uralkali. The groundwork was effectively prepared some years ago, when commitments were made to a rapid expansion of new capacity at a time of escalating prices. The aggregate volumes were so great that a period of slack capacity utilisation is now expected for the next decade that will create a low-profit environment for producers, which will be unable to shift prices appreciably upwards when so much competitive supply is on offer.

Against this background, the sound strategic fit between the two businesses takes on a different, more defensive complexion. In expectation of a challenging future, PotashCorp and Agrium are attempting to ensure lower costs until the global supply and demand balance improves, and more particularly to defend their share of business in the US, which was once their high-priced home market, but is now a magnet for cheap supplies from around the world.

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